Mideast Markets Shudder at Hamas's Massive Escalation

A flight out of equities across the region's major markets became evident on Sunday as traders speculated about the length, scope and ferocity of fighting that will follow Saturday's large-scale terror attack against Israel.

Lukas Strobl 09.10.2023
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Billowing clouds after an IDF airstrike on Gaza on Sunday, Oct. 8

Israeli stocks nosedived as markets re-opened on Sunday and the nation reeled from the deadliest terror attack it has suffered in its 76-year history. While isolated pockets of land near Gaza remained under the control of Hamas militants, traders also sold off the Shekel and withdrew from other major stock markets in the region. 

The Tavor-35 index of Israel's largest stocks held steady on Monday morning after an eight percent decline on Sunday. Peer benchmark indices in Dubai, Riyadh and Istanbul declined more than two percent since Saturday. 

Declaring his nation "at war" in a speech on Saturday, Israeli Prime Minister Benjamin Natanyahu mobilized reserve troops "to fight back on a scale and intensity that the enemy has so far not experienced." Amid vocal support for Hamas from both Iran and a once again well-armed Hezbollah to Israel's north, the threat of escalation beyond Gaza and Southern Israel looms large. 

Central Bank Intervention

The situation comes at a vulnerable time for Israel, where Netanyahu leads a coalition of center- and far-right parties that has been facing stiff resistance to controversial judicial reform. The nation's currency, on a downward trajectory all year, reached a seven-year low following Saturday's attacks. To curb the Shekel's volatility and ensure liquidity in financial markets, the Bank of Israel announced $30 billion in foreign currency sales on Monday. 

On Monday morning, Hamas militants were continuing attempts to enter Israel along breaches in its border fortifications. Hostage situations inside Israel were ongoing, and an unknown number of Israelis have been taken to Gaza proper as hostages. More than 700 Israelis were presumed dead according to the nation's military. Palestinian officials placed their death toll at 493 after about 1,000 targets were struck in the Israeli Defense Forces' counterattack, termed Operation Swords of Lion.

With a volatile situation on the ground, the extent of reverberations across financial markets is uncertain. Major stock indexes in the Middle East were declining on Sunday and Monday, though to a lesser extent than Israeli stocks. 

"For now, the conflict appears to be confined to Israel and Hamas, and stocks in other markets across the region have minimal exposure to Israel as a result of decades-long isolation that has only ended recently," Morningstar's European equity strategist Michael Field said on Monday. "Traders will be reluctant to sell off other major markets in the region until the picture changes."

Meanwhile, Israeli equity markets are heavily weighted towards a tech sector that is reliant on stable supply chains and a highly-qualified labour force. That makes them more sensitive to structural shocks, according to Field. 

Defence Stocks Rising

European aerospace and defence stocks outperformed on Monday as the spectre of a further destabilized Middle East raised the outlook for military spending in the region. By mid-day Monday, BAE Systems (BA) was up 4%, regional peers Rheinmetall (RHM) +4.8%, Leonardo (LDO) +5.2%, Thales (HO) +4.6%, Dassault Aviation (AM) +4.4%. 

U.S. defence contractors rose in pre-market trading with Lockheed Martin (LMT) up 5%, Northrop Grumman (NOC) up 3.7% and General Dynamics (GD) up 3.3%. The only major Israeli defence firm with an exchange listing, Elbit Systems (ESLT), was heading lower on Monday, indicated down 4.4%. 

Those gains may go further: With a protracted conflict seemingly ahead, Morningstar aerospace & defence analyst Loredana Muharremi sees a general positive impact on defense stocks, in particular BAE Systems as a major supplier to Israel. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BAE Systems PLC1,373.00 GBX0.81Rating
BAE Systems PLC ADR70.61 USD1.13Rating
Dassault Aviation SA195.10 EUR-0.66Rating
Elbit Systems Ltd192.30 USD-0.07
General Dynamics Corp295.79 USD0.79Rating
Leonardo SpA Az nom Post raggruppamento23.06 EUR-2.08
Lockheed Martin Corp460.30 USD1.67Rating
Northrop Grumman Corp445.83 USD-0.13Rating
Rheinmetall AG518.40 EUR0.19
Thales164.30 EUR0.15Rating

About Author

Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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