The Israel-Hamas war through the eyes of financial markets

A new conflict started in October with a direct impact on international financial markets. Following Russia’s invasion of Ukraine, the Israel-Hamas war poses risks both to regional markets and to international ones.

So far, the financial impact may have been limited, but risks mount.

In the first week after the Hamas attack, Israeli shares plunged 9%. They diverged from emerging and developed market shares but managed to drag other Middle East markets down.

Naturally, the local currency, the ILS (Israeli Shekel), lost ground. It is down now -13.67% YTD, dropping more than 6% in October alone.

But these are only local markets reactions. What about international markets? Can this conflict lead to a risk-off environment and a flight to safety?

An escalation would lead to a flight to safety

Before moving forward, we need to specify what an escalation of the conflict might be and what is a flight to safety.

First, an escalation might be if another Middle Eastern country becomes involved in the conflict. This would be a major risk for the region, and the immediate effects would be rising oil prices and a flight to safety.

Second, safety in financial markets is often misunderstood. The US dollar, for instance, is the absolute safe-haven currency due to its status as the world’s reserve currency. Whenever things go wrong, investors buy the dollar.

In this sense, one may say that investors already rushed into the safety of the US dollar, given its gains against literally all fiat currencies.

Another safe-haven currency is the Swiss franc. One can easily note that investors bought the Swiss franc, too, just by looking at how the GBP/CHF cross pair reacted in October – down three hundred pips points.

But safety also means dropping stocks and buying bonds. Well, both bonds and stocks have suffered major losses in the United States.

Also, safety means buying one other safe-haven currency – the Japanese yen. It isn’t easy to see a higher Japanese yen, especially against the US dollar. The exchange rate has been stuck at 150 for more than a week now.

However, the risk here is that we see the markets lagging. One should not underestimate the speed of market movements should more risk be taken off the table.

If that is going to be the case, the stock market and the Japanese yen should react the most, as other assets already did.