by Matt Tracy

WASHINGTON (Reuters) – Financial markets, sensitive to geopolitical risks, are weighing the possible fallout from the war between Israel and Hamas and waiting to see whether the conflict will spread to other countries, which could lead to a further rise in oil prices and impact the global economy.

Israel said on Sunday that Gaza residents could continue fleeing south as its troops prepare to launch a ground assault on the Hamas-controlled enclave in retaliation for unprecedented attacks by the Palestinian group.

Oil prices jumped nearly 6% on Friday as investors priced in the possibility of broader conflict in the Middle East. The start of oil trading in Asia later on Sunday will likely provide an early indication of market sentiment.

“It appears we are heading toward a massive ground invasion of Gaza and a large-scale loss of life,” said Ben Cahill, senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies ( CSIS). “Every time there is a conflict of this magnitude, there is a market reaction.”

The reaction over the past week has been relatively muted, although the Israeli shekel has taken a big hit.

“I don’t know if the markets will perform relatively well,” said Erik Nielsen, chief economic adviser at UniCredit Group. “It will almost certainly depend on whether this conflict remains localized or whether it escalates into a broader war in the Middle East.”

On Wall Street on Friday, the S&P 500 index fell 0.5% as investors turned to safe havens. Gold thus gained more than 3% and the US dollar reached its highest level in a week.

According to Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, New Jersey, an extension of the conflict would likely lead to an acceleration in inflation and, in turn, a rise in interest rates in the whole world.

However, while inflation and interest rates in other countries will likely rise in this doomsday scenario, the United States may be the exception as foreign investors pour capital into what they view as a safe haven in the event of global conflict, notes Bernard Baumohl.

“Interest rates could fall,” he added. “We should expect the dollar to strengthen.”

The war between Hamas and Israel represents one of the most significant geopolitical risks for oil markets since Russia’s invasion of Ukraine last year.

“If the war in Ukraine has taught us anything, it is that we should not underestimate the effect of geopolitics,” said George Moran, an economist at Nomura specializing in Europe, in a podcast from the bank.

Other energy markets could be affected, as recent events such as Chevron’s halting of natural gas exports via a major undersea pipeline between Israel and Egypt have shown.

Rising oil prices are not expected to have a significant impact on U.S. gas prices or consumer spending, analysts noted.

(Reporting Matt Tracy in Washington and Dhara Ranasinghe in London; Kate Entringer)

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