Good start to Q3 earnings season may not be enough for S&P500

So far, the war between Israel and Hamas has had less of an impact on stock markets than the war in Ukraine about a year and a half ago. While the Gaza conflict is smaller, it could escalate and draw in several oil-producing countries.

Compared with Russia's invasion of Ukraine in February 2022, the financial markets have taken a much cooler view of the Israeli-Hamas conflict that began on 7 October 2023. The Israel-Hamas war is smaller than in Ukraine. Furthermore, the two sides have very different military strengths, where Israel is much stronger than Hamas. However, the war has only begun and has the potential to escalate. The most likely scenario is that Iran, which helped plan the Hamas attack this time, will face further sanctions from the US and its western allies. This would reverse the recent trend of easing tensions between the US and Iran. Also in the background is Russia, which is benefiting from that the US has shifted its focus to the Middle East. Market participants believe that the escalation of the Israeli-Hamas conflict threatens to push up oil prices, undermine central banks' efforts to control inflation and, therefore, depress equity prices. Such a scenario could also increase investor appetite for safe-haven assets such as the US dollar and gold. In a worst-case scenario, a prolonged war could lead to a third wave of global inflation.

In terms of the impact of the conflict on global markets, the movements in oil and equity prices have attracted the most attention. The current consensus among market participants is that the impact on oil prices will depend on the scale and duration of the conflict, whether it spreads to the wider Middle East region, in particular the reaction of major oil producing countries such as Saudi Arabia and Iran. In terms of share prices, the conflict has already to a minor extent affected market sentiment on equity prices negatively.

At the same time as risk assets have suffered, increased demand for risk aversion is driving investors into gold, the US-dollar, and other safe-haven assets.

Since the start of trading on 9 October 2023, the US dollar has generally strengthened against most major currencies. The price of gold, which also has hedging properties, has jumped. This period of conflict is a good example of why investors should hold gold in their portfolios, as it is a good hedge against international turmoil. Similarly, the US-dollar tends to strengthen in such circumstances.

The US dollar index has risen 6.3% since 18 July 2023. In the past, the US-dollar's rise has prompted investors to bet on whether several Asian economies, including Japan, will intervene in the currency market. The current instability in the Middle East could lead to a further rise in the US dollar and speculation in the European market as to whether the euro could fall back to parity with the USD.

The price of gold, another safe-haven asset, is also benefiting from the escalation of the Israeli-Hamas conflict. The gold price rose by 5.35% to $1,945.9 USD per ounce, following last week's market events. Since then, the gold price has retreated somewhat to $1,924 USD per ounce. With the consumer confidence index coming in much lower than expected, coupled with the escalation of the Israeli-Hamas conflict, we believe that the gold price could continue to rise in the short term. Long-term, the future direction of the gold price will continue to be influenced by Federal Reserve policy. Federal Reserve Governor Michelle Bowman has said that US inflation is still too high and that further monetary tightening may be needed. Higher interest rates are generally negative for the gold price.