The 2024 Israel-Iran War: What’s the Impact on Global Stock Markets?

Itai Erdreich
Oct 9, 2024
3 min read

Updated: Nov 8, 2024

Israel-Iran War Impact on Global Stock Markets

The Israel-Iran war has recently escalated from a proxy war, to a series of direct confrontations. Hundreds of ballistic missiles directed at Israel from Iran, leading to numerous questions on the future of the Middle East, but a more prompting question in the financial world: How does this regional war affect the global stock market?

Before diving into this question, it is important to understand the Middle East’s strategic geographic location. The Middle East contains one of the most significant portions of oil and natural gas reserves. With some of the notable countries being Iran, Saudi Arabia, UAE, and Kuwait. As of today, the Middle East holds over half of the world’s crude oil reserves, and around 40% of natural gas reserves (World Energy 2021). Furthermore, Iran has one of the most strategic locations for oil transportation. The Strait of Hormuz, which is situated between Iran and Oman, is responsible for 20% of the world’s oil transportation, and disruption there could mark significant impacts around oil trade world wide.

Oil Prices

As mentioned prior, Iran holds power over the Strait of Hormuz, and a recent threat by Iran is to close and harm ships passing through the strait, disrupting the quantity supplied of oil worldwide. This disruption would lead to a shortage in oil, massively driving the price of oil upwards. The price of oil is a large component of inflation, hence, the massive spike in oil prices can result in upward inflation worldwide.

Global Trade

In addition, Iran used its proxy, the Houties, to close the Bab el-Mandeb strait and attack passing ships. This strait is one of the most strategic straits for trade worldwide. This strait is located between Yemen and Africa. Ships that contain goods from Asia would go through this strait to Europe and the Americas and vice versa instead of circling Africa from the South. 30% of crude oil and 40% of dry goods pass through the Bab el-Mandeb and the Suez Canal (Middle East Political). The danger of passing through the strait led to big shipping companies like Maersk to divert its units around Africa instead of going through the Bab el-Mandeb and the Suez Canal. Going around Africa will significantly slow down worldwide trade and increase costs for shipping companies. An increase in costs for shipping companies means that they would increase their price for their service, leading to a chain reaction with the increase in costs of goods being the end result.

Defense Stocks

Companies in the defense sector rely heavily on military expenditure. Therefore, escalation in conflicts tends to result in higher military expenditures by economies. The escalations in the Israel-Iran conflict result in higher military expenditures by both Israel and Iran, as well as Israel’s allies such as the United States. The higher military expenditure can result in the short term gain for many defense ETFs such as Aerospace and Defense ETFs. It is also important to note that escalations in the Middle East are in addition to other prolonged conflicts like the Russia-Ukraine annexation, which already resulted in the rise of defense stocks.

Investor Sentiment

Heightened geopolitical issues often result in investors reacting in a negative way to the stock market, as they often move to safer options like safe-haven assets such as gold and US treasury. This means that investors would often move their cash out of the stock market into these assets, resulting in the subsequent drop of stocks.

Conclusion

The escalation of the Israel-Iran war has significant effects on the global stock market. The strategic geographic location of the region holds significant control of trade routes, oil, and natural gas. The escalations in the conflict made disruptions in these aspects, from oil prices increasing and the slowing down of international trade from the closing of the Bab El-Mandeb increased costs of goods, and drove inflation upwards. In addition, the escalation in the conflict results in higher military expenditures by countries boosting defense stocks. Furthermore, escalations in geopolitical issues often drive investors to transfer cash from the stock market to safe-haven assets. In conclusion, the Israel-Iran war’s ramifications are felt not only inside their borders, but in the global markets as well.

Sources

“Iran Says It Can Close Hormuz Strait, Views Israeli Presence in UAE as Threat | Reuters.” Reuters, Reuters, www.reuters.com/world/middle-east/iran-says-israeli-presence-uae-is-threat-2024-04-09/. Accessed 6 Oct. 2024.

“Shipping Giant Maersk to Avoid Red Sea Routes for ‘Foreseeable Future.’” Al Jazeera, Al Jazeera, 5 Jan. 2024, www.aljazeera.com/news/2024/1/5/shipping-giant-maersk-to-avoid-red-sea-routes-for-foreseeable-future#:~:text=Due%20to%20’volatile’%20situation%20amid,journey%20times%20and%20shipping%20costs.&text=Container%20shipping%20giant%20Maersk%20has,for%20the%20%E2%80%9Cforeseeable%20future%E2%80%9D.

“The Geopolitical Importance of Bab El-Mandeb Strait: A Strategic Gateway to Global Trade – MEPEI.” Middle East Political and Economic Institute, mepei.com/the-geopolitical-importance-of-bab-el-mandeb-strait-a-strategic-gateway-to-global-trade/. Accessed 6 Oct. 2024.

Statistical Review of World Energy 2021 – Middle East, www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2021-middle-east-insights.pdf. Accessed 6 Oct. 2024.