Israel-Hamas Flare-Up Hitting Financial Markets

BMI View: The risk that the ongoing exchange of fire between Israel and Hamas will escalate into a larger-scale Israeli offensive is significant despite neither side having much to gain from further conflict. Israel's fixed income and equity markets are set to post continued losses until a ceasefire is agreed.

We see significant risk that the ongoing exchange of fire between Israel and Hamas - the militant group and political party that still effectively rules the Gaza Strip - will escalate into a protracted Israeli air campaign or ground operation in Gaza, despite neither side having much to gain from a further flare-up. Israel launched what it described as an open-ended offensive named 'Operation Protective Edge' against Hamas on July 8. Israeli forces struck at least 50 sites in Gaza by air and sea, and the Israeli cabinet authorised the military to call up 40,000 troops for a possible ground invasion. According to the army, the offensive is targeting Hamas and is aimed at halting the rocket fire that has intensified in recent weeks amid tensions over the killing of three Israeli teenagers abducted on June 12 and the apparent revenge murder of a Palestinian teenager.

Incentives For A Ceasefire High...

Further Losses On The Cards
Israel - ILS 2023 Government Bond Yield, %

BMI View: The risk that the ongoing exchange of fire between Israel and Hamas will escalate into a larger-scale Israeli offensive is significant despite neither side having much to gain from further conflict. Israel's fixed income and equity markets are set to post continued losses until a ceasefire is agreed.

We see significant risk that the ongoing exchange of fire between Israel and Hamas - the militant group and political party that still effectively rules the Gaza Strip - will escalate into a protracted Israeli air campaign or ground operation in Gaza, despite neither side having much to gain from a further flare-up. Israel launched what it described as an open-ended offensive named 'Operation Protective Edge' against Hamas on July 8. Israeli forces struck at least 50 sites in Gaza by air and sea, and the Israeli cabinet authorised the military to call up 40,000 troops for a possible ground invasion. According to the army, the offensive is targeting Hamas and is aimed at halting the rocket fire that has intensified in recent weeks amid tensions over the killing of three Israeli teenagers abducted on June 12 and the apparent revenge murder of a Palestinian teenager.

Incentives For A Ceasefire High...

Given Israel's superior military capabilities, a ground offensive would see Hamas most likely coming off as a loser, and Palestinian civilians would suffer heavy casualties. The signal sent by the mobilisation of reservists could encourage Hamas military commanders to refrain from firing rockets into Israel. Israeli government officials and former military officials also made it clear that Israel would prefer not to have a ground operation in Gaza, where fighting conditions are less favourable to Israel than from the air, where Israel has total supremacy. Indeed, the mobilisation of reservists does not mean a ground war is inevitable. During the last Gaza flare-up in 2012, the so-called 'Operation Pillar of Defence' offensive, Israel massed its forces on the border with the Gaza Strip. However, after eight days of Israeli air attacks and Palestinian rocket fire, a truce was agreed without a major Israeli incursion.

...But Risks Of Escalation Are Significant

Risks are significant that the current situation could escalate into a ground offensive similar to 'Operation Cast Lead' in 2008-2009, a three-week struggle that saw considerable fighting on the ground in the Gaza Strip. Although Hamas stands to have much to lose militarily from an eventual ground offensive, the more extremist wings of the movement could push to continue the escalation, seeing the chance to buttress the group's credentials as an anti-Israeli resistance force and recover some of its popularity. Indeed, Hamas's reputation in the Gaza Strip improved after the last flare-up in 2012. Moreover, several radical militias operate partly outside Hamas's control in Gaza, and it is possible that action by such groups could cause Israeli civilian casualties and trigger a more forceful response by the Israeli authorities.

Israeli Prime Minister Binyamin Netanyahu, who has shown reluctance to be drawn into a larger-scale military operation, is also seeing increasing political pressure from hard-liners in his cabinet. On July 7, Israeli Foreign Minister Avigdor Lieberman ended his Yisrael Beytenu party's political alliance with Netanyahu, accusing the premier of responding weakly to the surge of rocket fire from Gaza. Jewish public opinion in Israel also appears to be pushing the government towards a tougher response and a clampdown on Hamas infrastructure.

Further Losses On The Cards
Israel - ILS 2023 Government Bond Yield, %

Financial Markets To Suffer

We expect financial markets in Israel to continue suffering until a ceasefire is agreed. Investors have begun pricing in higher sovereign risks, as reflected in the domestic fixed income market. Israel's benchmark 2023 bond yields have increased by 10 basis points since July 1; yields stood at 2.75% on July 8, and we expect losses towards 2.90% over the coming days. The Tel Aviv 100 equity index (TA-100) has also lost 1.9% since July 7 and was trading at 1,236 on July 9. The TA-100 is currently trading above short-term support at 1,225. We see scope for the index to break support over the coming days and target further losses towards 1,200 on the first instance.

Likely To Break Support
Israel - Tel Aviv 100 Equity Index

If a ceasefire is agreed, we expect losses in Israeli fixed income and equity markets to pare back. Should a ground offensive or a drawn-out air campaign take place, however, protracted losses in both the TA-100 and the 2023 bond would be on the cards.

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This article is tagged to:
Sector: Country Risk
Geography: Israel, West Bank and Gaza
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