Geopolitics heightens market risks

The

conflict between Israel and Hamas

has the potential to not only be prolonged, but also widen, which raises risks for the global economy that are not yet reflected in markets. The 20-day conflict is still in its early stages. While the Israeli bombing of Gaza began immediately after the Hamas terrorist attacks on Israeli civilians on Oct 7, the ground invasion of the territory, for which Israel has been preparing, is yet to get under way. Moreover, the war shows signs of widening. Hezbollah militants based in Lebanon have

already fired missiles into Israel

– which faces the prospect of a two-front war – and in recent days, other Iran-backed militias based in Syria, Iraq and Yemen have launched rockets and drones against both Israel and US forces in Iraq and Syria.

So far, Iran, which also supports Hamas and Hezbollah, has not taken direct part in the conflict, choosing only to act through its proxies, but its deeper involvement is a plausible scenario. So is the possibility of the US tightening sanctions on Iran’s crude oil exports in response to its support for Hamas. Combined with the high odds of Russia also curtailing oil supplies as the Northern Hemisphere winter sets in, this raises the risks of a spike in oil prices, as often happens when there is serious instability in the Middle East. Analysts at BCA Research warn that investors should prepare for

major oil shocks

as their base case over the next 12 to 24 months. If such shocks come to pass, they would threaten to reignite inflation. A widening of the conflict may also result in a strengthening of the US dollar, driven by safe haven demand.