Market implications of the war between Israel and Hamas

The attack by Hamas on Israeli soil is shocking and tragic and has triggered a geopolitical chain of events that will result in even more bloodshed and fighting for some time to come. I am not an expert on politics in the Middle East, but this is what I believe, based on the reports I’ve been reading:

1. The IDF is in the process of clearing the presence of Hamas within its own territory and is attempting to secure its borders. Israel’s retaliation against Hamas has been brutal and swift and will result in many lost lives and infrastructure in Gaza over coming months.

2. Iranian-backed Hezbollah has joined the fighting by firing rockets and artillery at Israeli target, opening up a new front in the war. The weekend’s attacks likely could not have happened without the support of Hezbollah’s financial and military assistance.

3. Saudi Arabia has been in discussions with Israel about normalizing relations, but these talks will now be jeopardized by the war against Hamas.

4. The US has historically provided Israel with $3.8B in military aid per year ever since the US-Israel Memorandum of Understanding signed in 2016 that pledged $38B of military aid over ten years (2019-2028). Israel is the United States’s closest ally in the Middle East and is a counterweight against Iran and Syria, both Shiite ruled countries and historical enemies of the US.

In this post I’ll lay out how I think markets will react when the markets open on Sunday afternoon/Monday morning, and how I think they will trade over the course of this week and this month. As a former bank FX trader who covered the Asia open every Monday, I’ve traded a lot of geopolitical shocks that happened over the weekend and have experience seeing how the markets play out over coming days.