Israel-Hamas Conflict – How will this impact financial markets?



First off, I absolutely do not condone war of any kind.

Just like with the Ukraine conflict, I am absolutely not in favour of violent action of any kind.

If I had my way, I would find a way to end armed conflict between mankind for good.

But the world is not so idealistic, and as investors we need to see the world for how it is, not as how we wish it to be.

So I am not going to comment who is right or wrong in this conflict, and I am going to focus exclusively on how this is most likely to play out, and potential implications for investors.

This article was written exclusively for Patreons. I am releasing it as it may help you think through the geopolitical events that are currently playing out, and how it may affect you.

If you find content like this helpful, do consider signing up as a Patreon for more exclusive content like this. You will also receive full access to my personal Stock / REIT watchlist, and personal portfolio.

Immediate Impact of the Israel Hamas Conflict?

The immediate impact of the Israel Hamas conflict of course is more volatility for oil.

The Middle East collectively controls about 30% of global oil supply, so any volatility in the Middle East is likely to drive oil prices up.

We’ve already seen this, with oil prices up $3 a barrel today.

Oil is a big input cost into inflation, so any sustained rise in oil price will have big implications for inflation (and consequently Fed interest rates – as Feds cannot cut rates if inflation remains high).


Saudi deal off the table?

The other immediate factor is the impact on the Saudi-Israel-US deal.

This was a 3 party deal, that broadly promised:

  1. Saudi Arabia to recognise Israel formally (this has massive geopolitical implications)
  2. In exchange – US to provide Saudi Arabia with US weapon sales, security guarantees, and help in building a domestic nuclear program
  3. In return – Saudi Arabia to increase oil supply in 2024 (to bring oil prices down in line with US interests in an election year)

Much of this hinged on (1).

With the weekend attack by Hamas, and what is likely to be a strong Israeli military response against Gaza.

It makes it politically very hard for Saudi Arabia to formally recognise Israel (domestically it would be very unpopular to do so if Israel were to commence military action against Palestinians).

Preventing such a deal between Saudi and US would benefit the Iran-Russia-China bloc, and it just so happens that Hamas is supported by Iran, which makes you wonder who is really controlling the chess pieces here.

Mid Term impact of the Israel Hamas Conflict?

The mid term impact though, is not so straightforward.

The chart below shows how the 2006 Lebanon War barely had an impact on oil prices once the broader macro factors started to kick in.

As of today, the bigger macro factor is (a) lower demand for oil due to a global economic slowdown, and (b) whether OPEC+ supply cuts are continued in 2024.

So for oil, I would say those remain the bigger factors to watch in the mid term.

But… don’t rule out a potential escalation in the war

That being said, this assumes that the current conflict does not spiral into something broader.

War is unpredictable, and it is not impossible to see a scenario such as the following:

  1. Israel launches a massive ground invasion of Gaza Strip in retaliation for the attacks
  2. Hezbollah (Lebanon) joins the conflict
  3. The war goes poorly for Hezbollah, and they are in danger of defeat
  4. At this point, Iran enters the conflict (whether directly or indirectly)

And with a US carrier group being sent into the region, it is not impossible to see a sequence of events that results in broader conflict for the Middle East.

If so, all bets are off on the price of oil, as the Strait of Hormuz is the biggest chokepoint for oil globally.

Which just happens to sit next to Iran.

So a broader conflict here is not my base case, but as an investor it is foolish to rule out the possibility given the impact such a conflict would have on oil prices (and consequently inflation and interest rates).

How the Israeli conflict factors into the broader geopolitical landscape?

So that’s the immediate and midterm market impact.

But as a citizen of the world, I cannot help but look at the Israeli conflict though the lens of a disturbing series of geopolitical developments.

This plays out in 2 ways:

  1. Reshaping Global Energy Flows
  2. Pax Americana under threat, the rise of a more multi-polar world

Reshaping Global Energy Flows

Leaving aside the issue of who is right/wrong in the Ukraine conflict (as shared, I do not condone armed conflict) – the net effect of that conflict has been to reshape global energy flows.

Namely – Europe is now forced to rely more on US and African energy (and not Russia energy).

While Russian energy has been diverted East – to China and India.

This was the global energy flows pre-COVID, and you can see how the Russia-Europe leg has effectively been cut off, and replaced with Russia-China/India flows.

So Russia was a big energy supplier to Europe, and accordingly the Ukraine conflict reshaped energy flows for Europe.

It just so happens that Middle East is a big energy supplier to Asia.

So the question now – how is this conflict going to impact Middle East energy flows?

I don’t have any easy answers to this one.

But it just strikes me as interesting that Hamas is backed by Iran, and it is in Iran/Russia/China’s interests to ensure there is no Saudi-US deal.

Am I thinking too much? Perhaps.

You tell me.

Pax Americana under threat, the rise of a more multi-polar world

Ever since COVID (or rather Trump in 2018), it appears that the willingness to challenge US authority globally has been on the rise.

This has coincided with a decline in America’s omnipotence.

Let’s explore each in further detail.

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Willingness to challenge US authority

More and more countries are willing (or perhaps forced to) challenge US authority.

It started in 2018 with the US-China trade war, that led to an increasingly assertive China standing up to the US.

It continued in 2022 with the Ukraine-Russia conflict, that led to crippling sanctions from the West – which did not deter Russia but instead forced her closer to China/India.

It also continued in 2022 with the Saudis, a long time US ally, refusing to follow US demands to increase oil production (to bring oil price down).

And this weekend it continued in the Middle East.

A decline in America’s Omnipotence

How this Middle East conflict evolves and plays out remains to be seen.

But you have to at least consider the fact that US resources are limited, and this is playing into the minds of countries’ increasing willingness to challenge US authority.

The US and its allies have significantly drawn down on military stockpiles to be sent to Ukraine (including American weapons stockpiles held in Israel, which were diverted to Ukraine).

It’s gotten to the point where approving new funding for Ukraine is a real challenge (especially with Speaker Kevin McCarthy removed – but more on this later).

If the Middle East conflict develops further, can the US afford a war on 2 fronts?

To fund a war in Ukraine, at the same time as a conflict in the Middle East?

Just as we are heading into a US election year?

America is running very large budget deficits, with very high interest rates

Don’t forget that the US is running a huge budget deficit.

And with 10 year interest rates at 4.8%, the cost of servicing that debt is getting increasingly prohibitive.

Goldman estimates that if things continue on their current path – by the end of this decade the US will be spending 4% of its GDP just paying interest on its debt.

The point is – America’s current path of spending is not sustainable.

A long time ago America could afford to be involved in every global conflict. But today’s America is different.

With limited resources – they will increasingly be forced to choose their battles.

While internal conflict is very high

Ray Dalio had a very good article on this that I suggest reading for more colour.

The entire fiasco with Kevin McCarthy’s removal as speaker is instructive.

Kevin McCarthy basically stuck his neck out to get a bipartisan deal approved in Congress – to avoid a government shutdown last week (approved stop-gap funding for 6 weeks).

And in the subsequent no-confidence vote, none of the Democrats were willing to back him. In fact, all of the Democrats voted to remove him as speaker.

After an example like that, you’re pretty much guaranteeing no deal will be done when the current stop-gap measure ends in 6 weeks.

Which Republican Speaker will be willing to cut a Bipartisan deal after this?

To quote Ray Dalio:

I hope it is now clear that the two parties are squaring off into monolithic blocks that are controlled by uncompromising, win-at-all-costs extremists and that most everyone will be forced to pick a side and fight for it. While this tendency is most obvious in the Republican Party, it is also true for those in the Democratic Party. (Though the Democratic Party wisely chooses to make it less obvious, it very apparently demonstrates it in the ideological conflicts that are taking place throughout government, especially in congressional committees.) This is now a fight to win-at-all costs game in which just about anything goes, including fighting dirty (lying and cheating), and respect for the system doesn’t matter much.  

Who are the sides in this new geopolitical framework?

To the enemies of America, you’re seeing an America plagued by internal conflict, with its limited resources being stretched thin across the globe.

And to everyone else, you’re watching all this play out and wondering whether you want to be fully reliant on America, or whether you want to hedge your bets.

We’re starting to see countries increasingly coalescing into alliances around ideology, and perhaps more importantly – energy/commodities:

You have broadly 3 camps:

  • “US led” bloc – US/Europe/Japan/Australia
  • China led” bloc – Russia/China/Iran (possibly Africa)
  • In the middle (not so straightforward, possibly playing both sides):
    • Middle East
    • India
    • South East Asia
    • South America

What does this mean for investors?

Now this second part of the article is a geopolitical play, one that will play out over decades.

So the investment implications are not immediately so straightforward.

2 investment themes that come to mind are (note that these are mid – long term trends, the short term is driven more by the business/interest rate cycle which we discuss in other articles).

  1. Bearish USD / Treasuries
  2. Bullish Commodities

Bearish USD / Treasuries

The path above is one where US budget deficit remains high, while marginal buyers of Treasuries disappear (non-US friendly countries will increasingly diversify their USD and Treasury holdings).

The only sustainable path in the mid term is for either (a) US to reduce its spending (unlikely), or (b) more money printing.

My personal view is that eventually the only sustainable mid term path is a return to money printing – where the Feds will have to buy Treasuries to keep interest rates down, a modified version of yield curve control.

The only question is how do we get from here to there – and I don’t think that happens without some kind of big crisis/shock first.

Bullish Commodities/Gold

In a world where countries increasingly diversify away from USD and Treasuries.

Where does the money go?

A couple of beneficiaries stand out – commodities, gold, bitcoin.

Commodities because whoever controls energy (and commodities) controls the world. Recent events have shown the important of securing energy (and commodities supply).

In a climate like that, it just makes sense to hold your foreign reserves in commodities or some kind of commodities supply – whether it is buying oil to be stored as strategic reserves, or buying up copper mines around the world.

Gold, because if you don’t want to hold USD, gold is the most obvious alternative as the centuries old store of value outside of paper currency. Bitcoin could be a potential beneficiary as well, given it’s tiny market cap compared to gold.

This article was written exclusively for Patreons. I am releasing it as it may help you think through the geopolitical events that are currently playing out, and how it may affect you.

If you find content like this helpful, do consider signing up as a Patreon for more exclusive content like this. You will also receive full access to my personal Stock / REIT watchlist, and personal portfolio.


This article was written on 9 Oct 2023 and will not be updated going forward.

For my latest up to date views on markets, my personal REIT and Stock Watchlist, and my personal portfolio positioning, do sign up as a Patreon.


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