Key takeaways
Fighting recently escalated in the Russia-Ukraine war, now in its third year.
The conflict between Israel and Hamas has resulted in a significant human toll, as regional military tensions continue.
Despite growing global concern centered on these troubling geopolitical hotspots, capital markets remain generally unaffected to this point.
Well into the third year of the Russia-Ukraine war and approaching the first anniversary of events that triggered the Israel-Hamas war, both conflicts remain in the headlines. Ukraine’s recent surprise incursion into Russian territory and Russia’s subsequent bombings of Ukrainian cities indicate escalating tensions. In the Middle East, failure to achieve a cease fire between Israel and Hamas and the recent killing of several hostages taken by Hamas during its October 7, 2023, raid of Israel appeared to inflame matters.
As is the case with most global conflict, economic issues come into play. Often, oil prices are the most sensitive to rising global crises, although agricultural commodities are also a factor. Events like the Russia-Ukraine and Israel-Hamas engagements have forced government policymakers, central bankers and corporate leaders to contend with unique variables on a scale not experienced in decades. Yet neither conflict to date has led to a sustained impact on financial or commodity markets. Investors continue to remain more focused on factors such as central bank policies, the interest rate environment, economic growth and corporate earnings. Could today’s headline geopolitical conflicts eventually cause issues for the economy and capital markets as well?
The Russia-Ukraine war was mired in a virtual stalemate for months, but Russia began taking a more aggressive posture in early 2024, seeking to solidify its hold on additional territory in eastern Ukraine. Following long delays, the U.S. Congress in April 2024 approved a package of additional funding to provide Ukraine with weapons support. In 2024’s summer months, Ukrainian troops crossed the border into Russia, seizing some territory. Russia responded by stepping up attacks on Ukrainian cities. Events of recent months indicate that the war’s intensity is growing, and appears no closer to a resolution
“Russia is struggling against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who was a former operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim a victory in Ukraine. Yet Putin has remained persistent in maintaining military pressure despite significant casualties that have accumulated since Russia first invaded Ukraine more than two years ago.
Along with U.S. backing, Ukraine has benefited from the support of other NATO allies. However, within NATO countries, ongoing support for Ukraine’s war effort is far from universal. Political disagreement over continued funding represents a threat to Ukraine’s ability to fend off Russian attacks. Election outcomes in the U.S. and elsewhere may well determine the war’s future direction.
The Israel-Hamas conflict is the latest in a long series of Middle East military encounters. The situation intensified following a brutal October 2023 attack on Israeli territory by Hamas. Israel responded with its own invasion of the Gaza Strip, using ground troops and massive aerial bombardment. It resulted in significant destruction of Gaza territory and thousands of casualties, including civilians. The bloody conflict also leads to concerns regarding the potential for a more widespread conflict that embroils other countries.
An early offshoot of the Israeli-Hamas conflict was attacks on Red Sea shipping activity by Yemeni-based Houthi rebels. The Red Sea is used as a major navigation waterway leading to the Suez Canal. Attacks disrupted shipping activity, particularly affecting the movement of oil supplies. The war’s potential to expand by involving another Israeli enemy, Hezbollah, based in the border country of Lebanon, could complicate matters. There have been recent flareups between Israel and Hezbollah. The potential for Iranian involvement in battles against Israel is a growing concern. If the Middle East situation becomes more widespread, significant global economic ramifications could emerge.
One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance in 2023. Sweden was added in 2024.
Bridges believes Russia’s invasion of Ukraine could represent a new era, or second Cold War, that will differ distinctly from the previous three decades. In the new environment, economic weapons, much like those being imposed on Russia today, may be a primary form of combat, as both sides seek to avoid actual military conflict between the U.S. and Russia.1
The situation in the Middle East is more complex. Many countries have objected to the scope of Israel’s Gaza attacks. There is a risk that more countries in the Middle East that are aligned against Israel’s interests might choose to get involved, which could broaden the conflict’s scope.
Given the inter-connected relationship among economies across the globe, concerns about the worldwide economic fallout persist. Energy is a key part of the equation on multiple fronts. For example, Russia provides approximately 10% of the world’s oil output. Russia, in coordination with the Organization of Petroleum Exporting Countries (OPEC)+, has implemented supply cuts.2
“If global tensions continue to escalate, this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.
The impact is significant for Europe. For example, prior to the war, Russia supplied about one-third of European natural gas and about one-quarter of its crude oil imports.3 “Europe benefited from two consecutive mild winters that helped to moderate energy demand” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Nevertheless, this contributes to Europe’s economic challenges, and another winter is approaching.”
Concerns again rose about the direction of oil prices after the Israel-Hamas war began in October 2023, particularly when attacks on container ships on the Red Sea occurred. Those attacks prompted many shippers to divert traffic to much longer routes away from the Red Sea. Oil prices briefly exceeded $90/barrel range in 2023, but have recently hovered in the low-to-mid $70/barrel range.4 “The biggest concern is whether the conflict more directly involves Iran. That could create some pressure on oil supplies and prices,” say Haworth. Despite the concerns, Haworth sees little risk of a 1970’s-style oil embargo by Middle Eastern oil producing countries opposed to Israel’s actions. “Many Middle Eastern countries are too dependent on the income from oil sales, so most can’t afford to cut production or deliveries in any significant way,” says Haworth.
Both Russia and Ukraine are major suppliers of wheat and other agricultural products to various parts of the world. This contributed to a temporary spike in agricultural commodity prices in the early weeks following Russia’s invasion of Ukraine in February 2022. Wheat prices jumped briefly in May and June 2024 before again leveling off to their lowest levels in four years.5 Prices rose modestly since, but remain well below early 2022’s soaring prices.
“In the U.S., we’re a bit more insulated from the economic fallout from the conflicts compared to other parts of the world,” says Tom Hainlin, national investment strategist for U.S. Bank Wealth Management. Yet he points out that there is a greater risk for multinational companies. “If global economies slow as a result of the current conflicts, it may have a negative impact on business activity and for American companies.”
Haworth sees another issue arising not specifically tied to ongoing military conflicts. “One challenge is the lack of global trade in exports. This is creating issues for countries such as Germany, where its chemical business slowed due to an export decline.” Trade tensions, some related to the major wars, should be monitored for potential impacts on global economic growth.
From an investment perspective, the current conflicts have been overshadowed by other developments, such as the state of the U.S. economy, monetary policy, and corporate earnings. “If global tensions continue to escalate,” says Hainlin, “this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins.”
Haworth notes that capital markets have generally been unaffected. “To this point, the market seems to be responding more to fundamental economic and monetary policy factors than by global military conflicts,” says Haworth. Potential future changes in the U.S. commitment to NATO, as talked about in this year’s election campaign, are too far out in the future to have a direct market impact today, says Haworth. “Capital markets won’t deal in guesses about what may come. They’ll wait for something more concrete.”
Be sure to talk to your financial professional about what steps may be most appropriate for your circumstances.
The most prominent conflicts in the world today are found in two geographic regions. The first is Eastern Europe, where Russia and Ukraine have been involved in a war since Russia first attacked Ukraine in February 2022. The second, more recent conflict, followed a surprise attack by Hamas against Israel. In short order, Israel responded with massive bombardments and by sending ground troops into the Gaza Strip. The major concern is that this war could broaden to include other Middle East nations.
To this point, the economic impact of these conflicts has primarily been regional in nature. In the immediate aftermath of Russia’s invasion of Ukraine in early 2022, oil prices soared. That reflected efforts by western nations to place economic sanctions on Russia, which is a major oil supplier. However, that price spike was short-lived. Oil prices rose at the start of the Israeli-Hamas conflict, but haven’t spiked to previous levels, and stabilized in the $70 to $80/barrel range since then. While economic circumstances are extremely difficult for countries that are targeted in the current conflicts, the global impact has been muted. The U.S. economy continues to show significant stability despite global conflicts.
Stocks suffered through a bear market in 2022, though much of that was attributed to a changing economic environment. Most notably, the decision by the Federal Reserve to raise short-term interest rates beginning in early 2022 altered the investment landscape. By the end of 2022, stocks were on the rebound, and continue to move higher until pausing in August 2023. By the end of October, 2023, the three-month bull market pause was over, despite the onset of the Israeli-Hamas conflict. Stocks for the most part have moved in a positive direction since that time. “The risk of an Israel-Iran conflict does raise greater concerns that Middle East military action could become more widespread,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. However, Haworth notes that the global conflicts currently aren’t having a significant impact on investor sentiment.
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