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Israel-Gaza War Escalation Could Trigger Global Economic Downturn and Oil Price Surge

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Israel-Gaza Conflict Raises Concerns of Broader Regional Conflict and Impact on Global Economy

The Israel-Gaza conflict has the potential to escalate into a broader regional conflict, which could have significant implications for the world economy, warn experts. While the market reaction has been relatively modest so far, there are concerns that an escalation of the conflict could lead to increased oil prices, disruptions to oil supply, and even a global economic downturn.

Hamza Meddeb, director of the political economy programme at the Malcolm H. Kerr Carnegie Middle East Center in Beirut, highlights the potential consequences of a broader conflict involving Iran’s proxy armed groups, particularly Hezbollah. He states, “Such an escalation could lead to increased oil prices, concerns about oil supply, and the potential for a global economic downturn.”

The impact on oil prices is a major concern, as a crackdown on Iranian oil exports could instantly remove somewhere from 1-2 million barrels per day off the market. Brent Belote, founder and CIO of hedge fund Cayler Capital, warns that if the United States were to send troops into the Middle East, oil prices could see a $20 jump or more.

Oil prices have already shown some volatility, hitting $92 on Wednesday and rising 7.5% last week. Comparisons are drawn to the oil crisis in the 1970s, triggered by the Yom Kippur War, which saw a surge of over 300% in oil prices. However, experts note that Israel now has better relations with other Arab countries, and global oil supply is not as concentrated.

Nadia Martin Wiggen, director at commodity investor Svelland Capital, points out that a regional conflict would disrupt oil tanker routes in the Mediterranean, Black Sea, and around Turkey, further impacting oil supply.

The potential consequences of the conflict extend beyond oil prices. An inflation surge, which was already easing, could be halted by a spike in oil prices. Alessia Berardi, head of emerging markets macro and strategy research at Amundi, warns that if Iran gets involved, it could lead to higher commodity prices and external shocks, triggering a less disinflationary outlook.

The impact on bond investors is also a concern, as the S&P U.S. aggregate bond index is currently 14% below its January 2021 peaks. Trevor Greetham, head of multi-asset at Royal London, warns that a “global risk-off move” could strengthen the yen as Japanese investors pull their money home. He also highlights that Israel’s currency, bonds, and stocks, as well as those in Egypt, Jordan, and Iraq, have already been affected by the conflict.

While there are cautious hopes that most other emerging markets are largely shrugging off tensions for now, there are concerns that an escalation of the conflict could see oil prices jump by 20%, impacting numerous oil-importing countries already struggling with poverty.

The potential impact on various sectors is also worth noting. MSCI’s gauge of global tech stocks has historically moved inversely to oil and gas shares, which could be a concern for big tech if oil prices rise. Additionally, disruptions to infrastructure, such as undersea cables in Egypt, could have implications for global internet traffic.

As the conflict continues, airline stocks have already suffered, with MSCI’s airline stock index down about 5% since the Hamas attacks in Israel on October 7. On the other hand, aerospace and defense shares have seen an increase of almost 6%.

While it is too early to determine the full extent of the impact on the global economy, experts warn that the Israel-Gaza conflict has the potential to escalate and disrupt various sectors, with implications for oil prices, inflation, bond markets, and specific industries. The situation will continue to be closely monitored by global markets as they assess the potential risks and consequences.

More detail via Reuters here… ( Image via Reuters )

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