The Israel-Palestine War has been categorised as the worst attack on Israeli soil in several decades. Tensions started when there was a surprise attack by Iran-backed Hamas, which is a Palestinian militant group. This attack killed more than 1,000 in Israel and several other were wounded many. As a result of Israel-Palestine War, there were increased geopolitical worries yet again. As things got worse, experts believe that the consequences of this war will be far-reaching. Possibilities are there that this fight can impact global financial markets, investors & traders, businesses, and entire global economy.
Global economy, which is already struggling with higher inflation, is now dealing with another geopolitical crisis in the Middle East. Israel-Palestine War started on Saturday, when Palestinian militants shot over 5,000 rockets from Gaza Strip toward Israel. In retaliation, Israel announced about the war and approved for “significant military steps”. Impact of Israel-Palestine War on global economy might take some time to clear, but one thing is for sure. This might become more severe if this conflict spreads to the remainder of Middle East, mainly Iran. This is because Iran is a major oil producer and is a supporter of Hamas.
Global economists believe that major channel of impact on global economy is expected to be through oil prices, and these prices currently hover around ~$90 levels. If this Israel-Palestine War escalates further and other Middle Eastern nations get involved, this will pose a bigger threat to the global economy. Middle Eastern nations are key oil producers, therefore, any developments in this war should be watched very closely as global economy is continues to face ‘higher for longer’ interest rate environment.
On Monday, as a result of Israel-Palestine War, crude oil prices significantly increased as the tensions escalated in Middle East, which is a home to almost one-third of the global oil supply. Therefore, Brent crude saw an increase of ~3.44% to $87.49 a barrel, with US West Texas Intermediate crude rallying ~3.85% to $85.98 per barrel.
Experts have said that if the war continues for long, the oil dynamics might get changed. Brent crossed $90 mark but then the price corrected. Traders and investors should now use the $90 number as the threshold. This means if the price again breaches $90, there can be a trouble for the global economy. As the result, Indian economy might get impacted if the price remains high as a result of further supply disruptions. Iran joining the fray can end up impacting the sea routes, and this will push up transport and insurance costs. Increased crude prices might distort India’s balance of trade and CAD, which means rupee will come under pressure.
Israel-Palestine War Inflationary Impacts
If there is an increase in crude oil prices, the threat of higher inflation will again haunt the global economy. The US, India, China and other major economies are leading importers of oil and these economies might see high inflation if the oil prices remained high. An increase in the oil prices tends to impact numerous industries. Higher oil prices will push up cost of production for several industries and energy costs for businesses and households. As a result of this, inflation will remain higher.
Higher energy prices and new inflationary trends can impact the efforts of global central banks to bring inflation under the control. If this happens, central banks are expected to keep the interest rates at elevated levels for prolonged periods.
Tensions regarding the increased interest rates might impact the global economic outlook. The US Fed has clearly indicated that one more hike in interest rates might be on the cards and the rates might stay for a longer period. This has impacted the investors’ hopes. Escalation in the Israel-Palestine War will only make the situation worse.
Impact on Indian Economy
There appears to be no immediate impact on India’s trade with Israel as a result of conflict in West Asia. However, there can be potential supply-side problems in case any sort of escalation takes place. India’s exports to Israel make up for ~1.8% of India’s total merchandise exports and the exports are led by petroleum products.
Israel buys ~$5.5 billion – $6 billion of refined petroleum products. In FY23, India’s total exports to Israel came in at ~$8.4 billion. As a result of these exports, if there is any kind of rupee depreciation, Reserve Bank of India might have to intervene. The currency range might get shifted upwards to ₹83-84 bracket in this case.
On Monday, the overall market cap of the companies on Bombay Stock Exchange initially fell from about INR320 lakh crore to ~316 lakh crore. As a result, investors lost ~INR4 lakh crore. However, Indian markets recovered later in the day as BSE market cap increased to ~INR317 lakh crore. Finally, the BSE benchmark index Sensex fell by ~0.73% by the day’s end.
Increased crude oil prices will impact profitability of 3 government-owned oil marketing companies: Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd., and HPCL.
Israel-Palestine War impacted the global equity markets all over again as investors continue to put their money in safe-haven assets. That being said, investors are quite watchful and cautious.
On Monday, the US stock futures declined, with the Asian markets trading lower. On the other hand, safe-haven gold prices saw an increase of more than 1%. Spot gold went up by ~1.2% to $1,853.79 per ounce, with the US gold futures climbing ~1.2% to $1,867.80.
Meanwhile, foreign institutional investors continue to sell their holdings as a result of higher bond yields. High crude oil prices might add more issues and problems. Experts have opined that this is the time to remain watchful. Investors might consider refraining from taking big risks. It is important to wait for some developments regarding Israel-Palestine War to unfold.
Ongoing conflict in Israel seems to be an unforeseen event which has been impacting the market, and effects might take some time to be fully realised. That being said, it is of utmost importance to monitoring the current situation closely, mainly regarding potential involvement of other nations such as Iran.