Israeli soldiers entered southern Lebanon on Tuesday, after the military announced a ground offensive against Hezbollah. The military described the offensive as “limited” and “targeted” but failed to specify when it plans to withdraw from Lebanon.
Despite opening a new front in Israel’s year-long conflict in the Middle East, which has already displaced around 1 million people in Lebanon according to the UN, global markets remained largely stable on Tuesday.
Brent crude oil futures, which fell 17 per cent in the third quarter, steadied on Tuesday at around US$71.8 per barrel as the higher risk premium from escalating Middle East tensions was balanced by expectations of increased supply.
Spot gold, on the other hand, eased on Tuesday, after gaining around 13 per cent over the September quarter – its best quarterly gain since 2016. The commodity hit a record high late last week of US$2,671.88 on US monetary easing but dropped to US$2,639.92 by Tuesday afternoon.
The S&P/ASX 200 Index edged slightly lower on Tuesday, affected by underperformance in key stocks, yet it remained close to its yearly peak after posting its strongest September quarter in over a decade.
Speaking to InvestorDaily, AMP’s Shane Oliver acknowledged that while the escalating conflict is a “big worry” and a major humanitarian concern, the impact on financial markets is expected to remain relatively limited – unless Iran becomes directly involved.
“The key from an investment perspective is whether global oil supplies are impacted, say if Iran, which accounts for around 3 per cent of liquid global fuel production, is directly drawn in, and so far, this has not happened,” Oliver said.
According to the chief economist, oil prices are currently being cushioned by an anticipated supply boost, with Saudi Arabia set to ramp up production in December and Libya, accounting for 1 per cent of global output, expected to resume its operations. Additionally, rising production in non-OPEC nations and cooling global demand are further easing pressure on prices.
“Oil prices have been trending below US$70 a barrel and remain just above US$68/barrel, which is little changed from late last week. If sustained, the lower oil price is positive for growth and inflation, which is why so far, there’s been little impact on share markets,” Oliver said.
“But if Iran becomes involved directly, disrupting its and others oil supplies, then shares and global growth will be more negatively impacted.”
Oliver opined that with Israel inflicting significant damage on Iran’s proxies, Hamas and Hezbollah, Iran’s involvement now presents “a high risk”.
Commenting on gold’s recent performance, Oliver noted that while the pullback is likely a natural correction following record-breaking growth, it could also signal that investors are no longer flocking to traditional safe havens as eagerly as before.
“Its pullback in the last few days despite the Israel-Hezbollah [conflict] is a sign investors are not rushing to safe havens from geopolitical risk. The broad trend is likely to remain up though as the Fed cuts rates, easing the opportunity cost of holding gold,” he said.
