The Israel-Gaza conflict has shocked the world in its brutality, but stock markets have remained largely unmoved by the scale of the tragedy unfolding before us.
There’s been no meltdown, no panic and no race to safe-haven assets, and right now that doesn’t look like changing either.
So, what does this say about investors? Are they really a hard-hearted bunch who only care about the bottom line?
Individual investors are, no doubt, just as concerned about the human and political nightmare as everybody else.
Taken as a whole, markets are not. It’s harsh, but that’s the reality. To them, it’s no big deal. Yet.
But it’s wrong to say that no markets were affected. While western stock markets in the US, UK and Europe quickly recovered their exposure, local markets were deeply affected, says Kathleen Brooks, founder of Minerva Analysis, a market analysis company.
“There were significant declines in Israel, Palestine, Turkey, Qatar, the UAE, and Saudi Arabia in the immediate aftermath of the attacks,” she adds.
The oil price rose, too, with Brent crude jumping by 3.5 per cent to just more than $88 per barrel.
“The Middle East accounts for just under a third of global oil production. A war in the region can increase the risk of a major interruption to the oil supply,” Ms Brooks says.
Yet, it’s still well below this year’s intraday peak of $97.04 a barrel, which it hit on September 27 as low US crude inventories increased supply fears.
However, traditional safe-haven asset classes such as US Treasuries, the US dollar, Japanese yen and Swiss franc have only moved slightly. Defence stocks did pick up, though.
The gold price jumped by 3 per cent, to around $1,889 an ounce from $1,833, but that was driven more by a dip in the US dollar and falling yields on Treasuries, than the war. It is down 2 per cent over the last month.
The startling truth is that investors are far more worried about the direction of inflation and interest rates than what Israel will do next.
As Jeremy Batstone-Carr, European strategist at Raymond James, puts it: “Trading does not feel like becoming disorderly even as the threat of escalated tensions prevails. Financial markets are, sadly, all-too used to crises in the Middle East.”
Geopolitical events can have a major impact on markets, says Jason Hollands, managing director of wealth advisers Evelyn Partners.
“Most notably, the Arab-Israeli conflict in the mid-70s triggered an inflationary surge as the Arab states embargoed oil exports to the US in retaliation for their support of Israel,” he adds.
Yet, war never happens in a vacuum and that was true then, too, as the 1973 oil crisis took place at a time when inflation was already a problem, according to Mr Hollands.
The S&P 500 plunged almost 15 per cent in the week after the September 11 terror attacks in 2001, while oil and gold rallied.
Yet within a week, the oil price had retreated to pre-attack levels as no further attacks followed and crude oil shipments to the US were uninterrupted.
By the middle of October, markets had recovered nearly all their losses.
Global stock markets fell 10 per cent when Russia invaded Ukraine last year, triggering an energy price shock and a cost-of-living crisis, and the S&P 500 index ended the year crashing almost 20 per cent.
Once again, other factors had a bigger impact on markets, Mr Hollands says.
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“The origins of the inflationary surge ultimately lay with an excessive increase in money supply by central banks and supply chain bottlenecks caused by pandemic lockdowns,” he adds.
Despite hundreds of thousands of deaths and no conclusion in sight, the war in Ukraine seems contained and markets have moved on.
The Israel-Hamas conflict has had little impact on oil production, but one thing could shake markets out of their complacency, Mr Hollands says.
“If other regional actors became directly embroiled, this would trigger a much sharper reaction because of the threat to energy supplies if, say, Iran attempted to close the Straits of Hormuz,” he explains.
Samy Chaar, chief economist at Swiss private bank Lombard Odier, says the Gulf Co-operation Council region has suffered less than investors might expect.
“While it is fuelling some concerns over the region’s outlook, we see the GCC countries ultimately striving to avoid regional escalation and maintaining current oil output behaviour,” he adds.
Mr Chaar says the GCC’s long-term development plans rest on avoiding “geopolitical conflagration”.
It is unwilling to allow the oil price to spike higher as this would accelerate global electrification trends.
“The unpredictable nature and scale of the conflict will, however, require close monitoring,” he adds.
Israel-Gaza war – in pictures
Graphic images of the Israel-Hamas conflict may be dominating the headlines in the most horrific way imaginable, but what markets remain focused on are the same grey men in suits. Namely, central bankers led by the US Federal Reserve and yes, they are still mostly men.
What markets really want to know is whether they have finished hiking interest rates, and how soon they will start cutting them instead.
For them, this is a far more vital issue than how Israel exacts revenge in Gaza.
If the Fed pushes too hard, it could trigger bank collapses and a global recession, while a successful outcome would be to engineer an economic soft landing.
The Israel-Hamas conflict scarcely comes into that calculation, except in how it affects the oil price.
For now, investors are refusing to worry, says Sabin Hathorn, senior market analyst at Capital.com.
“Markets are assigning little chance that this conflict will become entrenched and the effects will be limited geographically,” he adds.
A 1970s-style oil price surge would change all that, but seems unlikely at this stage. Even that may not have the same impact, as the world is a lot less dependent on oil than it was 50 years ago.
What’s happening in Gaza is a human tragedy, rather than a financial one. Perhaps in that respect, markets have struck the right response after all.
