A sudden and shocking attack on Israel by the Palestinian group Hamas has sent shockwaves through Middle East markets, triggering a steep decline in stock indices and setting the stage for a tumultuous week ahead.
Major stock indices across the region experienced significant losses on Sunday, with Israel’s benchmark TA-35 stock index taking the hardest hit, plummeting by 7%. This marks its most substantial drop in over three years. The Tadawul All Share Index in Riyadh slipped by 1.2%, while Qatar and Kuwait also witnessed weakened stock performances. Egypt’s EGX30 index saw a significant decline of up to 5.4%.
The Hamas attacks represent the deadliest assault on Israel in many decades and have the potential to escalate into a broader conflict. Israeli Prime Minister Benjamin Netanyahu has declared a prolonged military campaign against the militant group and expressed confidence in Israel’s ultimate victory. President Joe Biden has pledged unwavering U.S. support for Israel in this critical time.
This conflict unfolds amidst diplomatic sensitivity and a backdrop of profound division within Israel, driven by Netanyahu’s coalition with Israel’s far-right factions and their efforts to overhaul the nation’s judiciary. Over recent days, the Israeli shekel has weakened significantly, nearing a seven-year low, just ahead of the planned reopening of Israel’s parliament later this month.
“Divisions in Israel’s politics and security structure will be papered over while the military response in Gaza is ongoing, but they are not going away,” warns Hasnain Malik, a Dubai-based strategist at Tellimer, a research and data provider on emerging markets. “That will remain a vulnerability for all Israeli asset prices.”
The substantial losses in Israeli stocks have raised concerns regarding the Tel Aviv exchange’s trade-suspension regulations. An 8% drop in the TA-35 Index would trigger a 30-minute trading halt. Beyond that threshold, rules dictate that a 12% decline would result in the market’s closure for the day, unless alternative decisions are made by management.
The ongoing war in Gaza is predicted to have a more profound impact on Israeli markets than previous military operations. Should the conflict escalate further, Israel’s economy may suffer due to reduced private consumption and diminished private and public investments. Additionally, decisions taken by Israel that do not align with the international community could lead to decreased international investments and strained trade relations with various countries, potentially affecting the shekel’s value.
Hamas’s attacks have come at a precarious moment for Israel. Netanyahu’s efforts to curtail the judiciary have sparked mass protests and rattled foreign investors. The shekel already ranks as one of the year’s poorest-performing currencies among a basket of 31 major currencies tracked by Bloomberg.
Netanyahu’s plans for greater regional integration with Arab and Muslim nations now face a severe test. Israel is in discussions with the U.S. and Saudi Arabia for a complex three-way agreement, involving U.S. security assurances to Riyadh and normalization of relations between Saudi Arabia and Israel. Israel has also engaged in negotiations with Turkey and other nations concerning gas exports to Europe and trade corridors from Asia.
“Regional risk is on the rise for the foreseeable future,” observes Tellimer’s Malik.
The ongoing conflict has resulted in hundreds of casualties on both sides. Palestine suspended trading on its stock exchange on Sunday, citing “security conditions in the Palestinian territories,” with plans to resume trading on Monday.
