Muted market reaction. The Israel-Hamas conflict is tragic from a humanitarian standpoint, and we hope the tension will be contained in the coming months. In financial markets, the impact has been minimal thus far. As with past conflicts in the Middle East, a key source of market volatility will arise from surging energy prices, and its knock-on effects on inflation and the broader economy.
As news of the conflict broke, the expected increase in energy prices took hold, with commodities rallying some 5% when the market re-opened on Monday (9 October). However, the classic flight-to-safety and selldown in risk assets did not materialise:
So where do we go from here? Whether this crisis escalates further into a long-drawn affair which may significantly impact the global economy will depend on whether the geopolitical upheaval can be contained and not trigger intense involvement of other nations. There are no easy answers – it all hinges on how the situation evolves over the next few days.
Middle East conflicts: Historically muted impact on financial markets. Beyond current headlines and knee-jerk reactions, our analysis of past data suggests that market reaction to these conflicts in the longer-term were minimal. Since 2000, there were a total of 6 of such conflicts. On average:
Barring further escalation, we believe this time shall be no different and overall impact on risk assets will be limited.
Tactical strategies for volatile times: Stay with quality. Listed below are our tactical strategies in the current environment:
Figure 1: Relationship between oil and inflation
Source: Bloomberg, DBS
Table 1: Major Israel-related conflicts since 2020
Source: Britannica, Journal of Conflict Studies, Institute for Middle East Understanding, Bloomberg
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