Markets React to Middle East Conflict

Facts

After Hamas' surprise attack on Israel over the weekend, Israeli stocks sank by 6.5% by Sunday. Shares in nearby countries also fell, with Egypt's market declining by 2.6% while Saudi Arabia's fell by 1.6%.¹
By Tuesday, the Tel Aviv Stock Exchange bounced back somewhat but remained short of figures prior to the escalation of violence.²
Meanwhile, the Israeli Shekel weakened to 3.95 to the US dollar, its worst level since 2016. On Monday, Israel’s central bank said it will sell up to $30B worth of foreign currencies in an attempt to stabilize the currency.³
In the US, over fears that the conflict would spill over into a wider war, the Dow, S&P 500, and Nasdaq all also had setbacks initially on Monday. Amid concerns that fighting would dampen the appetite for travel, travel stocks were among the worst affected.⁴
However, after two Federal Reserve officials suggested interest rates might remain steady at their next policy meeting, the markets recovered. By the end of the day, the Dow and S&P 500 both gained by 0.6%, while Nasdaq rose by 0.4%.⁵
In the meantime, stocks of defense contractors surged amid the news of hostilities. Northrop Grumman's share price increased by 11.4% while L3Harris Technologies gained 10%. Oil and gas stocks were also among the biggest gainers. Halliburton climbed by 6.8% while Marathon Oil saw increases of 6.6%.⁵

Narrative A, as provided by CNN. Although this geopolitical conflict is worrying for the market in general, importantly, this situation will likely be limited in scope, duration, and consequences in terms of oil prices. Higher volatility, however, could be expected as the conflict unfolds.
Narrative B, as provided by Reuters. Rising tensions in the Middle East could turn the tide against further Federal Reserve interest rate hikes, and may even lead to an easing next year. Easing these rate hikes may decrease pressure on the US and even the global economy.