Impact of the Israel conflict on the Global Economy & Markets
With #investmentbank and #bank interviews in full swing, most students are being asked to discuss a noteworthy market news and its impact on the #globalmarkets or specific sectors.
As the Israel and Palestine conflict unfolds, there were initial concerns that an escalation could lead to a wider war in the Middle East, potentially tipping the world economy into recession and disrupting oil supplies leading to a surge in global oil prices.
✅ Impact on Interest Rates: The conflict led to a decrease in the market-implied probability of an increase in the fed funds target rate next month, which fell below 14%. This comes after strong headline payroll reports and easing wage pressures, which support the view that the Federal Reserve will keep the target rate unchanged in its next meeting. Interest rate-sensitive sectors like technology, communication services, and utilities outperformed as expectations for further hikes in 2023 diminished.
✅ Impact on Energy sector: Crude oil prices will be highly sensitive to spiking with any signs of the conflict spreading to oil-producing Middle Eastern heavyweights like Iran. If the conflict stays confined to the region, Bloomberg Economics estimates a $3 to $4 boost to oil prices due to tighter enforcement of U.S. sanctions on Iran's oil. The impact on the global economy would be minimal, particularly if Saudi Arabia and the UAE offset the lost Iranian oil with their spare capacity. However, a direct military confrontation between Israel and Iran could have a significant impact on the global economy, potentially causing oil prices to rise by $64 per barrel. This could result in a 1.0 percentage point drop in global GDP and a 1.2 percentage point increase in inflation.
✅ Impact on Equity Positioning: The risk of a wider conflict involving Iran or other countries in the region could push volatility higher, sending stocks lower, and could shift market leadership more towards defensive assets. However, if the conflict remains confined to Israel and Gaza, the market impact will likely be limited as Israel contributes only about 0.5% of world GDP and is not a major crude oil producer. Defense stocks could benefit from increased defense spending, which may rise if Congress acts to bolster supplies of munitions and air defense systems being supplied to Ukraine and Israel.
📌 But certain economists believe that the Israel-Gaza conflict may accelerate deglobalization, already spurred by protectionism, the Trump administration's tariff war, the Covid-19 pandemic and Russia's invasion of Ukraine. Deglobalization could slash international trade cooperation, less information and technology sharing, and fewer financial market linkages. However, it might also protect nations from supply chain disruptions. This shift could raise inflation and interest rates globally, impacting monetary policy.
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