The City woke to grim news this morning. Benjamin Netanyahu has ordered the Israel Defense Forces to expand their control to 70% of the Gaza Strip, effectively scuppering any remaining hopes for a ceasefire. For markets, this is a fresh dose of geopolitical uncertainty. The shekel is wobbling, oil prices are creeping higher and safe havens are in demand. You can already see the yield on 10-year gilts dip as investors scurry for shelter.
Let's look at the numbers. A 70% takeover means a significant escalation. It is no longer surgical strikes or limited incursions. This is a full-scale reoccupation of territory that has been a flashpoint for decades. The human cost is incalculable, but the financial cost is becoming clearer. Defence stocks are up, of course. BAE Systems and others will benefit from increased military spending. But for the broader market, this is a drag. Supply chains in the region are already fragile. Ports, shipping lanes and energy infrastructure are all at risk.
The fiscal implications are just as worrying. Netanyahu's government is already spending heavily on the war effort. Deficits are widening. Credit rating agencies are watching. If this conflict drags on, we could see downgrades for Israeli sovereign debt. That would ripple through emerging markets and hit pension funds holding those bonds. Meanwhile, the Bank of Israel is stuck between supporting the shekel and fighting inflation. They will likely raise rates again, but that could choke off growth.
For the UK, the impact is indirect but real. Higher oil prices mean higher petrol costs, which feed into core inflation. The Bank of England has been wrestling with sticky service inflation and this will not help. Governor Bailey may have to hold rates higher for longer. That is bad news for mortgage holders and for the housing market. Gilts are already pricing in this risk. The yield curve is flattening, a classic sign of economic uncertainty.
Capital flight is another concern. Wealthy investors in the Middle East are already moving money to London and New York. That might seem good for UK property prices, but it is a short-term fix. If the conflict spreads, we could see a broader risk-off move. Gold is rallying. Bitcoin, too. The so-called 'digital gold' is back in fashion. For now, the safe havens are the only winners.
Let's be clear: this is not a sustainable strategy. Waging war is expensive. The US is footing much of the bill, but American taxpayers will eventually tire of it. The Biden administration is facing its own fiscal pressures. A prolonged conflict in Gaza could strain the special relationship and lead to trade frictions. That would be a disaster for global markets.
In summary, Netanyahu's gamble is a high-risk one. The market is giving him the benefit of the doubt for now, but patience is thin. If ceasefire talks do not resume soon, expect volatility to spike. The bottom line: this is a lose-lose for everyone except the defence sector and the gold bugs. I would be looking to hedge portfolios with put options on the FTSE and increase exposure to commodities. The bull case is fading fast.
