The human tragedy of the Israel-Palestine conflict is front of mind and our thoughts are with all those who have been impacted by this.
The conflict is set to remain headline news, but the macro impacts of the conflict are likely to be limited, unless there is an escalation and/or oil prices spike significantly and remain at elevated levels for a prolonged period.
Outside of oil prices, asset markets are also unlikely to be impacted beyond the short term. History shows that typically there is only a short-term negative impact on equities from geopolitical events, with returns usually positive over one- three- and six months after the event.
The Israel-Palestine conflict remains fluid, with the potential for regional actors like Iran and Saudi Arabia to be drawn in further. We detail the potential macro and market implications of the conflict below.
There has been a muted reaction in global financial markets to developments thus far, with risk markets trading well and assuming the conflict will be contained.
In the week after the escalation on October 7th, global equities and the S&P rose by 1.4% and 1.0%, respectively. The US Dollar index (DXY) is up by 0.3%. Brent crude was up by 4.1%, but was still down by 8.8% from the recent high.
However, risks remain in terms of a potential wider regional conflict, directly involving Iran, which would likely lead to a significant spike in the oil price. Oil price risks are centred around disruption to Iranian supplies, lower Saudi production as improved relations with Israel are postponed and damage to production facilities in the region.
In the event of further escalation, equities would be expected to fall while oil prices could rise further. A quick resolution would probably see equities rise and oil prices fall.
Looking at global geopolitical events since 1948, the impact on the S&P 500 has tended to be relatively short lived and modest with markets on average being higher one month and six months post the event (see table below).
Central banks are likely to look through a short-term oil price spike, but would consider growth implications if a high price was sustained in the medium term. Current moves are unlikely to result in a change in current guidance of higher for longer rates.
Governments could adjust cost of living supports should oil prices stay high, but again, a sustained move up would be required.
ILIM'S BOTTOM LINE
Headlines around the conflict are likely to be dramatic, but the macro and market impacts are less likely to be significant unless there is an escalation. It is thus important for investors to look through these events and stay invested for the medium term.
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.