Israel and Hamas at War – Geopolitical, Economic and Market Impact

  |   Geopolitics, Macro

Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA

Israel’s Shock and Reaction

On October 7th 2023 Hamas’ surprise attack on Israel shook the world. The conflict between Israel and Hamas has escalated ever since. Any mass terrorist attack should be named and condemned! Israel, like all nations, has the full right to defend itself – yet in line with humanitarian and international laws to ensure the protection of all civilians.

Israel’s reaction has been determined by its security requirements, military strategy, domestic public opinion and the support provided by the US, but also by Prime Minister’s Netanyahu’s urge to redeem himself after his colossal security failure.

US President Joe Biden wisely advised Israelis ‘not to be blinded by rage’ and warned ‘after 9/11, we were enraged in the US’ and ‘while we sought justice and got justice, we also made mistakes’. The failed states of Afghanistan, Iraq and Libya, including activities of long active and emerging terrorist groups are testimony in progress.

War Proliferation – Calculations and Miscalculations

Israel is not existentially threatened and we expect no contagion from the Israel-Hamas war into a regional war involving the US because it makes no sense considering the political calculations and economic interests of the relevant nation-state parties.

However, major wars are often the results of compounded miscalculations by key actors – think of WW I & II or, more recently, Russia’s apparent miscalculations to attack Ukraine.

Consider the anatomy and phases of armed conflicts, typically starting with a war trigger, followed by a shock and awe attack, ensuing reaction and hot battle phase, exhaustion, stalemate, winning or losing, finally ending in post war order – peace, armistice, occupation, failed state.

Israel is reacting with its ground operation into Gaza to strategically eliminate the Hamas military threat. However, the cost is enormous – population displacement, vast destruction of civilian infrastructure and humanitarian catastrophe. Any nation state at war is therefore well advised to prepare a comprehensive strategy encompassing war and peace.

Fighting Asymmetric Warfare – State vs Non-State Conflict

Whenever regular and standing military forces of nation-states fight non regular military forces such as terror groups, insurgents, guerillas and resistance movements, the historic outcomes are uncertain – remember how the US fought the Vietcong in Vietnam, France the Front de Libération Nationale (FLN) in Algeria and both Russia and the US the Taliban in Afghanistan.

History teaches us that desired and sustainable political ends cannot be achieved by classic military force – that is an illusion! The Israel-Hamas asymmetrical war is no different. There is no chance for lasting peace, perspective and prosperity in the Mid-East without a political settlement.

International Protests, Incidents and Violence

Make no mistake – winning battles, wars or peace are very different aims. Just remember the US-Vietnam war was lost not only on the battlefield in Vietnam but also at the homefront, such as university campuses across the US.

As the Israel-Hamas military confrontation rages on, so do condemnations, mass protests, racist and violent incidents internationally, as well as within countries exposed to one or both parties at war.

We expect Israel to prevail in military terms within weeks, probably without being able to eliminate Hamas entirely. Then what?

This question is very hard to answer as Israel’s ground offensive into Gaza causes enormous civilian casualties, a desolate humanitarian situation and ongoing physical destruction of critical infrastructure. Mass protests and violence sharply increase in the West Bank and in neighboring Arab nations and potentially destabilizing respective governments.

The US – The Indispensable Actor

The US has been and is the only indispensable military and political superpower to be able to broker peace in the Mid-East.

Needless to say, that this is a highly complex and very delicate balancing act – while the US guarantees Israel’s security it also holds significant security commitments, military presence and aerospace/naval/defense assets across the Mid-East including Saudi Arabia, Turkey, Iraq, Syria, Jordan, Egypt, Kuwait, Bahrein, UAE, Oman and Qatar.

Often, it is darkest before dawn – the current disaster might open a historic opportunity to bring all the concerned parties to the table to establish and supervise a comprehensive security, political, economic and regional framework and align the various interests under a UN mandate.

Crucial Role of Regional Powers

Currently there is 24/7 news and media coverage on the Israel-Hamas war. However, context and perspective are needed given the legacy-loaded past, the raging and all absorbing war and a highly uncertain future.

Crucial is how the regional powers Saudi Arabia, Iran, Turkey, Egypt and Jordan will act. The root of the problem as seen by neighboring Arab populations is the occupation of Palestinian territories by Israel.
Saudi Arabia takes center-stage and is in ongoing diplomatic exchanges with the US, Israel, Iran, Egypt and Jordan. Their immediate goal is to contain the conflict and prepare grounds for post war negotiations. The ultimate objective is to establish a two state solution and regional order for peace and prosperity.

Currently, the biggest risk is Hezbollah, backed by Iran, opening a second battle front from South Lebanon into Northern Israel. We believe it to be a small risk as Iran is better served to extract various political and economic concessions than to play its military joker.

After Israel, Egypt and Jordan are the biggest recipients of US assistance. Yet, neither Egypt nor Jordan can and will accept Israel pushing Palestinian mass migration onto them – it would crush their economies, destabilize their countries, threaten their governments and most importantly, take the pressure off Israel for a two state solution.

What About China and Russia?

China, traditionally a backer of the Palestinian cause, avoids to deepen its involvement in this conflict and tries hard to be seen as a neutral player, keeping all options open, particularly in regards to their all-important and oil-supplying relationships Iran and Saudi Arabia.

Clearly, China tries to benefit from the unfolding events watching the US struggling with its balancing act and increasingly fragmented Europe.

For the time being, Russia benefits from the war in the Mid-East. It distracts attention from its war against Ukraine and underpins energy prices ahead of the seasonally strong winter season. Russia has not condemned Hamas and has called for a peace process. However, it is neither militarily, politically nor economically capable to play any relevant role in Mid-East affairs.

Power, Politics and Peace

There is no prospect for lasting regional peaceful co-existence and prosperity in the MidEast without any political settlement.

After the initial war phase causative factors matter and so do historic, religious, political, economic, social and cultural context. All parties involved will have to compromise to achieve permanent peace.

These divisive topics and crucial factors will eventually have to be addressed and negotiated in a political context:

  • ‘battle pauses’ and ceasefire to address the humanitarian crisis

  • exchange of Hamas hostages against Palestinian prisoners in Israel

  • negotiations to establish a two state solution including land for peace

  • a UN mandate including UN peacekeepers to ‘protect civilians, actively prevent conflict, reduce violence, strengthen security and empower national authorities to assume these responsibilities’

  • Palestinian consent regarding their governance, in Gaza and overall, and representation to negotiate a post-war solution.

The Netanyahu Factor

Remember the outstanding personalities and great leaders Israeli Prime Minister Menachem Begin and Egyptian President Anwar Sadat who signed a historic peace treaty between Israel and Egypt in 1979 at Camp David with US President Jimmi Carter. That peace treaty was titled ‘Framework for Peace in the Middle East’. Begin and Sadat were awarded the Nobel Prize for Peace in 1978.

What a contrast to today – a corrupt and dysfunctional Palestinian political leadership and Benjamin Netanyahu being the worst Israeli Prime Minister since its foundation in 1948.

Over the years, Netanyahu has divided and polarized Israeli society, sidelining any two state solution with the Palestinians, while being fully responsible for the collective failure of Israel’s security apparatus regarding Hamas’ atrocious assault.

Netanyahu has become a major liability and key obstacle to any solution in the ongoing armed conflict as well as peace and eventual political settlement.

Global Capital Markets’ Outlook

The effect of the conflict on global capital markets, as of today, is relatively contained.

Surprisingly, global capital markets digest geopolitical crises rather well. However, significant regional escalation including Iranian and US military involvement could lead to sharply higher oil prices resulting in higher inflation and interest rates and contracting economic activity. The Russia-Ukraine war situation and winter season in the Northern Hemisphere would be negatively compounding factors.

In that case we might see a general ‘risk-off’ trend benefiting safe haven investments such as cash, US Dollar, Swiss Franc, gold and G7 sovereign bonds.