The terrorist incursion into Israel and Jerusalem’s subsequent declaration of war is already having global economic reverberations that could intensify with the conflict.
On Saturday, Hamas and Palestinian Islamic Jihad launched a surprise attack that included a barrage of rockets and terrorists streaming across the border into Israel, resulting in hundreds of civilian deaths and the taking of hostages. Israel responded by bombarding the Gaza Strip and declaring war for the first time since the Yom Kippur War in 1973.
The global economy reacted immediately, with stock markets absorbing the shock, oil and gold prices lurching upward, and fear and uncertainty dominating. How big of an impact the conflict will have on the global economy has yet to be seen, although the effects could widen if attacks expand to include Hezbollah in the north of Israel or if Iran becomes a target.
Stocks
The Israeli stock market, the Tel Aviv Stock Exchange, operates from Sunday through Thursday, so when it opened on Sunday, shares plunged in response to the turmoil. Key Israeli stock indices closed nearly 7% lower and banking shares crashed by some 9% amid the uncertainty.
ISRAEL ORDERS 'TOTAL SIEGE' OF GAZA IN AFTERMATH OF UNPRECEDENTED TERROR ATTACK BY HAMAS
U.S. stocks opened lower on Monday, with all three major indices in the red, although the declines were nowhere near as pronounced as those in Israel. Defense stocks moved upward as traders evaluated the odds of broader involvement or a more protracted war.
Shares of Lockheed Martin were up more than 8% by midday on Monday, while Northrop Grumman rose more than 11%. Shares of General Dynamics were nearly 9% higher, while RTX Corporation’s shares were up more than 4%.
Generalized anxiety on Wall Street was captured by the Chicago Board Options Exchange Volatility Index, better known as VIX and also the “fear index.” The VIX was up about 5% on Monday.
Anna Rathbun, chief investment officer for CBIZ Investment Advisory Services, told CNBC that the movement on the U.S. exchanges is likely just a “knee-jerk reaction” and the coming days will be key to understanding how broad the effect on the markets will be.
“So there’s dust going up, and now the dust is coming back down. I think it will take a few days to really understand where the impact actually is,” she said.
Oil
The war has major implications for global energy markets.
U.S. West Texas Intermediate crude prices were up more than 4% on Monday while Brent crude oil, which is an international benchmark for oil prices, also rose above 4%. Israel isn’t a major producer of oil, although it did shutter its Tamar gas field. Natural gas fields fuel about 70% of the country’s electric power.
“The economy's energy needs will be supplied by alternative fuels,” Israel’s Ministry of Energy announced. “The power industry is preparing to use alternative fuels to power its stations.”
The bigger driver of the higher oil prices is the uncertainty about whether the situation will escalate, given that the Middle East region is one of the world’s largest oil exporting areas. There have been reports of Iranian involvement in the planning and execution of the assault. If Israel and Iran get enmeshed into a direct conflict, oil prices would be expected to spiral.
“The crude oil market remains hyper-alert to any indication that the conflict between Israel and Hamas is poised to expand into the oil producing region in the Middle East,” said Quincy Krosby, chief global strategist for LPL Financial.
“Reports regarding Iran's support for the Hamas attack have been denied by Iran but concern is focused on a broader Iran-Israeli conflict, which would, in turn lead to a dramatic escalation of conflict in the region, and a dramatic climb in oil prices,” she added in a note.
Higher oil prices stemming from the conflict will have a direct effect on consumers stateside and on the U.S. Federal Reserve’s fight to bring down inflation. Higher oil and gas prices have the knock-on effect of raising prices in other industries — for instance, by raising costs for truckers who are shipping goods across the country. The prices of those goods might end up being increased to make up for the higher shipping costs.
Gold and currencies
Gold prices rose on Monday, up more than $18 to $1,863. While the increase is fairly modest, if the conflict grows or appears to have the potential to further roil global markets, the metal will likely keep increasing in value as it is seen as a safe haven asset in times of instability.
The U.S. dollar, another safe haven, rose against the euro and British sterling amid the backdrop of the war. Meanwhile, the Israeli shekel traded nearly 3% lower. The Bank of Israel, the Israeli equivalent of the Fed, announced that it would sell up to $30 billion in foreign reserves to help shore up the shekel.
The future
The biggest factor at play in how the conflict in the Middle East affects the U.S. economy and the broader global economy is how the situation evolves over the coming days and weeks. If the Israel Defense Forces is able to contain the Hamas threat and attacks from Gaza are ended, the conflict will likely not have a major economic impact, at least for the global economy.
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But if the conflict morphs into involving Hezbollah more broadly and especially Iran, it could become a much bigger problem for the U.S. and other global economies. Israeli Prime Minister Benjamin Netanyahu is girding for the possibility of a challenging fight and said in a statement that his country was “embarking on a long and difficult war” brought on by the attacks.
The Washington Examiner reached out to the Treasury Department about what it is doing to monitor the unfolding economic implications of the conflict but didn’t receive a response. The U.S. Fed was also contacted for comment.