The sudden onset of war in Israel and the Gaza Strip shocked the globe on Oct. 7, further aggravating the current climate of geopolitical uncertainty. As the world laments the tragic loss of human life, the situation in Israel also has investors anxious about potential impacts on financial markets and global economics.
On Oct. 11, U.S. Treasury Secretary Janet Yellen downplayed the threat of major economic consequences, stating, “Thus far I don’t think we’ve seen anything suggesting it will be very significant.” And so far, the U.S. stock market seems to agree, posting no dramatic swings in the early days of the conflict.
Nevertheless, financial experts are keeping a close eye on the potential effects of the war, including rising oil prices or Israeli currency devaluation in the near term, or trends like accelerating deglobalization in the longer term. The ultimate impact on financial markets will likely depend on the duration of the conflict and whether it expands to involve other countries.
As events continue to unfold, several BOK Financial® executives offered their perspectives on the conflict’s implications for investors and the global economy.
- How is the war affecting financial markets in general? Should investors be concerned?
Brian Henderson, chief investment officer: To this point, the markets have remained relatively calm. Oil prices jumped briefly but quickly stabilized, and the stock market actually gained ground based on other economic indicators. The market is behaving rationally with the understanding that Israel is a relatively small economy with little impact on global GDP.
So, for now, the war isn’t creating big waves in the global economy. However, the situation is very fluid and the war has the potential to escalate into a regional conflict, which would be of much larger concern. From an investment standpoint, the unpredictable nature of war highlights the importance of diversifying your portfolio to guard against volatility.
Steve Wyett, chief investment strategist: What we know is that the global geo-political environment is even less stable today than it was before last weekend’s events. As of now, we are not making major changes to our general outlook and strategies based on the conflict, since it’s still too early to fully understand the potential long-term impacts.
But we certainly have “both hands on the wheel,” as there is a high risk of escalation and involvement from other countries. We’re monitoring the situation closely so we’re ready to adjust to multiple possibilities. - Will the conflict lead to higher oil prices? And what about the longer-term effects on the energy sector?
Wyett: Israel is not an oil-producing country, so the war with Hamas won’t have an immediate, direct impact on supply. That’s why oil prices remained mostly stable in the week after the attack. The key thing to watch is whether more countries get involved. Most important is Iran, which is a major oil supplier. Iran has been the chief sponsor of Hamas. So, if Iran comes to the aid of Hamas and the U.S. retaliates by tightening sanctions on Iran, the oil market will be undersupplied and prices are likely to rise.
Matt Stephani, president, Cavanal Hill Investment Management, Inc.: Another point of interest is the Strait of Hormuz, a shipping channel largely controlled by Iran that provides passage for about 20 million barrels of oil per day (20% of world oil demand). Uncertainty surrounding this highly strategic choke point could lead to rising prices for oil and other commodities.
Dennis Kissler, senior vice president of trading: Longer term, energy prices are likely to rise as a result of the war, as it’s just a matter of time until other oil-producing countries make their presence felt in one way or another. The world needs oil from the Middle East, as the Russia-Ukraine war has disrupted supplies from that region and the U.S. crude and diesel inventories are well below their five-year average, with high demand of the winter heating season around the corner.
An alternative viewpoint suggests that oil prices could go lower if OPEC uses its excess capacity to meet world demands, if necessary. Also, U.S. crude production surged to a record high in the third quarter, and major refineries are entering maintenance season, when near-term demand for crude lessens and crude storage can see some larger builds. With these and other factors in play, there are still many “what ifs” surrounding the Israeli war, thus producers are likely hedging their bets on price strength. - How is the war impacting Israeli currency and what does it mean for the U.S.?
Pete Tibbles, manager, international sales and trading: The Israeli shekel has been weakening relative to the U.S dollar for the past year, for various reasons unrelated to the war. But the Hamas attack led to a near-immediate devaluation of another 3%, leading the Israeli government to intervene by selling up to $30 billion (U.S. equivalent) in foreign currency in an effort to stabilize the shekel.
This news may not mean much for average investors, but it will raise red flags for many global companies with business interests in Israel. For example, the country’s blossoming technology sector has attracted significant investment from major tech players in recent years, but that trend could reverse if the war continues or escalates.
- What other broad or long-lasting economic impacts may result from the war?
Henderson: As we’ve mentioned, the big question now is whether the war will intensify and spread beyond Israel and Gaza. If that happens and oil prices increase, it will likely have a ripple effect across the global economy. For example, higher energy prices are typically correlated with higher inflation across the board, because so many aspects of daily life depend on fuel.
If inflation rises too rapidly, the Fed will continue to raise interest rates, which are already the highest they’ve been in many years. Ultimately, these outcomes could have tangible repercussions for American consumers and businesses.
Stephani: The risk of supply chain disruptions continues to increase, as the new conflict in the Middle East adds to problems related to the Russia-Ukraine war and tensions between China and Taiwan. As a general rule, wars are inflationary – they drive up commodity prices and increase the cost of shipping. In addition, a reassessment of the U.S. supply chain for key goods and services is likely to result in some movement of production from low-cost countries to higher-cost countries.
Moreover, the war in the Middle East could accelerate the trend toward deglobalization. The balance of power among nations has become more distributed in recent years, as China and Russia have already emerged as formidable competitors to the United States, and both appear willing to use military might to advance their interests. Now, the war in the Middle East creates further instability and may lead more countries to pick sides.
. © 2024 BOKF, NA.