Market Focus Turns To Length, Scope Of Conflict (1/2)

Amid the mass bombardment of targets in the Gaza strip by Israeli forces overnight and the likelihood of a war that extends beyond the coming days into weeks, market focus is likely to turn to two crucial aspects of the conflict: how long it continues for and does it broaden into a regional conflagration.

• On the length of the conflict, JPM highlights the potential economic/fiscal impact of a lengthy conflict: "With the sharp increase in uncertainty and security risks, economic activity is likely to fall in the near term. While supply disruptions and FX passthrough are likely to add to inflation in the very short term, the demand weakness will likely dominate over a horizon of a few months (in case the conflict proves protracted), while in the longer run much will depend on the scale of the fiscal impulse. The likely drop in fiscal revenues and rise in military-related budget spending should lead to fiscal loosening in 2023-24, although its scale remains a question mark — debt issuance appears likely to increase."
• Given reports that PM Benjamin Netanyahu said the US President Joe Biden that a ground operation in Gaza was in the offing, a short conflict looks unlikely. The last instance of IDF troops entering Gaza on the ground in 2021 came in a two week conflict, but of much reduced intensity compared to the current fighting. The last full-scale 'war' in Gaza occurred in 2014 and continued for seven weeks.