Russia’s attack on Ukraine, Hamas rockets hitting Israel or the terrorist attacks on skyscrapers in New York on September 11, 2001 are among the events that shook the world. However, even these or other tragic events in the past four decades did not have a significant impact on stock indexes, which have shown extraordinary resilience.
At the same time, the aforementioned attack on September 11, 2001 marks one of the most traumatic moments in modern history for American society. After a short-term decline in the order of one percent, the stock markets returned to their growth potential after only one month.
In light of the current conflict between Israel and the terrorist movement Hamas, which saw the bloodiest attack on the Jewish people since the end of World War II on October 7, it is good to look at the world of investment. The impacts of major and minor conflicts were analyzed by the staff of the Freedom24 investment platform and application operated by Freedom Finance Europe.
|What is the DAX index?|
|DAX (German Deutscher Aktienindex) is the German stock index (stock index) of the Frankfurt Stock Exchange. It includes the ongoing share prices of selected 40 most important German companies from the blue chip segment traded on the Frankfurt Stock Exchange. It is the largest and most important European index, which is considered a benchmark for European shares. (Source: Wikipedia)|
In an environment of increasing geopolitical instability (the war in Ukraine, the Israel-Hamas war, fears of China’s attack on Taiwan), the financial markets behave remarkably calmly.
“Over the past four decades, stock markets have weathered short-term declines in response to various geopolitical crises. What is perhaps even more remarkable is the rapid recovery that typically follows these declines,” analysts at Freedom24 wrote.
Even the Hamas attack on Israel, when the terrorists killed 1,400 mostly civilians on the territory of Israel and dragged over two hundred hostages to the Gaza Strip, is not different from previous reactions to various types of regional conflicts.
Analysts prove this by the behavior of the DAX stock market of German companies traded on the Frankfurt Stock Exchange. (see box)
CHART: How the German stock index DAX reacted to conflicts from the 1980s to the present
Source: Freedom Finance Europe
From a historical comparison, there is usually a short-term decline in the stock index. However, it often returns to its values or shows growth after a week or month after the given event – a military operation or a terrorist attack. This applies not only to the attacks of 9/11, but also to the military invasion of the Ukrainian peninsula of Crimea in 2014.
The markets are not interested in the conflict with Hamas (yet).
The sensitivity of European indices to a number of recent conflicts between Israel and its neighbors is then even lower than for other conflicts.
“The current escalation in the region is also likely to have a very limited impact on the economy and stock market of the European Union,” say analysts.
The Israeli economy is Europe’s 25th largest trading partner. It constitutes only 0.8 percent of the total volume of trade in goods within the EU.
If a major regional player does not join the conflict, especially drawing attention to erratic Iran, the real impact (and not only) on the European economy and its companies will be small.
Will there be escalation from Iran?
In the case of a black scenario, oil imports through the Strait of Hormuz could be disrupted, which would lead to a spike in oil prices. The strait, which is 54 kilometers wide at its narrowest point, separates Iran and Oman.
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About 25 percent of the extracted oil in the world and a third of the deliveries of liquefied natural gas LNG are transported through this strategically key strait. But such a scenario is currently unlikely, analysts at Freedom Finance Europe said.
However, the possibility that the United States (together with the EU) will increase the pressure on Iran remains a risk factor. The result could be a drop in oil production in the autocratic Islamic republic. At the same time, Tehran has been increasing the production of black gold in recent months. The US and other governments turned a blind eye to it, as it eased price pressures caused by OPEC+ production cuts.
According to a September report by the OPEC cartel, the volume of Iranian oil production reached 3 million barrels per day. In July alone, Iran increased its production by 143,000 barrels per day and is the third largest producer within the cartel. And in early November, the country’s petroleum minister, Javad Owji, said the country was producing 3.4 million barrels a day.
Oil at $150?
The World Bank warned at the end of October that the wider conflict in the Middle East could lead to a strong rise in Brent oil prices to $150 a barrel. “If the conflict (between Israel and Hamas) were to escalate, the global economy would face a double energy shock for the first time in decades,” SB Chief Economist Indermit Gill said. In this context, the bank presented three scenarios for the possible development of the oil market.
If the conflict were to escalate, the “moderate” version of this escalation could lead to an increase in the price of oil in the 4th quarter towards 93-102 dollars per barrel. At a “moderate” intensity of conflict expansion roughly at the level of the beginning of the Iraq war in 2003, the price of oil could rise towards $109-123 per barrel. And in the darkest scenario, which would roughly correspond in scope to the Arab oil embargo of 1973, prices could jump up to $140-157 per barrel of Brent.
In the case of higher prices of fossil resources, the pressure on the growth of inflation in Europe would of course also increase. “An escalation of conflict (in the Middle East) would intensify food security problems. And not only in the region, but all over the world,” said World Bank economist Ayhan Kose.
Historian warns of war with the Arab world
Niall Ferguson, a respected American economic historian, is more critical of the current Middle Eastern conflict from the perspective of history and its impact on the global economy, who contributes his views to the Bloomberg website.
According to him, the war in the Arab world is just beginning and Israel may fear for its existence. In addition, the Western left plays the role of “useful idiots” in favor of the interests of Russia and Iran with its statements in support of the Palestinians.
At the same time, both countries openly oppose the values of the West and threaten it with armed conflict. Iranian Foreign Minister Hossein Amirabdollahyan, for example, warned in early November of “harsh consequences” if Israel continued its attacks in the Gaza Strip. According to Reuters, the head of Iranian diplomacy said this at a joint press conference with his Turkish counterpart Hakan Fidan in Ankara.
And we cannot forget “quiet” China, which benefits from economic cooperation with the Kremlin, from which it buys fossil resources at a significant discount.