The global economy, currently shook by raised inflation, is presently facing another geopolitical crisis in the Middle East after the surprise assault of Hamas on Israel and subsequent declaration of battle by the last option.
On Saturday, Palestinian militants fired more than 5,000 rockets from the Gaza Strip toward Israel, killing no less than 700 individuals and wounding thousands others, the worst assault on Israeli soil in decades.
In retaliation, Israel formally pronounced war and supported for “significant military steps”, as the military crushed Hamas militants still in southern towns and intensified its barrage of the Gaza Strip.
The toll passed 1,100 dead and thousands wounded on the two sides, as fighting entered a third day.
The fallout of Israel-Hamas battle on the global economy might get some margin to turn out to be clear but would turn out to be more severe if the conflict spreads to the rest of the Middle East, especially Iran, which is both a major oil producer and supporter of Hamas.
“A major channel of impact on the global economy would be via oil prices which have previously risen close to $90 level. Further escalation of the conflict towards other Middle Eastern nations which are key oil producers poses a bigger danger and needs an exceptionally close watch given that the global economy is currently facing a ‘higher for longer’ interest rate scenario,” said Kanika Pasricha, Economist, Standard Sanctioned Bank.
Allow us to understand the impact of Israel-Hamas battle on global economy and markets:
Oil prices boil
Crude oil prices surged sharply on Monday as the tensions escalated in the Middle East, home to almost a third of global oil supply.
Brent crude rose 3.44% to $87.49 a barrel, while US West Texas Intermediate crude rallied 3.85% to $85.98 a barrel.
Be that as it may, the crisis is unlikely to pose any major immediate danger to the oil supply unless it further spreads to different countries in the region which could form into a more devastating intermediary war, embroiling the US and Iran.
While reports of Iran are being involved in the attacks against Israel, any possible retaliation against Tehran could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously taken steps to close, analysts said.
“That’s what the issue is if the conflict persists for long, which is say, even a fortnight onwards, then the oil dynamics will change. Brent had crossed the $90 mark but then, at that point, withdrew. Presently we can use the 90 number to be the threshold past which there is trouble for the world economy. India can get impacted if the price remains high due to further supply disruptions,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
Iran joining the conflict can influence the sea routes and push up transport and insurance costs. Higher crude will distort our balance of trade and computer aided design thus putting pressure on the rupee.
Inflation
As the crude oil prices surge, the danger of high inflation grasps the global economy again. The United States, India, China and other major economies are big importers of oil and can see high imported inflation if the oil prices remain raised.
At the point when oil prices rise, the cost of production for various industries and energy costs for businesses and households also surge, driving inflation higher.
High energy prices and new inflationary trends could undermine the efforts of national banks to bring inflation under control. This can see interest rates at a raised level for a drawn out period.
The concerns over higher interest rates gouge outlook for global economic growth. With the US Fed plainly indicating another hike in interest rates was on the cards and rates can stay raised for a more extended period has managed a disaster for investors’ hopes that rate hikes have topped and national banks could begin thinking about rate cuts.
India-Israel Trade
There is no immediate impact seen in India’s trade with Israel due to the conflict in West Asia. In any case, it can make supply-side problems if the conflict escalates, analysts said.
India’s exports to Israel account for 1.8% of India’s total merchandise exports drove by petroleum products. Israel buys around $5.5 – 6 billion of refined petroleum products from India. In FY23, India’s total exports to Israel stood at $8.4 billion
“Therefore the rupee depreciation is a distinct possibility which will require RBI action. The currency range will shift upwards to the ₹83-84 section in such a case,” said Sabnavis.
Then again, India imports machinery, pearls, diamonds and other precious and semi-precious stones from Israel. In FY23, India’s imports from Israel were at $2.3 billion.
Global markets
The Israel-Hamas war has spooked equity markets done with investors shifting towards safe-sanctuary assets. Investors remain cautious and watchful of the global events with risk-off sentiment grappling the market.
The US stock futures declined while the Asian markets traded lower on Monday. Safe-shelter gold prices rose more than 1%.
Spot gold jumped 1.2% to $1,853.79 per ounce, while the US gold futures climbed 1.2% to $1,867.80.
Dollar and Japanese yen also edged higher. The dollar index was last 0.1% higher at 106.33.
“This is a time to be cautious. Investors might refrain from taking big risks. Wait for the developments to unfold. Long haul investors can slowly accumulate high quality stocks on declines,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Meanwhile, foreign institutional investors (FII) are continuously selling due to higher security yields and high crude oil prices could add more issues.
Be that as it may, analysts don’t see a major immediate impact on the Indian stock market.
“The ongoing conflict in Israel is an unforeseen occasion impacting the market, and its effects might find opportunity to be fully absorbed. Monitoring the situation closely, especially regarding potential involvement of different actors like Iran, is essential. The possibility of a third front involving Iran is a significant worry as it could trigger a sharp increase in crude oil prices,” said Santosh Meena, Head of Research, Swastika Investmart.
From a technical standpoint, the 19,300-19,250 range is a critical demand zone for Nifty 50. Until the market stabilizes within this range, it’s likely to remain in a sideways design, facing a striking obstacle at 19,800. A break under 19,250 could prompt a sound correction, potentially reaching the 18,800 level, he added.
“For short-term traders, it’s advisable to exercise caution and not rush into trades. Then again, a substantial correction could present an excellent buying opportunity for long haul investors,” Meena said.
Raj Vyas, VP of Research at Tejimandi said he did not think there was any cause of panic as far as the Indian stock market is concerned but the performance would be mirrored as to how the global markets do.
“Right now we are not worried because this Israel-Hamas is an evolving situation and needs to be followed for a couple of days before we respond to it. Since the earnings season will kick start from eleventh October 2023, markets will acutely watch the report card and the management critique to gauge the trajectory going ahead and state elections starting next month.”