CIO Notebook : Tragedy in the Middle East

October 09, 2023

While the impact to investors in the short term might be limited, the impact on human life and the potential for further escalation in the region cannot be understated.

Early Saturday morning, Hamas staged an unprecedented attack on Israel, launching thousands of missiles from strongholds in Gaza, the seat of the terrorist group’s power, and sending its fighters into southern Israel over land, sea, and air to capture, abduct and kill Israeli civilians. Israeli Prime Minister Benjamin Netanyahu responded on Sunday by declaring war on Hamas, vowing to cut off Gaza completely and retaking control of towns targeted in Saturday’s invasion.

The reaction from politicians globally has been a condemnation of the atrocities committed, as well as a call for a path towards peace. From a market perspective, equity markets in the U.S. are down modestly, with global equity markets also closing down in Monday’s trading session. The bond market in the U.S. is closed today in observance of Indigenous People’s Day, but the implied move in the Treasury market based on bond ETFs is that yields too may move lower in tomorrow’s session. Risk off sentiment typically strengthens immediately following an increase in geopolitical tensions, and as such it would not be a surprise to see equities weaker, bonds firmer, and gold higher over the next several days. In addition, given the importance of the region in terms of oil production, WTI and Brent crude prices may be pressured upwards, although as of today, they are not yet back to near term highs crested in late September.

Longer term, however, there is little historical evidence to indicate that the current conflict will have a significant negative impact on the equity markets. It is important to note, however, that the market reaction to geopolitical events in terms of magnitude and length tends to be more closely correlated with the economic backdrop than anything else, and that causes us pause. With the reacceleration of energy prices already weighing on investors’ expectations for consumer demand and corporate margins, the flaring of renewed conflict in the world’s major oil exporting region could have ripple effects that extend beyond the geographic borders directly in the line of fire.

The pain and suffering endured this weekend is likely to continue as the conflict expands to all of Gaza and into border territory with neighboring Lebanon. While the impact to investors in the short term might be limited, the impact on human life and the potential for further escalation in the region cannot be understated, and we will continue to monitor the situation from both an economic and human perspective as we hope for peace.


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