Turmoil in Middle East Fuels Oil Prices Surge, Stocks Plummet, and Israeli Shekel Suffers: Market Shockwaves Explained

At the beginning of the week, oil prices experienced a significant increase, while stock markets and the Israeli currency faced a decline. This was a result of investors responding to the ongoing conflict between Hamas and Israel. Despite Israel not being a major oil producer, the rising tensions in the oil-rich Middle East caused concern among investors who had been selling off oil in the past few weeks.

US oil prices have fallen from approximately $95 a few weeks ago to slightly above $80 last week due to inflation, concerns of a global economic decline, and a correction in surging prices. However, on Monday morning, US oil prices increased by 3%, reaching above $85 per barrel, after reducing gains overnight. Similarly, Brent crude, the global standard, also experienced an almost 3% rise, trading at nearly $87 per barrel.

Rockets are fired from Gaza into Israel, in Gaza City, on Rockets are fired from Gaza into Israel, in Gaza City, on Saturday.

Mohammed Salem/Reuters

Hamas has launched an unprecedented attack against Israel. Here's what to know

Israel declared war on Hamas on Sunday following the unexpected and lethal attack executed by the Islamist militant group on Saturday. Authorities report that over 700 Israelis and over 400 Palestinians have lost their lives in the conflict.

Israel intervenes to support shekel

The Israeli shekel experienced a decline on Monday, reaching 3.91 against the US dollar, marking its lowest point since 2016. To ensure stability in the currency and facilitate seamless market operations, Israel's central bank announced its intention to sell foreign currencies amounting to $30 billion.

The Bank of Israel announced that it is prepared to offer an extra $15 billion of assistance if required. The bank affirmed its commitment to monitoring developments, observing all market trends, and taking necessary actions using its available resources. Furthermore, US stock futures, which experienced a significant surge due to an unexpectedly robust job market report on Friday, experienced a substantial decline late on Sunday.

Following Israel's announcement that the fighting between the Israel Defense Forces and Hamas within Israel had ended, resulting in the IDF regaining control of all communities around the Gaza Strip, the losses were reduced. Dow futures experienced a decline of 125 points or 0.37% after a previous drop of nearly 200 points. Similarly, S&P 500 and Nasdaq futures faced respective decreases of 0.5% and 0.6%.

Global investors are concerned about the potential spillover of the Israeli conflict to the broader region. They worry that ongoing tensions in the Middle East could negatively impact the delicate global economic recovery. European stocks initially declined on Monday as traders processed this news. However, by 5.20 a.m. ET, they stabilized, with France's CAC 40 index only showing a 0.1% decrease, while Germany's DAX index experienced a 0.3% dip. London's FTSE 100, on the other hand, saw a 0.6% increase, driven by gains in oil company shares.

Reuters

Israel at war with Hamas after unprecedented attacks

In Asia, initial reaction among investors was mixed.

After a week-long holiday, the Shanghai Composite in mainland China declined by 0.4%. In contrast, Australias S&P/ASX 200 closed 0.2% higher. When trading resumed after a morning suspension caused by a typhoon, Hong Kong's Hang Seng index increased by 0.2%. However, markets in Japan and South Korea remained closed due to holidays.

Analysts at ANZ wrote in a report on Monday that the crucial inquiry for markets presently is whether the conflict stays contained or escalates to encompass other areas, specifically Saudi Arabia. Initially, at least, it appears that markets will presume that the situation will remain limited in terms of its extent, duration, and impact on oil prices. However, an elevated level of volatility is anticipated.

Robert North contributed to this report.