09/10/2023

Dispatch from Tel Aviv: A new kind of global conflict has begun

“In the age we are about to live, clashes of civilizations pose the greatest threat to world peace, and an international order based on civilizations is the best protection against the danger of a world war”

 

– Samuel P. Huntington, The Clash of Civilization and

The Remaking of world order, 2002



Another geopolitical hotspot has started flashing red. With companies and investors already keeping close tabs on the war in Ukraine and growing tension between the United States and China, an outbreak of deadly violence in Israel adds the danger of contagion across the Middle East. And it’s erupting just as the global economy is in a fragile position.

EXECUTIVE SUMMARY

Fighting in Israel is raging into a third day after Hamas fighters breached the border from Gaza in an unprecedented surprise attack, nearly 50 years to the day after the Yom Kippur war of 1973

Officials say the death toll in Israel has passed 700. Videos show the horror on the ground, including an attack on a music festival where Israeli rescuers say they found 260 people dead. Other clips show Israeli civilians taken hostage. Hamas claims it is holding more than 130 hostages, including Israeli army officers. More than 400 Palestinians have died, according to the health ministry in Gaza, and medical care has been complicated by Israel cutting energy to the territory

Israel has been pounding Gaza with airstrikes and formally declared war on Hamas. An Israel Defense Forces spokesperson said that Israel is still not in full control along the border with Gaza as troops go “door to door” to hunt “the last terrorist inside Israeli territory”

Following Hamas’s brutal attack on Israel, the framework of the Abraham Accords, which was poised to culminate in the normalization of diplomatic relations between Saudi Arabia and Israel, could potentially be thrown into crisis or put on hold in light of the possible developments in the conflict. However, for Mohammed bin Salman, reversing course regarding Israel would indeed constitute a significant defeat, a sign of domestic and regional political weakness, as it would call into question the kingdom’s foreign policy strategy

In the light of Samuel P. Huntington’s theory of ‘The clash of civilizations’, the reopening of conflict should not be categorized as a classical positional warfare but rather as a conflict between civilizations that pits contrasting cultural paradigms against each other. In this regard, the demise of political bipolarity has served as a catalyst for the emergence of increasingly frequent and intense conflicts along cultural fault lines rather than political-ideological ones, as observed in the 20th century

On Saturday morning, Hamas fired thousands of rockets and sent fighters into Israel in a surprise attack. Israel responded with a deadly bombardment of the blockaded coastal enclave and declared a state of war

Reactions in US

US VICTIMS

  • Several Americans are among the dead and some were still missing after the attacks, a National Security Council official, who declined to say whether they are among the hostages held by Hamas in Gaza
  • The US plans to move Navy ships and military aircraft closer to Israel as a show of support, said two US officials familiar with the planning

Republicans’ reactions

  • Former President Donald Trump was also on the campaign trail in Iowa just hours after the attacks in Israel unfolded, where he attributed the attacks to “perceived weakness” from the United States. “I would not be at all surprised if part of that tremendous wealth that they just accumulated went into suddenly watching this level of aggression. They didn’t have that level of aggression with me”, Trump said during remarks in Cedar Rapids, Iowa
  • Florida Governor Ron DeSantis suggested Biden’s administration “empoweredIran after it agreed to allow $6 billion in Iranian assets to be unfrozen for specific purposes in exchange for five American hostages. He said the U.S. should hold Iran accountable for its financial backing of Hamas, the ruling militant group in the Gaza strip that carried out the deadly attack
  • Nikki Haley went on Fox News late Saturday and sent a message to Israeli Prime Minister Benjamin Netanyahu, telling him to “finish them” after the Hamas attack
  • In Glenwood, Iowa, on Saturday, former Vice President Mike Pence called on Mr. Biden to assure Israel the U.S. will send military support and aid, according to the Des Moines Register. Despite the focus on strengthening the US-Israel relationship during the Trump-Pence administration, Pence on Saturday slammed Trump and others in comments related to the attacks in Israel
  • South Carolina Senator Tim Scott showed support for providing Israel with whatever assistance it needs and called on the US to mobilize the US Navy’s Sixth Fleet in Europe.

Problems for Biden

  • It all amounts to one of the most volatile geopolitical situations of Biden’s presidency, which is also confronting a war in Ukraine that has become a politically fraught issue at home
  • President Joe Biden and his top aides are absorbing the explosion of violence in Israel on Saturday and contending with a complicated diplomatic situation unlike any previous conflict between the Israelis and the Palestinians
  • Ties between Biden and his Israeli counterpart, Benjamin Netanyahu, friends for decades, have been strained by Netanyahu’s far-right governing coalition in Israel
  • A fractured political environment among the Palestinians will make it difficult for American officials to identify a reliable negotiating partner
  • In the US, an already active Republican presidential primary campaign appears destined to pin blame on Biden for helping fuel attacks on Israel through his recent deal with Iran
  • Looming in the background is a historic normalization agreement between Israel and Saudi Arabia that Biden had hoped was nearing the finish line

Reactions from the world

  • Pope Francis in the Vatican’s St. Peter’s Square: “I follow with apprehension and pain what is happening in Israel. I express my solidarity with the families of the victims. May the attacks and the weapons cease, I beg you”

 

  • EC’s President Ursula von der Leyen: “The attack is terrorism in its most despicable form.” She said “Israel has the right to defend itself against such heinous attacks

 

  • Commissioner of Neighborhood and Enlargement Oliver Varhelyi said the EC has put all of its development financing for Palestine under review, worth a total of €691 million

 

  • UK Prime Minister Rishi Sunak: “As the barbarity of today’s atrocities becomes clearer, we stand unequivocally with Israel. This attack by Hamas is cowardly and depraved. We have expressed our full solidarity to [Israeli Prime Minister] Netanyahu and will work with international partners in the next 24 hours to co-ordinate support”

 

  • The Chancellor of Germany called news of the attacks “horrifying” and said he was “deeply shocked” by the violence. “Germany condemns these attacks by Hamas and stands by Israel

 

  • The President of France Emmanuel Macron: “I have spoken to President Herzog and Prime Minister Netanyahu. I condemn the attacks carried out from Gaza on Israel, its soldiers and its people

 

  • Canadian Prime Minister Justin Trudeau: “Canada strongly condemns the current terrorist attacks against Israel. These acts of violence are completely unacceptable. We stand with Israel and fully support its right to defend itself. Our thoughts are with everyone affected by this. Civilian life must be protected

 

  • Saudi Arabia’s Ministry of Foreign Affairs said that it is “closely following” the situation between Palestinian and Israeli forces, and called for “an immediate halt to the escalation between the two sides

 

  • Qatar Ministry of Foreign Affairs holds Israel alone responsible for the current escalation due to its ongoing violence of the rights of the Palestinian people, the latest of which is the repeated raids on the blessed Al-Aqsa Mosque under the protection of Israeli police

 

  • Ukraine President Volodymyr Zelensky: “Today, the entire world saw horrifying videos from Israel. Terrorists humiliate women and men, detain even the elderly, and show no mercy. In the face of such a terrorist strike, everyone who values life must stand in solidarity”

 

  • Mikhail Bogdanov, Russia’s Deputy Foreign Minister and former ambassador to Israel and Egypt, told the state Tass agency that Moscow has been in touch with “all parties of the conflict, including Arab countries” and urged an immediate cease-fire and peace between Hamas and Israel”

 

  • “We call on relevant parties to remain calm, exercise restraint and immediately end the hostilities to protect civilians and avoid further deterioration of the situation” China’s Ministry of Foreign Affairs said in a statement about the “escalation of tensions and violence between Palestine and Israel.” China did not mention the Palestinian militant group Hamas
  •  

Reactions from Italy

  • The President of the Republic Sergio Mattarella: “I have learned with deep dismay the news of the attack that since dawn this morning has involved several regions of the State of Israel. In these dramatic circumstances, may the expressions of Italy’s solidarity reach you, Mr. President, and all Israeli citizens”

 

  • Foreign  Minister and Vice-Premier Antonio Tajani: “The Government condemns in the strongest terms the attacks on Israel. People’s lives, the security of the region and the resumption of any political process are at risk. Hamas ceases this barbaric violence immediately. We support Israel’s right to exist and defend itself”

 

  • Minister  of  Infrastructure  and  Vice-Premier  Matteo  Salvini:  “All  my support for the people of Israel, under violent and cowardly attack by Islamic extremists

 

  • PD  Leader  Elly  Schlein:  “Clear  and  firm  condemnation  of  Hamas’ terrorist attack on Israeli civilians, with thousands of rockets and military raids”

Responses from the market

  • Conflict in the Middle East often raises the specter of higher oil prices given the risk of disruptions to supplies. Here is a roundup of responses from investors, economists, traders and market strategists to the weekend’s news

 

  • Reuters, rising geopolitical risk would see buying in assets like gold and the dollar, and boost demand for US Treasuries, which have been sold off aggressively, analysts said over the weekend

 

  • Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall,” said Ed Yardeni, President of Yardeni Research Inc. “Much will depend on whether the crisis turns out to be another short-term flare-up or something much bigger like a war between Israel and Iran”

 

  • Gonzalo Lardies, Senior Equities Fund Manager at Andbank: “This will add more uncertainty to markets, with inflation and growth taking a step back and geopolitical risk taking center stage. We could expect a spike in volatility, with short-term fixed income becoming again a safe haven, while in cyclical sectors will be in the spotlight”

 

  • Guillermo Santos, Head of Strategy at iCapital: “Leaving aside the human drama […] it is evident that any extension of this to oil-producing countries, Saudi Arabia in the lead, could make the price of crude oil more expensive with negative inflationary effects for the West and would mean higher rates for longer and falling stock markets if the above caused a recession

 

  • Richard Flax, Chief Investment Officer at Moneyfarm: “The conflict has the potential to hurt broad market sentiment, but it’s not for certain. We think a lot will depend on whether the conflict is contained or widens in scope – for instance on Israel’s northern border – and that could prompt increased concerns about commodities oil in particular. The oil price has been quite volatile in recent weeks, and another spike could feed into consumer prices in the coming months”

 

  • Anthi Tsouvali, Multi-Asset Strategist at State Street Global Markets: “The timing of the conflict could not have been worse given the talks between Saudi Arabia and Israel. A conflict in the Middle East has obvious implication in oil prices. Markets will worry about higher energy prices and since we are already in a risk-off environment, that could push equity markets lower”

 

  • George Lagarias, Chief Economist at Mazars: “The number one risk for the global economy is the possibility of a third inflation wave, just as the current one is petering out. The flaring of tensions in the Middle East could drive energy prices higher, and undermine the efforts of central banks to bring inflation under control”

 

  • Thomas Hayes, Chairman of Great Hill Capital: “In the short term, we may see a bit of volatility, but when you step back and look company by company as to whether a regional conflict will effect their earnings power — in most cases the answer is no. It’s an unfortunate circumstance but will have little to no impact on aggregate earnings power

 

  • John  Leiper,  Chief  Investment  Officer  at  Titan  Asset  Management: “While the geopolitical set-up is very different to the early ‘70s in the region, there is a real risk that we see a strong reaction from Israel that will upset the Saudi-led negotiations and could see the US bolstering sanctions against Iran, which would see the oil price rise from here”

 

  • Mansoor Mohi-uddin, Chief Economist at Bank of Singapore: “Financial markets will worry about the risk of higher oil prices pushing up global government bond yields. If the conflict widens across the region then oil supplies may be threatened

 

  • Ori Greenfeld, Chief Strategist at Psagot Investment House, warned that compared to previous military conflicts, which had a minimal effect on the local financial market, the war that was triggered over the weekend is expected to have a more substantial impact

The view of think tanks

Atlantic Council

Ever since Hamas defeated Fatah in the 2007 Battle of Gaza, only two years after Israeli disengagement from the territory, the rhythm of the Israel-Hamas conflict had become increasingly routine, with regular Hamas terrorism followed by predictable Israeli reprisals. Whenever the destructive cycles became especially violent, outside mediators would help negotiate a temporary ceasefire. Israel would typically accomplish its primary goal of enhancing its security, and Hamas would usually accomplish its goal of presenting itself as the leader of the “resistance.” And the people in Gaza, those who Hamas claims to support, would continue to suffer

 

Brookings Institution

Hamas executed a stunning military surprise, breaching the Israeli border in multiple ways and attacking more than 20 Israeli population centers, as well as military bases. The failure of Israel’s intelligence and preparedness is second only to that in 1973. But this Hamas victory might prove Pyrrhic. In fact, Hamas itself might have been surprised by the extent of its initial success. The trauma in Israel today should give pause to those thinking that Israel will simply acquiesce to a short tit for tat. As bad as things have been in Gaza in the past two decades— and they have been terrible—the coming weeks could prove even worse

Center for a New American Security

 

October 7 will be remembered in Israel as a tremendous national trauma. Today’s atrocity will test the country’s unity, foresight, and military might. Throughout the difficult days ahead, it’s worth recalling that Israel, not the Arab coalition that launched the war, won in 1973. 9/11 may be the better comparison. A nonstate terrorist group entered the country bent on maximizing civilian casualties. The world watched as sheer barbarism shook a democratic nation. The attack followed a massive intelligence failure. And it will stir Israel, like 9/11 prompted the United States, to a resolute response

So what?

  • Geopolitical risk-watchers can sketch out how things might escalate. Massive retaliation, or even an invasion of Gaza by Israeli forces, could lead to further action by Hamas or Lebanon’s Hezbollah. Both groups are backed by Iran, meaning a worst-case scenario would see Jerusalem and Tehran squaring off against each other directly

 

  • A conflict would undermine stability in the Gulf, which is responsible for 32% of the world’s annual supply of crude oil. That could boost inflation at a time when central bankers have already hiked interest rates and bond yields are rising rapidly

 

  • One key player is Saudi Arabia. The Kingdom’s rulers have historically supported Palestinian rights and opposed Israel, while waging proxy wars against Iran. President Biden had hoped to broker a normalisation of relations between Netanyahu and Saudi Crown Prince Mohammed bin Salman, which could have led to a beefed-up security treaty between Saudi Arabia and the United States

 

  • Indeed, one motivation of the Hamas attacks may have been to provoke an Israeli response that derails those negotiations

 

  • However, Biden could also respond to Iran’s support for Hamas by toughening up sanctions on Tehran’s oil exports. Saudi could then play a stablising role in the oil global market (it has 3 million barrels of spare daily capacity, roughly the same as Iran’s overall output)
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  • Investors have reason to remain on edge. The Middle East is far from the only region which has the potential to flare up. At a time when the global economy needs inflationary geopolitical risks to simmer down, more are flashing red

Sources

  • Al Jazeera
  • Atlantic Council
  • BBC
  • Bloomberg
  • Brookings Institute
  • Center for a New American Security
  • Center for European Policy Analysis
  • CNBC
  • CNN
  • Corriere della Sera
  • Euractiv
  • Euronews
  • Foreign Policy
  • Il Sole 24 Ore
  • Le Monde
  • Politico
  • Reuters
  • South China Morning Post
  • Tass
  • The Financial Times
  • The Guardian
  • The Times of Israel
  • The Wall Street Journal

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