An outbreak of deadly violence in Israel has raised concerns about the potential for contagion across the Middle East, adding to the already tense geopolitical landscape. The recent attacks by Hamas fighters that have killed hundreds of Israelis are of a different magnitude than previous conflicts between Israel and Hamas-controlled Gaza. The attacks have shaken confidence in Israel’s missile and land defenses and could embolden its enemies. Israeli Prime Minister Benjamin Netanyahu’s coalition government is under pressure to respond forcefully, leading to retaliatory strikes that have killed hundreds in Gaza.
The escalation of violence has raised fears of further action by Hamas or Lebanon’s Hezbollah, both of which are backed by Iran. A worst-case scenario could see Jerusalem and Tehran directly confronting each other, with potential repercussions for stability in the Gulf. The Gulf region is responsible for a significant portion of the world’s crude oil supply, and any disruption could lead to increased inflation at a time when central banks have already raised interest rates and bond yields are rising.
Saudi Arabia, a key player in the region, has historically supported Palestinian rights and opposed Israel. The country has been involved in proxy wars against Iran and could play a stabilizing role in the global oil market. If tensions escalate, Saudi Arabia’s 3 million barrels of spare daily capacity could help offset any disruptions caused by Iran.
The recent attacks may also have been aimed at derailing negotiations between Saudi Arabia and Israel, which could have led to a stronger security treaty between the two countries. In response to Iran’s support for Hamas, President Joe Biden may consider toughening sanctions on Tehran’s oil exports, further affecting the region’s stability.
Investors have reason to be concerned about the situation, as the Middle East is not the only region with the potential for escalating geopolitical risks. At a time when the global economy needs inflationary risks to subside, multiple hotspots are flashing red.
The outbreak of violence in Israel adds to an already fragile global economy, overshadowed by tensions in Ukraine and between the United States and China. It serves as a reminder that geopolitical risks can have significant implications for markets and economies worldwide. As the situation unfolds, it will be crucial for companies and investors to closely monitor developments in the region and assess potential impacts on their portfolios.