The Fighting in the Middle East Could Hit the Markets in Several Ways
Middle East #MiddleEast
As the war between Hamas and Israel continues and the death toll rises, we’re trying to assess how markets will respond.
Let’s first consider several factors:
How far will Israel go, and how far can it go? The attack over the weekend has shaken the nation to its core. The veil of safety has been pierced. How far can Israel go in its response without turning part of the world against it? While the most vicious and deadly battles will be fought in the streets, campaigns of varying truthfulness will try to shift global opinion. Will Israel win the battle, but risk losing the war? This will be tricky, and the relatively small size of the Gaza Strip and its high population density will make it extremely difficult to be effective and not harm civilians. This will be a tough balancing act.
Will others get involved? Many observers find it difficult to believe that Hamas acted alone, but that remains the official line. This has not escalated into a battle for Israel on multiple fronts. Iran has not been brought into the war, which would up the ante significantly.
While not directly part of this discussion, our increasing concern is that our global adversaries understand that inflation has become an “Achilles Heel” and this will only make adversaries more aware of that.
Over the next 48 hours, we should get answers to these questions. Those answers will help us have an idea of how the markets and global economy and companies might respond — many companies with operations in Israel have faced an incredibly difficult and scary time.
On the markets, we have other areas to watch, including oil, Treasury yields, and stocks.
First, I expect oil should go higher. Facing risk are shipping and any Iranian oil making its way to the market (especially if Iran is implicated in any way). The Saudis could increase production to help, but how this is being viewed on social media in the region could shape its behavior significantly (the information war will be important). Our inability, unwillingness, or lack of urgency in replenishing the Strategic Petroleum Reserve is not helpful as our “insurance policy” was used and hasn’t been re-upped.
Treasury yields, however, should also go lower. It doesn’t matter what oil does, yields will be lower. The price of oil is not in the Fed’s control right now, but the risk of economic slowdown is. The risk of escalation and spreading of the violence is real and should keep investors focused on safety. I was not alone in thinking that Treasury yields were too high before this, so look for a push to lower yields.
Finally, stocks are a wildcard. I’ve been in the “bad news is good news” for stocks mode, and that seemed to play out again today. I don’t know how much “bad news” stocks can take before the lower yields/higher stocks algos fail and we get a more traditional “flight to safety” like we had overnight. If things don’t escalate, stocks can continue to squeeze higher as so much negativity was priced in (while at the same time pricing in a hawkish Fed). I’d be reducing equity exposure here, still long, but this “bad news” has the risk of being really bad.
This is a developing situation, so pay close attention as we provide ongoing insight.
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