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>>> 3 market implications from the Israel-Hamas war


Yahoo Finance

by Rick Newman

October 9, 2023


https://finance.yahoo.com/news/3-market-implications-from-the-israel-hamas-war-183752115.html


Just about every US president gets a Middle East crisis, and President Biden now has his. The war between Israel and the Palestinian Hamas group, which attacked Israel on Oct. 7, could be long and complex. Iran, which backs Hamas and seeks the destruction of Israel, might be involved. Israel has vowed a massive operation in Gaza, which Hamas controls, and months or even years of urban warfare there are likely to be grueling and ugly.

Financial markets are insulated from the direct effects of this unfolding war, which doesn’t immediately threaten energy supplies, corporate profits, or banking stability. But there are market concerns nonetheless, especially if the war escalates. Here are three things to watch.

Oil supplies in 2024. Crude prices jumped by about 4% following the Hamas attack, which is a fairly typical reaction as markets apply a “fear premium” premised broadly on the perception of higher risk. That’s not a huge jump and the price hike could quickly fade if the oil market continues to function normally.

Two geopolitical changes could affect oil supplies in 2024, however — which means they have implications for the US presidential election. The first involves Saudi oil supplies. Before Hamas attacked Israel on Oct. 7, the Biden administration had been trying to broker a deal in which Saudi Arabia and Israel would establish formal, normalized relations for the first time ever. Each nation would make concessions to the other, and the United States would do its part by offering Saudi Arabia defense guarantees that make a deal with Israel possible.

Some analysts think an unstated part of the deal would be Saudi willingness to pump more oil in 2024, to help keep US gasoline prices down as Biden is running for reelection. But the war may now scuttle the Israeli-Saudi deal and with it the prospects of a boost in Saudi oil production in 2024.

“We see more support for tighter oil supply and higher oil prices over the longer term as diplomatic progress on a security deal with Saudi Arabia is likely to face significant headwinds during a period of heightened military activity in the Middle East,” Raymond James analysts wrote in an Oct. 8 report. “Speculation that Saudi Arabia could ease its oil production cuts to build goodwill for a security deal with the US had ramped up, but the potential for this weekend’s events to spark a broader regional conflict will likely place any further progress on hold.”

Iranian oil is another 2024 wild card. There have been subtle signs of a thaw between the United States and the Islamic theocracy, including Iran’s recent release of five US hostages in exchange for the unfreezing of $6 billion in Iranian funds. That, too, may have been a Biden effort to coax or allow more Iranian oil on to global markets to bring prices down. But even suspicion of Iranian aid to Hamas in its attack on Israel may force Biden to tighten sanctions on Iran and end any make-niceties. “Iran’s fingerprints on the attacks could reduce political space for the White House to pursue such leniency,” analysts at ClearView Energy Partners wrote in an Oct. 8 analysis.

Biden’s political prospects have suffered from high inflation, including gasoline prices that hit $5 per gallon in 2022 and have been persistently higher than when Donald Trump was in office before him. Biden clearly wants to keep gas prices as low as possible while he campaigns for reelection. The war in Israel will make that harder.

A coherent Republican party? Republicans in the House of Representatives are waging civil war among themselves, with the first big casualty being former Speaker Kevin McCarthy, who lost his post on Oct. 3 when a handful of far-right members voted to fire him, depriving him of a majority vote. Deep divisions between moderates and conservatives could keep the House leaderless for weeks and lead to a government shutdown when temporary funding bills expire on Nov. 17.

But a shocking war involving a close US ally that might at some point require Congressional action could cure Republicans of their adolescent hissy fits. A “growing sense of crisis will place new pressure on the House to resolve its leadership battle,” Raymond James asserted in its Oct. 8 report. The first test will come sometime around Oct. 11, the first opportunity Republicans will have to elect a new speaker. If they do so in short order, it would reduce the odds of a November shutdown. If they don’t, then maybe the party’s immaturity is incurable.

More aid for Ukraine and more money for defense. The temporary spending bills Congress recently approved did not include the $24 billion Biden wanted for Ukraine in 2024, to help fight its own war against Russian invaders. McCarthy’s ouster darkened the outlook for that aid passing Congress through some other mechanism, since the far-right conservatives asserting their newfound power generally oppose further aid to Ukraine.

The Israeli war may create a fresh opportunity for Congress to approve that aid. Russia is an ally of Iran, which is Israel’s sworn enemy and perhaps a co-conspirator in the Hamas attacks. So it could become politically more difficult for some members of Congress to snub Ukraine, since that favors Russia and by extension Israel’s nemesis, Iran. The world also seems even more dangerous in the aftermath of the Hamas attacks, which came as a total surprise and ruptured a period of relative calm in the Middle East. There are now two major wars in America’s sphere of influence, with China signaling its own interest in invading Taiwan one of these years. Gamesmanship over defense spending suddenly seems dumber than usual.

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