Oil prices surged while stock markets and the Israeli currency fell at the start of the week as investors reacted to war between Hamas and Israel.
Although Israel is not a major oil producer, escalating tensions in the oil-rich Middle East spooked investors who had been selling off oil in recent weeks.
Inflation, fear of a global economic downturn and a correction to prices that were surging in recent months had sent US oil down from around $95 a barrel in late September to just above $80 last week.
But on Monday, US oil prices traded 4% higher above $86. Brent crude, the global benchmark, was also up almost 4%, trading at nearly $88 a barrel.
Israel formally declared war on Hamas Sunday after the Islamist militant group launched its deadly surprise assault Saturday.
More than 700 people have been killed in Israel, and more than 400 Palestinians have been killed, according to authorities.
“With the Israeli government warning of a long and difficult war, there are concerns that deep and incessant retaliative strikes on Gaza could potentially bring Iran into the conflict and have an impact on the flow of energy in the region,” Susannah Streeter, head of money and markets at Hargreaves Landsdown, wrote in a note.
Israel intervenes to support shekel
On Monday, the Israeli shekel weakened to 3.92 to the US dollar, its worst level since 2016.
Israel’s central bank said it would sell up to $30 billion worth of foreign currencies to stabilize the currency and to “provide the necessary liquidity for the continued proper functioning of the markets.”
In a statement, the Bank of Israel said it would provide an additional $15 billion of support if needed, saying it would “continue monitoring developments, tracking all the markets, and acting with the tools available to it as necessary.”
In equity markets, US stocks, which surged Friday on a surprisingly strong American job market report, were mixed, but relatively unchanged after ticking down earlier in the session.
The Dow opened lower but by midday Monday it was up by 39 points, or 0.1%. The S&P 500 added 0.05% and the Nasdaq Composite declined 0.3%.
Global investors fear the conflict in Israel could spill over to the wider region, and that prolonged tensions in the Middle East could hurt the fragile global economic recovery.
European stocks also fell at the open Monday as traders digested the news. But they later steadied a little, with France’s CAC 40 index falling 0.6%, while Germany’s DAX index dipped 0.7%. London’s FTSE 100 inched up 0.03%, propped up by gains in the shares of oil companies.
In Asia, initial reaction among investors was mixed.
In mainland China, the Shanghai Composite slipped 0.4% after it reopened following a holiday week. Meanwhile, Australia’s S&P/ASX 200 ended 0.2% higher.
Hong Kong’s Hang Seng index ticked up 0.2% when trading resumed following a morning suspension due to a typhoon, while markets in Japan and South Korea were closed for holidays.
The key question for markets now “is whether the conflict remains contained or spreads to involve other regions, particularly Saudi Arabia,” analysts at ANZ wrote in a report Monday.
“Initially at least, it seems markets will assume the situation will remain limited in scope, duration, and oil price consequences. But higher volatility can be expected.”
— Robert North and Krystal Hur contributed to this report.