Mideast Markets Price Low Probability of Wider Regional War

(Bloomberg) -- Middle Eastern markets that opened on Sunday showed little sign of panic a day after Israel started its ground invasion of Gaza.

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Israel’s TA-35 stock index was up 1.3% at the close in Tel Aviv, its first gain in three trading days. The index is down 11% since Israel declared war after a Hamas infiltration on Oct. 7. Moves on other major equity exchanges in the region were mostly subdued, with the Tadawul All Share Index in Riyadh and Qatar’s gauge rising less than 1% each. The EGX30 gauge in Cairo fell 0.8% and stocks in Kuwait dropped 2.5%.

With a ground invasion of Gaza widely expected before it began on Saturday, investors have been on alert for any signs that the conflict could expand, for example by deepening hostilities with other regional powers and drawing in other nations, including Iran and possibly the US. Saudi Arabia and the UAE condemned the intensified ground operations over the weekend as Israel warned they were the beginning of a long war.

Tom Holland and Yanmei Xie of Gavekal Research said in a note to clients on Sunday that “the near-term probability of an escalation severe enough to destabilize global financial markets — driving oil above $100 a barrel and triggering a major flight to safety — remains low.”

“The chance that the fighting between Israel and Hamas will escalate into a wider Middle Eastern war remains small,” the analysts wrote. “All the other players in the region have clear incentives to avoid a broader conflict. This includes Hezbollah, which although it has fired missiles into Israeli-controlled territory, has by and large so far followed established, if informal, rules of engagement aimed at limiting bloodshed.”

Israel said Sunday it hit hundreds of Hamas targets in Gaza and was responding to rocket launches from Lebanon by Hezbollah, which, like Hamas, is supported by Iran and listed by the US and others as a terrorist organization. Israel’s strikes on Gaza have killed thousands of Palestinians so far, and Iran’s president said it had “crossed the red lines, which may force everyone to take action.”

US President Joe Biden and Israeli Prime Minister Benjamin Netanyahu were due to talk later on Sunday, US National Security Adviser Jake Sullivan said on CNN. He called on Israel to use “every means available” to protect innocent civilians in Gaza and said negotiations to release the more than 200 Israelis being held hostage by Hamas are ongoing.

Israel’s currency, the shekel, will begin trading again on Monday. It rose on Friday for the first time in 15 days, ending its longest losing streak since 1984. The currency is down nearly 14% against the dollar this year, one of the worst performances among major world currencies.

(Updates with closing prices. Adds Biden-Netanyahu call in penultimate.)

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