Geopolitical Tensions Escalate: Attack on U.S. Warship Raises Concerns Over Economic Impact

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The recent attack shows further global tensions due to the war. (Image Credit: AP News)

An attack on an American warship and commercial vessels in the Red Sea on Sunday has sparked renewed concerns among investors about the potential escalation of the conflict between Israel and Hamas. This incident adds a layer of complexity to the market outlook, just as U.S. stocks reached a fresh closing high for the year last week.

The Pentagon confirmed its awareness of reports regarding the attacks on the American warship and commercial vessels, while Yemen’s Houthi group claimed responsibility for drone and missile attacks on two Israeli vessels in the same area. Concurrently, a U.S. military official reported a self-defense strike in Iraq against an “imminent threat” at a drone staging site.

The developments heighten fears of the Israel-Hamas conflict expanding into a broader and more complex situation, potentially involving the U.S. and regional players like Iran. Concerns over such a scenario had previously flared after an attack by Hamas into southern Israel on October 7, but tensions had eased in recent weeks.

In Asian trade on Monday, S&P 500 futures fell 0.2%, reflecting the market’s immediate response to the geopolitical developments. Brent Crude futures initially bounced before slipping 0.8% to $78.27 a barrel, while gold surged to a record high of $2,111 an ounce.

Quincy Krosby, Chief Global Strategist at LPL Financial, noted that a widening conflict could prompt some investors to take profits on the recent rally in stocks. The S&P 500 rose nearly 9% in November, driven by signs of easing inflation and optimism about the Federal Reserve halting interest rate hikes. The index is up almost 20% for the year, reaching a 2023 closing high on Friday at 4594.63.

“The market is sensitive to any expansion of this conflict,” Krosby stated. “I think active managers, in any event, are more likely to lock in their gains if this is a harbinger of a deeper military conflict that involves the U.S.”

Historically, spikes in geopolitical tensions have led investors to seek safe-haven assets such as gold, Treasuries, and the U.S. dollar. An escalation in the Middle East conflict could also impact oil prices, which have experienced recent declines.

Phil Orlando, Chief Equity Market Strategist at Federated Hermes, suggested that rising tensions in the region might push West Texas Intermediate crude prices up to a range of $80 to $90 per barrel.

Investors are now closely monitoring factors that could influence markets in the coming weeks, including a U.S. employment report due on Friday, which could further support the argument for a restrained Fed monetary policy. Additionally, the upcoming Fed monetary policy meeting on December 12-13 and seasonal factors like tax-loss selling and the so-called Santa Claus rally are potential market-moving events.

Orlando warned that a significant spike in geopolitical tensions could lead to a drop in the S&P 500 by “one or two hundred points.” However, he remained optimistic about the index, expressing conviction that it would end the year at 4,600.

Written by Ava LeFevre

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