The attack on Israel by Palestinian militant group Hamas over the weekend has caused oil prices to spike and raised new worries about a wider conflict in the Middle East and its potential impact on global financial markets and inflation.
Fighting continues to rage between Hamas and the Israeli military with over 1,000 killed and thousands of others wounded in Israel and Gaza, as Israel has formally declared war on Hamas.
According to the Israel Defense Forces, more than 3,200 rockets have been fired into Israel from Gaza since the morning of Oct. 7.
A key concern is the possible involvement of Iran in this ongoing saga.
On Oct. 8, U.S. Secretary of State Antony J. Blinken said: "There's a long relationship between Iran and Hamas. In fact, Hamas wouldn't be around in the way that it is without the support that it's received from Iran over the years. In this specific instance, we have not yet seen evidence that Iran directed or was behind this particular attack, but there's certainly a long relationship," according to State Department's website.
Meanwhile, crude oil prices have surged.
West Texas Intermediate oil was trading at $86.58 per barrel at about 10:35 a.m. EDT on Oct. 9, after closing at $82.79 on Oct. 6.
The "horrific attack" over the weekend will have some immediate short-term impacts, with the risk of more serious long-term implications if the war widens to Iran, said Rhys Williams, chief strategist at Spouting Rock Asset Management.
"The knee-jerk reaction will be oil jumping, stocks down, the dollar up and the U.S. government bonds stronger," Williams said. "(As) Gaza is very populated and relatively tiny complicates the Israeli response. But the (Israeli) government's reaction over the weekend suggests that Israeli security will trump any restraint about Arab civilian lives in Gaza."
Spouting Rock has $2.3 billion in assets under management.
James Demmert, chief investment officer at Main Street Research, which has $2 billion in assets under management, said the attack by Hamas is expected to create "short-term volatility in the stock market and oil market as investors digest the heightened tensions in the Middle East."
Maximilien Macmillan, Edinburgh, Scotland-based investment director at asset manager abrdn, said the escalation of the conflict in Gaza is "generating a typical pattern of risk-off moves across asset classes, with equities selling off and the dollar appreciating in a safe-haven bid."
This geopolitical shock is sending oil prices higher, Macmillan noted, as the
market prices in the possibility of an escalation that would see Iran drawn into the conflict.
This is unhelpful, he added, "following a three-month period of strong oil price appreciation that had helped push government bond yields higher and equities lower."
Indeed, the soft-landing narrative and associated positive returns across asset classes is conditional upon the continued fall in inflation, he added. "Oil rising — and remaining high — challenges this environment and may alter monetary policy setting in a hawkish direction," Macmillan observed.
Abrdn had £496 billion ($626.2 billion) of assets under management and administration as of June 30.
Williams of Spouting Rock is also worried about Iran and its possible participation in the attack on Israel.
"(Israeli Prime Minister Benjamin) Netanyahu has long desired to remove the Iran nuclear threat militarily if necessary," Williams said. "This may be the excuse he needs to act."
The conflict also greatly complicates U.S. foreign policy goals.
"The Biden administration has desired to improve ties to Iran to hold back nuclear weapons development and to keep oil flowing while the war rages in Ukraine," Williams noted. "Saudi Arabia had desired to thaw relations with Israel in return for an American arms package, and in return, raise oil production next year. So, a lot of great power politics may have been dashed over the weekend."
Williams said he thinks the U.S. will put pressure on Israel not to attack Iran, especially if Iranian involvement is not certain.
"We are not sure that U.S. pressure will be enough to dissuade Israel," he warned. "This is the biggest risk that the relatively muted reaction today in markets becomes quite a bit larger."
Macmillan of abrdn also noted that safe-haven government bonds in the U.S. are trading sideways, a sign of conflicting influences. "On the one hand, a shock to sentiment generates demand for safety, on the other hand, upward pressure on oil is typically associated with higher yields due to the feedthrough to inflation," he added. "Shocks of this kind are stagflationary in nature at the margin and will therefore prove particularly hard to navigate for policy makers having to juggle the growth and inflation imbalance they are already struggling with."
In the short term, Williams of Spouting Rock, said he thinks that gold, oil and defense stocks have the potential to outperform, and they will be call options if the Hamas-Israel war widens.
