The flare-up of the Hamas–Israel conflict raised concerns about the potential for significant market turbulence, particularly in terms of higher oil prices, but in the past week, both the US and Australian share markets maintained their upward momentum.
According to AMP Capital chief economist Shane Oliver, while the situation will likely “get worse before it gets better”, historical precedent shows that there have been several flare-ups in the Israeli–Palestinian conflict that had minimal impact on financial markets.
“The same goes for Lebanon and Syria if they are drawn in,” Dr Oliver explained, alluding to the overarching concern that other Middle Eastern countries may be drawn into the conflict.
“The Gulf Wars in 1991 and 2003 briefly impacted oil prices because key oil producers were involved,” he said, adding that “this is not a re-run of the 1973 Arab/Israeli war”.
“Now, Arab countries are on the sidelines with many having better relations with Israel.”
But Dr Oliver explained that the highest risk would come from Iran being drawn into the conflict.
“The timing of Hamas actions looks motivated to prevent progress towards a Saudi/Israeli security pact which could have harmed them and Iran,” said Dr Oliver.
“So, the main risk would be if Iran, which backs Hamas and Hezbollah in Lebanon, is drawn into the conflict.”
He also highlighted that this scenario could pose a threat to Iran’s oil production, which accounts for 2.5 per cent of global consumption, disrupt the flow of oil through the Strait of Hormuz – a critical passage for 20 per cent of the world’s oil consumption – or impact Saudi Arabia’s oil production.
However, Dr Oliver clarified that, as of now, investment markets seem to have confidence that Iran will not be drawn into the conflict, as evidenced by the 6 per cent increase in oil prices on Friday, 13 October.
“If that remains the case, then expect minimal impact. If not, then expect a surge in oil prices,” Dr Oliver said.
In response to a slight oil price dip on Monday, Dr Oliver told InvestorDaily that the shift has been minor.
“No change in my views. It’s only moved a few cents so hasn’t really reversed Friday’s move. In fact, it’s all just normal day-to-day volatility in the oil price so far,” he said.
“The key remains whether Iran or other significant oil producers get involved directly which is not my base case but is a high risk,” Dr Oliver added.
He anticipates the US will likely seek to postpone involving Iran in the conflict until after next year’s election, and that Israel may be hesitant to open another front at the moment.
“But Iran’s backing of Hamas and its nuclear weapons’ breakout capability mean that Israel has a strong incentive to attack Iran at some point resulting in a greater threat to world oil supplies,” Dr Oliver elaborated.
In the meantime, Dr Oliver noted, “the risk is high”, with uncertainty expected to rise as the war escalates.
Regarding potential inflationary consequences, when comparing the current situation to that of 18 months ago – a period characterised by surging oil and petrol prices due to the Ukraine war – Dr Oliver noted that during that time, household budgets were robust.
“Households wanted to get out and spend with reopening and monetary policy was easy. Now all of that is reversed so a further surge in oil and petrol prices is more likely to be a drag on growth and hence be deflationary which will make it very hard for higher fuel and transport costs to be passed on to consumers beyond the increased price at the petrol station.
“Our rough estimate is that a typical Australian household is now paying $12 a week more for auto fuel than back in May. With stretched household budgets, this means that $12 a week less is available for spending elsewhere.”
Ultimately, Dr Oliver explained that for the near term, shares are “at high risk of a further correction” due to the uncertainty surrounding the conflict, but also due to the elevated risks of a recession, earnings risk, the possibility of sustained higher interest rates from central banks, and the concurrent rise in bond yields, which have resulted in less favourable valuations.
But he added that AMP’s 12-month view on shares remains positive.
“The next 12 months are likely to see a further easing in inflation pressure and central banks moving to get off the brakes. This should make for reasonable share market returns, provided any recession is mild.”
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.