Major stock markets in Israel and across the Middle East tumbled on Sunday amid worries that rising conflict between Palestinian group Hamas and Israel threatens to spiral, setting the stage for an unstable week.
Key Tel Aviv share indices ended nearly 7 per cent lower, led by a 9-per-cent drop in banking shares on turnover of 2.2 billion shekels (US$573-million), and government bond prices fell as much as 3 per cent in the market’s initial response to the bloodiest attack on Israel in decades. Saudi Arabia’s benchmark index (.TASI) slumped 1.6 per cent, the sharpest decline in 10 months.
The threat of a prolonged war will likely rattle already shaky global markets and could see investors buying in safe haven assets like gold and the dollar and potentially boost demand for U.S. Treasuries, which have been sold off aggressively, analysts said.
“This is a good example of why people need gold in their portfolios. It is a perfect hedge against international turmoil,” said Peter Cardillo, chief market economist at Spartan Capital Securities, who predicted the dollar would also benefit.
“Anytime there is international turmoil, the dollar strengthens,” Mr. Cardillo said.
Markets have been reacting in recent weeks to an expectation that U.S. interest rates will stay higher for longer. Bond yields have soared while the U.S. dollar has been on a streak of gains. Stocks meanwhile had sharp losses for the third quarter but stabilized in the last week.
While the foreign exchange market is closed on Sundays, the shekel is already at its weakest level of the year owing to a highly contested government plan to overhaul the judiciary.
“This round of violence is expected to be more prolonged and severe than previous ones, clearly having a more negative impact on the economy and the fiscal budget,” said Jonathan Katz, chief economist at Leader Capital Markets.
“The shekel will most likely weaken sharply tomorrow and we see a high probability that at some point the Bank of Israel will sell FX.”
Saudi Aramco Base Oil dropped 6.8 per cent and the world’s largest Islamic bank by assets, Al Rajhi Bank slipped 2.1 per cent. The Qatari index fell for a third straight session, ending 0.6 per cent lower, with most sectors in the red. Outside the Gulf, Egypt’s blue-chip index plunged 2.6 per cent, the steepest drop in nearly three months.
Gunmen from the Palestinian group Hamas rampaged through Israeli towns on Saturday, killing at least 400 Israelis, before abducting dozens of hostages and returning to Gaza. Israel has retaliated with air strikes on Hamas targets in Gaza.
Gaza militants also fired thousands of rockets into Israel, some reaching as far as Tel Aviv, prompting airlines to suspend flights to and from Israel.
Finance Minister Bezalel Smotrich said he had directed heads of ministry departments to quickly provide the budgets required to help manage the war.
The Bank of Israel said it was too soon to assess the economic damage from the conflict but pointed to a 50-day war with Hamas militants in Gaza in 2014 that caused damage of 3.5 billion shekels (about US$909-million), or 0.3 per cent of gross domestic product. The central bank has been projecting 3-per-cent growth in 2023 and 2024.
“Whether this is a massive market moment or not depends on how long it lasts and whether others are sucked into the conflict,” said Brian Jacobsen, chief economist at Annex Wealth Management, of the situation in Israel. Mr. Jacobsen questioned how much impact it would have on the oil price despite Iran having been boosting output.
The Hamas attack was openly praised by Iran and by Hezbollah, Iran’s Lebanese allies.
“Iranian oil production has been increasing, but any progress they’ve been making behind the scenes with the U.S. will be dramatically undermined by Iran’s celebrating Hamas’s actions,” said Mr. Jacobsen, adding that “the possible output loss matters, but it won’t be earth shattering.”
“It’s most critical to see how Saudi Arabia reacts,” Mr. Jacobsen said. Washington has been trying to strike a deal that would normalize ties between Israel and Saudi Arabia.
David Kotok, chair and chief investment officer at Cumberland Advisors in Sarasota, Fla., said that the situation was concerning as the U.S. is weakened by dysfunction in Washington. Republicans are looking for a successor to ousted speaker Kevin McCarthy of the House of Representatives, and a budget showdown looms.
“I am very worried about more explosive situations that require U.S. determination and U.S. defense capability, which is being injured” by the situation in Washington, Mr. Kotok said.
Delta Air Lines said flights to and from Israel to New York and Atlanta were cancelled through Monday, while United Airlines said “future operations at TLV (airport) will be suspended until conditions allow them to resume.” Air India said flights to and from Tel Aviv would be suspended until Oct. 14.
Nvidia, the world’s largest maker of chips used both for artificial intelligence and for computer graphics, said it had cancelled an AI summit scheduled for Tel Aviv next week, where chief executive Jensen Huang was due to speak.
Schools were shut and many companies gave workers the day off, and most stores other than supermarkets and pharmacies were closed.
Israel’s Manufacturers Association said factories were still operating to limit concerns over any scarcity of food and other essential products.
“All companies will continue to operate as much as possible despite the difficult emergency conditions, the rocket barrages and the resulting shortage of workers,” association president Ron Tomer said. “Thanks to Israel’s production independence … even in times of emergency, the residents of Israel will lack nothing.”
Intel Corp., Israel’s largest employer and exporter, declined to say whether chip production was affected.
“We are closely monitoring the situation in Israel and taking steps to safeguard and support our workers,” a spokesperson said.