Israeli Hamas conflict - market impacts

The Hamas incursion into Israel last weekend is by far this week’s biggest story in geopolitics, but the event has left markets outside of the Middle East largely unmoved. The Tel Aviv stock exchange index (TA-125) fell by almost 7% last Sunday following the attacks on Saturday, with the Israeli central bank resorting to unprecedented measures on Monday to contain the most volatility faced by the shekel (that slumped to its weakest level since 2016) in two decades.

But most major equity indices around the world shrugged off the impact of the Hamas incursion and Israel’s subsequent declaration of war. For example, having already enjoyed a strong day last Friday, the S&P500 showed gains on Monday, Tuesday, and Wednesday, before retracing 0.62% yesterday.

While oil prices jumped briefly on Monday, they rapidly fell back slightly and remain well below the $97 a barrel reached in late September. This suggests that markets are not expecting the conflict to result in the sort of energy crisis precipitated by the Yom Kippur war. Unlike 1973, it seems improbable that Middle Eastern countries will use the current conflict as a pretext to weaponise oil exports. Furthermore, with markets fretting about a possible slowdown in the global economy, oil price increases are likely to remain muted.

With exception of gold, typically a safe haven asset which has risen 4% this week, it appears that global financial markets have not yet attached any real risk to the current events in Israel, and instead have preferred to focus on US economic indicators.

Although, all eyes will be on Israel over the weeks to come with a focus on the failure of the authorities to prevent the attack and what this will mean for Prime Minister Benjamin Netanyahu and his government, the spotlight in the shorter term will be on the extent of Israel’s military response to Hamas. Whatever the response, prospects for an enduring resolution to one of the world’s most intractable conflicts appear to be dim.

The primary concern should, of course, be for the suffering and loss of innocent lives among those caught up in the events. But it seems likely that the Hamas attacks and Israel’s response may undermine recent efforts to normalise relationships between Israel and its neighbours, sabotaging regional stability and the prospects for more pragmatic cooperation.

All of that said, the outcome of the conflict in Israel presents yet another uncertainty to be managed from an investment perspective. While we recognise that geopolitical risks can have both short and long-term impacts on markets, contagion from the current crisis appears contained for now. As always, the key to navigating unpredictable events is to have a defendable long-term approach for our clients.

“I look at it and say: the market’s nervous, but it’s not terrified. Right now, it’s being viewed as a manageable crisis, not a 1970s-type crisis.”

– Dan Pickering, head of Houston-based consultancy Pickering Energy Partners

Global News

Global trade is showing its first, although tentative, indications that the worst of the downturn may be behind it. Bloomberg’s Trade Tracker shows only four out of ten gauges sat in below-normal range in early October, compared to six in August in the surest sign yet of recovery since the start of 2023, when as many as nine out of ten indicators were deep in the red. However, the International Monetary Fund has now warned that the new war in the Middle East could potentially upend a world economy already reeling from several years of overlapping crises.
Views on potential hikes in the US differ. Two Fed officials have expressed the idea that the recent surge in US yields may have done some of the job of tightening financial conditions for the central bank. This statement caused stocks to rise, and treasury yields to fall. In a contrary statement, Federal Reserve Governor Michelle Bowman has suggested that interest rates may need to rise further and stay higher for longer than previously expected to get inflation down to the central bank’s goal.
US headline inflation is holding steady, with costs gaining 3.7% year-on-year, which is the latest evidence that inflation is continuing to fade toward the Fed’s goal. Economists had predicted 3.6%. Core inflation declined to a two-year low of 4.1%.
Sources indicate that China may raise its budget deficit for 2023 as government prepares to unleash a new round of stimulus to help the economy meet the official growth target. Policymakers are considering issuing $137 billion of additional sovereign debt for spending on infrastructure projects.
Australian business conditions are showing continued resilience to elevated price pressures while consumer confidence remains in “deeply pessimistic” territory, highlighting the contrasting responses of firms and households to tighter monetary policy.
JPMorgan Chase & Company, Citigroup, and Wells Fargo & Company, which post their third-quarter results today are expected to join Bank of America — which said in a trading update that earnings and revenue forecasts had weakened — in posting roughly $5.3 billion in combined third-quarter net write-offs, the highest for the group since the second quarter of 2020, according to data compiled by Bloomberg.
Luxury goods company LVMH saw its shares drop after it reported softer sales growth in the third quarter — evidencing that the post-pandemic boom in high-end goods is losing steam. Organic revenue rose below analysts’ expectations and half the pace of the first six months. (LVMH is a key holding in the Fundsmith Equity Fund as one of Dynasty’s preferred funds).
Medical-device stocks have declined due to the increased popularity of weight-loss drugs, Ozempic and Wegovy, sending the iShares US Medical Devices ETF down roughly 15% over the past six months. Medical-device shares are poised to extend a drop into year-end as investors steer clear, according to JPMorgan Chase & Company.
As at Thursday’s close the S&P was 1% up for the week.

Local News

Stephen Grootes, in an article for Daily Maverick, writes that public remarks made by Fikile Mbalula, the secretary-general of the ANC, in which he asserts that his predecessor Ace Magashule was responsible for the deterioration of both the ANC and the Free State, highlight the party’s approach to addressing the State Capture era. It appears that the party is quick to assign blame to those who have left its ranks while avoiding accountability for those individuals who remain within the party and face allegations.
Eskom’s chairman Mpho Makwana has resigned, reportedly over a conflict with Minister of Public Enterprises Pravin Gordhan. Makwana is the shortest-serving chairperson of Eskom to date. Non-executive director Mteto Nyati, who recently stepped down from Nedbank’s board due to capacity constraints, will fill the Eskom chairman role. Arena Editor-at-large, Peter Bruce, says this is a positive move for both Eskom and citizens.
Recent data released by Eskom showed that, between March 2022 until the first quarter of 2023, the amount of electricity generated by small-scale embedded generation — usually small rooftop solar installations by households and businesses — grew by 350%.
The International Monetary Fund now expects the country’s 2023 growth to come in at 0.9%, from the previously expected 0.6%. This is because of lower-than-expected load-shedding in the second quarter. This lags sub-Saharan Africa peers though, where growth is expected to average 4%.
South Africa’s population reached 62 million last year according to Statistics SA, a gain of 20% from 2011. Of those counted, 81.4% were Black, 8.2% of mixed race, 7.3% White and 2.7% Indian. Zimbabweans account for more than 40% of 2.4 million immigrants. The average annual growth rate of 1.8% over the period was the highest since the first post-apartheid-rule census was undertaken in 1996. This creates a bigger challenge for government to provide basic access to services, whilst exacerbating the pressure on GDP per capita.
Business confidence failed to gain upward momentum in September, remaining in stagnation, which provides evidence that the current business climate is not conducive to stimulating overall economic activity. The South African Chamber of Commerce and Industry’s business confidence index fell slightly to 108.2 in September from August’s 108.6.
The SA Revenue Service is going after coal-smuggling syndicates whose modus operandi includes hijacking deliveries of high-grade coal to Eskom and swapping them with lower-grade product. The syndicates’ tax crimes apparently amount to R500 million.
The race to rescue embattled sugar group Tongaat Hulett, is intensifying as Associated British Foods (AB Foods) the owner of Illovo Sugar Africa has stepped into the bidding fray with an offer to buy Tongaat Hullet’s Mozambican assets. The preferred bidder, Kagera, has yet to raise finance to buy the whole business and the losing bidder, Terris Consortium has resubmitted its bid. As was reported two weeks ago Tongaat Hullet has in the interim secured short-term funding to keep operations running while a longer-term solution is finalised.
As at the time of writing, the rand was 1.6% stronger and the ALSI was 2.4% up for the week.