The surprise terrorist attack on Israel by Hamas has created a new geopolitical crisis with many unexpected implications. We cannot forget the hundreds of people that have been killed in this attack—a terrible loss of innocent lives. In markets, the Key Tel Aviv share indices declined around 7% and sovereign bonds slumped by 3% after the bloodiest attack on Israel in many years.
Investors should not worry because this war has very significant ramifications. Iran has supported Hamas in their attack, and this could lead to new tensions with the United States. Furthermore, this war against Israel may create an even larger division between the two largest military and economic powers, the U.S. and China. It is very difficult to think that China will support Hamas and Iran, but it is also hard to see them supporting Israel.
The impact on the oil market is likely to be strong but maybe short-lived. Any geopolitical tension that may lead to further supply cuts in a tight market is likely to create a strong reaction on the front end of commodity prices. However, we must remember that oil prices have fallen to $82.79 per barrel after signs of weak demand in the United States became evident in the past week. The weak demand situation may be offset by rising geopolitical risk and keep prices elevated for longer.
This war may keep the geopolitical premium on oil prices for a prolonged period. It may also accelerate the global economic slowdown as the tailwind of low import costs stops working for developed economies.
The war has more than just energy implications. Ignoring the macroeconomic impact of this war would be irresponsible. It has significant financial implications, as it is likely to trigger more sanctions and financial restrictions for those countries supporting Iran and Hamas. This should not be a surprise. Furthermore, the war may be a good reason for many developed nations to increase protectionist and surveillance measures. Security risks are going to soar, and we must acknowledge that governments are always keen on imposing protectionist measures on other economies.
If we look at this attack as something distant and irrelevant, we are going to be very wrong. This will have strong implications for security, global commerce, and economic growth. In fact, this attack arrives when the world is suffering a serious slowdown after the inexistent multiplier effect of multibillion-dollar stimulus plans. Therefore, lower growth and more burdens on commerce will mean higher debt and persistent inflationary pressures.
I hope that this disaster ends soon and that Hamas frees the hostages, but we need to acknowledge the economic implications. All the ingredients of a significant global slowdown are already in place, including weak PMIs and weakening consumer confidence. The geopolitical implications of this horrific attack, even if it ends soon, will last for many years.