What the Conflict in Gaza Means for Financial Markets

The combat currently going on in Gaza involving Israel and Hamas could have profound effects on the financial markets. Let's take a look at the situation.

Where We Currently Stand

Egypt and France are leading the way to broker a truce between Israel and Hamas. Egypt's ambassador to the UN, Mr. Maged Abdelaziz, said peace talks could begin in Cairo. French President Nicolas Sarkozy has said Israel has accepted the ceasefire plan. And in what could be a step towards a peace agreement of sorts, Israel halted its military operations for three hours Wednesday to allow for civilian aid; Hamas is reported to have held fire during those hours as well. The Scotsman has a more detailed report.

Still, though, the conflict has widened, as rockets from Lebanon struck northern Israel yesterday. Bloomberg has the full story.

Ultimately, the geopolitical scenario remains tense. If the conflict continues and widens, it sets the stage for a larger war to emerge, with US, India, and Israel on one side, and Pakistan, China, and Iran on the other. Economic interdependencies can help expand the war as well, and may have the impact of pulling in seemingly uninvolved countries, like Russia and Venezuela.

Impact on the Financial Markets

Four key observations:

1. As bad news and uncertainty in general tends to be bullish for gold, this could stimulate demand for gold. We have already seen a bit of this.
2. Given the economic aid US provides to Israel, the threat of economic warfare against the United States becomes more likely as a way of weakening Israel. Economic warfare would come in the form of selling US dollars and US Treasury bonds. A key turning point to watch for is if China is pulled into this conflict, as China is a large holder of US Treasury bonds and thus more capable of waging economic warfare by dumping Treasury bonds. Thus far, China has urged for a ceasefire, though China has been reported to have provided arms to Hamas, and has cooperative relationships with Pakistan as well. Economic warfare would be bearish for US dollars and US Treasury bonds.
3. While neither Hamas nor Israel is directly in the business of oil, conflict in the Middle East tends to increase the likelihood of supply lines being attacked, intentionally or not. Moreover, whether or not actual supply is affected, the psychology of traders is, as evidenced by a spike in oil prices at the onset of the conflict. 24/7 Wall St notes that Iran benefits from higher oil prices, and as a source of funding for Hamas, and thus there are economic incentives that play into prolonging/exacerbating the conflict as well.
4. US Defense ETFs naturally benefit from the greater likelihood of war, particularly if it becomes more likely that the United States will get involved. In particular, PoweShares Aerospace & Defense ETF (PPA) may be an interesting play from a technical perspective; the market is making a double top formation and is testing its November 4 high of 14.69. This could be a nice "break or bounce" play, in that a break above 14.69 coupled with momentum indicators and expansion of war could be a buying opportunity, while a bounce off this level coupled with successful peace talks could represent a short selling opportunity. The chart below illustrates.

Disclosure: Long gold.

Comments

[Conan the B...:]

Most extraordinary. First the Cartel will stay out of it because they want oil prices to rise. The Saudii USD debt holding alone exceeds China's.

China has already earmarked USD Debt sales for its stimulus, its increase for oil storage and the purchase of Gold. They will not want Oil or Gold to rise dramatically nor will they want their Debt reserves to depreciate. It is in their current interest to keep the Dollar stronger than the Yuan from a competitive viewpoint as well.

So, While your Article has merit on a hypothetical basis, I doubt it will come to pass at the present time.

This conflict is not about resources,The Resource Wars will begin eventually. IMHO

Jan 09 05:44 AM

[isaac the t...:]

In gaza there is no oil, there is no pieline so people don't care. Also people realize that Hamas isn't interested in a two state solution, so they won't really get the kind of international support that there might otherwise be.
Hamas does not have the kind of ideology that would lend itself to any sort of peaceful arrangement with Israel.

Jan 09 11:49 AM

[MattGigEm:]

"In gaza there is no oil"

But there is natural gas, a lot of it, just off the coast.

Jan 09 12:09 PM

[Andy B.:]

Considering that Egyptian authorities are fully aware of numerous tunnels along their border and the Gaza strip which are being used for smuggling weapons and missiles into Gaza to be used against Israel, who are these closet terrorists to be brokering any peace agreement?

I think that Israel is doing a fine job of bombing these tunnels and Hamas targets and wiping Gaza off the face of the map and at the same time killing terrorists and would-be terrorists. It's about time that someone started killing the families of the terrorists and the people who allow the terrorists to launch missiles from their neighborhoods. This will help cut down future terrorist attacks. If most everyone is dead or hungry and wounded they won't have time to terrorize. This policy worked great on Lebanon. You don't see those people sending rockets into Israel anymore, do you?

Now Israel needs to work on those who are supplying these terrorists; the Iranians. A few well-placed bombs/missiles into the heart of Iran (especially the nuclear sites) will help take the wind out of their sails.

A well-placed missile on the palace of Iranian President Mahmoud Ahmadinejad (pronounced: I'm mad in the head) would also help curtail terrorism.

I'd like to see China even try economic terrorism against the US. When the Western world stops buying their products they will be reduced back to a Third World country. I've already stopped buying any Chinese products if I can help it. Most of their products sent to the US already contain numerous deadly chemicals and poison and it's obvious to even the simple-minded FDA officials that the Chinese are already systematically poisoning our children with lead, melamine and other deadly poisons. So they don't have to start a war with us, they already have, by targeting the next generation of Americans, our children.

Jan 09 08:01 PM

[tom007:]

"It's about time that someone started killing the families of the terrorists and the people who allow the terrorists to launch missiles from their neighborhoods. This will help cut down future terrorist attacks. If most everyone is dead or hungry and wounded they won't have time to terrorize. "

Your words work very well with respect to the Israel terrorists, only they do not launch home made fireworks from their neighborhoods, but use Hell Fire missiles, and the like, launched from Apaches and Fighter Bombers.

And Yes, its well past time for this to occur, and I hope the worlds Great Powers deal Israel a crippling blow in the future. It is a debt past due.

Jan 09 10:51 PM

[Conan the B...:]

Tom007: Are you a US citizen? Assuming you are, If rockets were flying from Mexico into Texas. What would you have the US do? Pretend that it was not happening?

Home Made fireworks? Weapons are weapons whether home made or not. If they were fired into the US, we would destroy them.

The US would use "Hell fire missiles and the like" to take out the firing sites.

If the Mexican people were harboring the shooters within their homes and the US gave those who were not protecting the shooters ample time to leave, the people left within would all be considered combatants.

The Palestinian people were cheering in the streets when the twin towers fell on 9/11.

They willingly harbor terrorists and they willingly give their lives and the lives of their children to try to destroy Israel. This is normally taught in the Mosques. Am I wrong?

Am I wrong that "Those who die are perceived as martyrs for the cause and that Paradise will be theirs"?

If Israel felt that their destruction was imminent, they would not bother with "missiles and the like". The lands of Egypt and Iran, Saudii Arabia and the UAE and all in between would be a Sea of Glass. They will not be slaughtered willingly again.

This is a Debt past due also.

Jan 10 05:18 AM

[Zi Palestine:]

Paul and Andy,

What's past due is to wipe the real terrorists Israel off the map. The real terrorists are people like, how dare you justify the killing of the innocent, innocent children, women and men. Only terrorists like you both can justify such acts. Anyhow Israel days are numbered and the US will no longer be the world's super power, especially with people like you.

Jan 11 02:46 AM

[Andy B.:]

Zi Palestine,

Innocent children, women and men? LOL. Don't make me laugh, my lips are chapped.

Palistinian children are brainwashed from a young age to hate and are trained to kill in terrorist training camps along with their parent's approval. They are not innocent like you claim. Let's talk about the real terrorism in Palestine (and in other Muslim countries); female genital mutilation of young girls, forced marriage of young girls as young as nine, legalized pedophilia and child rape (child marriage), honor killings, public stoning and chopping off of hands and feet and floggings for minor infractions and, of course, the old standby, suicide and homicide bombings and lately, random and indiscriminate firing of missiles into civilian areas. All in the name of the false god, Allah.

Of course, you probably already knew that. Which ones are you guilty of, since you stated that I'm guilty of terrorism even though I don't adhere to the above practices like most Muslims do?

Mad rabid dogs are exterminated, not coddled. Look what happened in Europe; those dumb goverments let all those Muslims in because the immigrant's own people were persecuting them and what have those ingrate immigrants turned around and done since they got there? Bombing, rioting, protesting and destabilizing western society. They've proven, time and time again, over the centuries and throughout history, that they are a bloodthirsty and war-like people. Europe will rue the day they let the Muslims in to their countries. Their European ancestors died to keep the Mongel and Muslim hordes out and their own governments betrayed them and let them in.

www.middle-east-info.o...

Palestinians are nothing but biological remnants of past invasions into Canaan by the Egyptians, Persians, Arabs and Islamic cultures. Modern-day Palestinians have no more claim over the ancient lands of Canaan than anyone else. Recorded ancient history shows the Jewish peoples having lived in Palestine earlier than anyone else, having been forced there by the Egyptians. They have more claim to the area more than anyone else.

As far as Israel's days being numbered, before they succumb to the Islamic hordes of the Middle East, most Arab countries will be eternal unliveable nuclear-toxic zones. That's a high price to pay for the spread of Islam. Good luck in your mutually assured destruction of the Semetic races.

On Jan 11 02:46 AM Zi Palestine wrote:

> Paul and Andy,
>
> What's past due is to wipe the real terrorists Israel off the map.
> The real terrorists are people like, how dare you justify the killing
> of the innocent, innocent children, women and men. Only terrorists
> like you both can justify such acts. Anyhow, Israel days are numbered
> and the US will no longer be the world's super power, especially
> with people like you.

Jan 11 05:19 PM

[Zi Palestine:]

You're a joke. What pedophilia are you talking about and what stoning?? In Palestine?? You're having a laugh, maybe you're talking about where it happens in Utah where they marry little girls at the age of 9. Please your excuses are ridiculous and your justification of killing children is barbaric, yes you are the terrorist. Secondly The Israelietes where 12 tribes, most the of jews today living in Palestine are European and they have nothing to do with Palestine. As for Canaan we, the Palestinians are the people of Canaan, not the jews. The Jews were Israeliets that came from Egypt and they were the ones that attacked the Cannanites. As for Muslims being barbaric, what about the crusaders that slaughtered Muslims, and Jews alike??? What about Hitler, who happens to be a Christian that slaughtered the Jews?? Christian again, what about the US when they massacred innocent Japanese when they dropped the Atomic bomb, massacre and state Terrorism. You are as clueless as they come, I have nothing against Jews, but I have something against people who want to eliminate my race. One more thing, random firing into Civilian areas?? Are you serious? Yes I agree that Hamas are firing randomly but the Israelies with they're so called sophisticated weapons are blatantly targeting innocent women and children. shame on you and your lack of humanity.


On Jan 11 05:19 PM Andy B. wrote:

> Zi Palestine,
>
> Innocent children, women and men? LOL. Don't make me laugh, my lips
> are chapped.
>
> Palistinian children are brainwashed from a young age to hate and
> are trained to kill in terrorist training camps along with their
> parent's approval. They are not innocent like you claim. Let's talk
> about the real terrorism in Palestine (and in other Muslim countries);
> female genital mutilation of young girls, forced marriage of young
> girls as young as nine, legalized pedophilia and child rape (child
> marriage), honor killings, public stoning and chopping off of hands
> and feet and floggings for minor infractions and, of course, the
> old standby, suicide and homicide bombings and lately, random and
> indiscriminate firing of missiles into civilian areas. All in the
> name of the false god, Allah.
>
> Of course, you probably already knew that. Which ones are you guilty
> of, since you stated that I'm guilty of terrorism even though I don't
> adhere to the above practices like most Muslims do?
>
> Mad rabid dogs are exterminated, not coddled. Look what happened
> in Europe; those dumb goverments let all those Muslims in because
> the immigrant's own people were persecuting them and what have those
> ingrate immigrants turned around and done since they got there? Bombing,
> rioting, protesting and destabilizing western society. They've proven,
> time and time again, over the centuries and throughout history, that
> they are a bloodthirsty and war-like people. Europe will rue the
> day they let the Muslims in to their countries. Their European ancestors
> died to keep the Mongel and Muslim hordes out and their own governments
> betrayed them and let them in.
>
> www.middle-east-info.o...

>
>
> Palestinians are nothing but biological remnants of past invasions
> into Canaan by the Egyptians, Persians, Arabs and Islamic cultures.
> Modern-day Palestinians have no more claim over the ancient lands
> of Canaan than anyone else. Recorded ancient history shows the Jewish
> peoples having lived in Palestine earlier than anyone else, having
> been forced there by the Egyptians. They have more claim to the area
> more than anyone else.
>
> As far as Israel's days being numbered, before they succumb to the
> Islamic hordes of the Middle East, most Arab countries will be eternal
> unliveable nuclear-toxic zones. That's a high price to pay for the
> spread of Islam. Good luck in your mutually assured destruction of
> the Semetic races.
>
> On Jan 11 02:46 AM Zi Palestine wrote:

Jan 12 03:56 AM

[Razors Edge:]

Welcome to the circus. This little neighborhood conflict will be over soon and it is not going to affect anthing but Hamas ability to influence. If there was anyone going to get involved further (Iran?) they should have done it earlier. It will be over in a very short time. Now if Israel can control itself afterwords at the same time protecting it's citizens we can get back to some sanity in the world. I find it abhorant to even discuss an investment opportunity when people are dying on both sides.

Jan 12 10:15 PM

[Simit Patel:]

Likewise, I would find it abhorrent and negligent in my responsibilities to not understand how geopolitics affects my wealth and my personal financial obligations, which in turn impact my ability to make a better world.


On Jan 12 10:15 PM Razors Edge wrote:

> Welcome to the circus. This little neighborhood conflict will be
> over soon and it is not going to affect anthing but Hamas ability
> to influence. If there was anyone going to get involved further (Iran?)
> they should have done it earlier. It will be over in a very short
> time. Now if Israel can control itself afterwords at the same time
> protecting it's citizens we can get back to some sanity in the world.
> I find it abhorant to even discuss an investment opportunity when
> people are dying on both sides.

Jan 13 08:03 AM