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Modest Global Market Reaction to Middle East War Reflects Investors’ Preparedness for Turbulent Times

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Global Markets Show Resilience in Face of Middle East Conflict

Global financial markets have reacted with relative calm in the wake of the recent conflict between Hamas and Israel, suggesting that investors are already prepared for turbulent times. Despite the attacks and Israel’s declaration of war, investors have quickly shifted their focus elsewhere. While Israeli assets and the shekel have come under pressure, oil and gold prices have only seen marginal increases. Some asset managers anticipate that the conflict will last for several weeks, but expect it to remain localized in Gaza and the West Bank, thereby limiting its impact on energy prices.

Experts draw comparisons to the 2014 Gaza War and suggest that there is unlikely to be any significant negative impact on US or global stocks in the long term. However, they caution that a conflict comparable to the 1973 Yom Kippur War, which resulted in an oil surge, may have different consequences. Nevertheless, given the already elevated price of oil and the reduced oil intensity of the global economy, experts believe that any major impact on global inflation is unlikely.

The global investment landscape is now characterized by the presence of numerous “outside risks” associated with various geopolitical tensions and flashpoints. These risks, such as the possibility of China invading Taiwan or Russia using nuclear weapons in Ukraine, are considered to be “non negligible” but are difficult to price accurately. Investors are finding it challenging to determine where to absorb these risks, as traditional safe havens like sovereign bonds and gold prices remain relatively subdued. The strong US dollar and high cash holdings may reflect global political anxiety, but could also be attributed to the recent interest rate squeeze.

Investors may have become more complacent about geopolitical risks after experiencing several years of dramatic twists, including the US-China trade tariffs, the COVID-19 pandemic, and Russia’s invasion of Ukraine. Many funds are now focusing on identifying opportunities and potential beneficiaries in commodities or unexpected alliances. The International Monetary Fund (IMF) has highlighted the potential impact of greater climate and geopolitical risk on volatile commodity prices, which could pose macroeconomic risks. The IMF also expresses concern about high and stretched debt levels, rising debt servicing costs, and a stronger dollar, which may lead to a sharp repricing of risk and increased borrowing costs, particularly in emerging markets.

While geopolitical risks in various regions often receive significant attention, it is important not to overlook the rising political risks within core economies such as the United States. The traditional haven of US Treasury debt, which has long been considered a safe investment, is now unnerved by threats of government funding cutoffs, shutdowns, and the upcoming contentious election. Consequently, investors may struggle to find a truly safe place to protect their assets.

In conclusion, global markets have displayed resilience in the face of the recent Middle East conflict, indicating that investors are already prepared for turbulent times. While concerns remain about geopolitical risks and their potential economic impact, finding a suitable place to absorb these risks has become increasingly challenging. The calmness of global markets in the face of stress overseas may also be attributed to rising political risks in core economies. The situation highlights the need for investors to remain vigilant and adaptable in an environment of constant flux.

Disclaimer: The opinions expressed in this article are those of the author, a Reuters columnist, and do not necessarily reflect the views of the news organization.

More detail via Reuters here… ( Image via Reuters )

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