Need to Know: From $150 oil to no impact at all: What the surprise attack on Israel means to markets

Meanwhile, financial markets have to price the new violence in the here and now. Tragic as it is, markets don’t really care that much about economic demand in Israel (28th ranked GDP in 2022, per the World Bank), much less the West Bank and Gaza (coming in at 120), but rather on what it means for OPEC member Iran.

The Wall Street Journal reported Iran was involved in directly planning the attacks, which raises the prospect that the U.S. could increase enforcement of sanctions on its exports. Analysts at Goldman Sachs say the de-escalating trend in regional tensions before the weekend attacks had been an important factor behind the rise in Iranian oil production, by nearly a half million barrels per day over the last year. On the bank’s numbers, for every 100,000 barrel a day decline in Iran’s production next year, Brent crude prices rise by a bit more than $1 per barrel.

At the moment, the prospect of Israeli-Iranian direct fighting seems remote; even the Hezbollah militia which is backed by Iran has not engaged Israel much at all so far on the northern border. There’s also the practical limitations for Israel — the route to Iran would require either flying through Iraq via Jordan, or through Saudi Arabia, which despite its hostilities with Iran isn’t about to green-light an Israeli invasion through its territory. The idea these two countries would just lob missiles at each other all day long is not one either desires.

If Hamas’ missiles can overcome Israel’s Iron Dome defenses, what could Iran’s weaponry accomplish? If you want a number, though, Israel striking Iran’s nuclear facilities could send oil north of $150 per barrel, says Dan Alamariu, chief global strategist at Montreal investment research firm Alpine Macro, who gives the option a 20% probability.

Pointing to another extreme, Marko Papic, the chief strategist at Clocktower Group, shared this chart showing oil price changes around major Israeli-Palestinian conflicts this century. The takeaway is that they often do not matter. “I am open minded that this can change, but thus far ‘what happens in the Levant, stays in the Levant’ has been a reality,” he said.

Granted, this century of course excludes the Yom Kippur war of 50 years ago. The social media account Gold Trends pointed out that, over the next seven years after that pan-Arabian attack on Israel, crude went from $5 to $50; interest rates from 6.5% to 18%; and gold from $42 to $875. Stocks actually stabilized after a rocky first year.

It’s also at least worth considering the paradox that the event could be, over the new months, a positive catalyst for stocks, given that it could slow down if not reverse the deep slide in bonds. Crazier things have happened.

The markets

The knee-jerk reaction — a plunge in Israeli stocks, a rise in crude-oil prices
CL00,
+3.50%,
a gain in Treasury futures
TY00,
+0.38%
(the cash market is shut due to Columbus Day), an increase in gold
GC00,
+1.00%,
and a decline in stock-market futures
ES00,
-0.62%

NQ00,
-0.77%.
But already, oil has moved off its highest levels.

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The buzz

Fighting in Israel itself seems to have stopped as Israel conducted air strikes on Gaza.  The Associated Press cited reports at least 700 people have been killed in Israel and more than 400 have been killed in Gaza. 

Defense contractors including RTX
RTX,
+0.56%
and Lockheed Martin
LMT,
+0.85%
rallied in premarket trade.

Nelson Peltz is planning a fresh push for board seats at Walt Disney
DIS,
+2.64%
after increasing his stake, according to the Wall Street Journal.

Bristol-Myers Squibb
BMY,
+0.43%
agreed to buy Mirati Therapeutics
MRTX,
-3.49%
for up to $5.8 billion.

Dallas Fed President Lorie Logan is due to speak at 9 a.m. Eastern.

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Top tickers

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The chart

Strategists at JPMorgan offer this chart, in a piece about how the time is coming to prepare for the long-duration trade. It shows the equal-weighted S&P 500 is still showing a gap compared to real yields. Their view of what has to give are bond yields. “We are currently in a transition phase, rising bond yields at these levels are problematic for investor sentiment and for the economy, and are therefore ultimately not sustainable,” say the strategists. They say if yields do fall, it would underweight banks, while defensive stocks such as insurers, staples and utilities would benefit.

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