Investors are keeping a tight eye on events in Israel as a geopolitical risk to markets, with some anticipating that the violence may spark a shift towards safe haven assets.

against Saturday, gunmen from the Palestinian organisation Hamas launched an unprecedented attack against Israel. Western countries, led by the US, condemned the attack and offered their support for Israel.

Rising geopolitical danger may prompt investors to buy assets such as gold and the dollar, potentially increasing demand for US Treasury bonds, which have been aggressively sold off, according to analysts.

“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,” said Cardillo.

Markets have been reacting in recent weeks to the anticipation that US interest rates will remain higher for a longer period of time. Bond yields have risen, while the US currency has been on a roll. Meanwhile, stocks suffered significant losses in the third quarter but have now stabilised.

“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. Jacobsen questioned how much impact it would have on the oil price despite Iran having been boosting output.

Iran and Hezbollah, Iran’s Lebanese allies, openly welcomed the Hamas strike.

“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 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,” said Jacobsen. Washington has been trying to strike a deal that would normalise ties between Israel and Saudi Arabia.

The scenario is alarming, according to David Kotok, chair and chief investment officer at Cumberland Advisors in Sarasota, Florida, since the United States is weakened by dysfunction in Washington. Republicans are seeking for a replacement for fired House Speaker Kevin McCarthy, and a budget battle is looming.

“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, Kotok said.

(Adapted from Crast.net)

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