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Israel-Hamas war: oil, inflation, the US dollar and tech stocks


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As the war between Israel and Hamas escalates, the markets are reacting to the increased geopolitical uncertainty.

oilSource: Bloomberg
 

 Charles Archer | Financial Writer, London | Publication date: Tuesday 24 October 2023 14:06

As the war between Israel and Hamas teeters on the verge of regional escalation, local markets in Israel, Iraq, Egypt and Jordan among others are seeing both bond and stock market selloffs in response to the increased uncertainty.

Of course, this was to be expected — but secondary effects could ripple through much larger swathes of the global economy.

Israel-Hamas war updates

Israel’s President Isaac Herzog has described Hamas’ original attacks on 7 October as ‘one of the worst atrocities of modern times’ and has also accused Hezbollah of ‘playing with fire’ in Israel’s North. The President has accused Iran of creating tensions between Hezbollah and Israel and warned that if Hezbollah drags Israel into war that ‘Lebanon will pay the price.’

Meanwhile, Israeli military spokesperson Daniel Hagari has noted that the military is now ‘ready and determined’ for the next stage of the war, having carried out limited ground raids on the Gaza Strip.

The UN’s humanitarian agency, OCHA, now considers that 1.4 million — or nearly two-thirds — of Gaza’s 2.3 million-strong population is now displaced as a result of people moving from the North to the South. The agency has highlighted the shortage of drinking water and the overcrowding as the ‘major concern.’

It seems that Israel is holding off on a ground invasion while it considers how best to rescue more than 200 hostages held by Hamas in Gaza. As previously noted, it’s this potential escalation that could drag other actors into a wider regional war.

1. Oil

Brent Crude remains elevated at $90 per barrel — reflecting fears that Iran could enter hostilities. This could be a huge problem as the US would then likely increase sanctions on Iranian oil. According to Cayler Capital’s founder and CIO Brent Belote, this could remove between one and two million barrels per day from the market ‘almost instantly.’

For context, while global oil supplies are now less concentrated, between October 1973 and March 1974, oil prices rose by over 300% as Arab nations imposed an oil embargo on Israel’s supporters due to the Yom Kippur War. And Iran has already called for Israel to face an embargo.

Perhaps the bigger issue is the Strait of Hormuz. The world’s busiest shipping channel sees 20% of the world’s total oil consumption pass through each day. JP Morgan analysts argue its closure would ‘shut down the region's oil trade, supercharging oil prices.’

In early 2012, Iran threatened to close the Strait in response to international sanctions against its nuclear program. At the time, the US deployed naval forces to ensure the safe passage of ships, stating it would not tolerate a closure.

2. Inflation

Inflation has eased significantly across western nations over the past year. CPI inflation in the UK now stands at 6.7%, down from 11.1% in October 2022 — and is expected to fall further over the next few months.

However, inflation has come down due to rising interest rates, with the Bank of England base rate now at 5.25%. If oil remains elevated, inflation may become more entrenched, as the hard commodity is used across global supply chains to create thousands of products.

A key aspect of renewed inflationary fears is domestic and business energy bills; both consumers and companies have seen bills fall sharply since their peaks a few months ago, but Europe is heading into winter. With sanctions already in place against Russia, energy could surge again.

And for perspective, Brent rose to as high as $139/barrel in the aftermath of Russia’s invasion.

3. US Dollar

In the day after the initial Hamas attacks, the US Dollar rose by 0.2% against both the Euro and the Pound, while other safe haven currencies including the Swiss Franc and Japanese Yen also rose. Of course, the dollar could be hit if the US suffers a recession, but the currency remains one of the defensive assets of choice during times of geopolitical stress.

Other safe haven assets, including short-term US treasuries and gold, have also remained elevated. There is some debate to the extent to which the US Dollar remains a safe haven — while it remains the world’s reserve currency by some margin, the growing US deficit is causing some analyst concern.

4. NASDAQ tech stocks

With some of the largest US tech stocks reporting back to investors today — including Microsoft and Alphabet — it’s worth framing their individual efforts against the macroeconomic backdrop.

Tech shares tend to move inversely to oil and gas shares; this was the case in mid-2022 as the Ukraine war pushed up oil prices, feeding inflation, sending bonds higher. Higher inflation must be met with higher interest rate rises, and the tech stocks typically rely on the water of loose monetary policy to grow rapidly.

It’s no coincidence that the NASDAQ 100 fell into a bear market for much of 2022 as rates rose; while the index has seen a large recovery through 2023, a new inflationary spike could see the tech stocks sell off once more.

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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