That is the topic of my latest Bloomberg column, here is one excerpt:
Despite the continuing war in the Middle East, most markets have been relatively calm. Stock exchanges have not plunged, while volatility appears manageable, indeed ordinary. If you were looking at just the markets (except for Israel’s), you might not even know there is a war on.
The question is what to make of such data. Allow me to make a daring inference: At least for the time being, the assumption is that the current conflict will not widen into a much larger war. It may pull in Syria, Lebanon, Yemen and other parties, but so far markets are indicating that the Israel-Hamas war will not much disrupt most of the world’s large economies.
There is one very important caveat: This is an ex-ante analysis. Markets are wrong all the time, but they are also often the best predictive tool available. Consider the Super Bowl. Before the game, the betting odds are usually the best indication of who is favored and by how much. Every single time, those odds end up being wrong: By the end of the game, one team is 100% likely to win, and the other team 100% likely to lose. Still, the odds were the best available predictor before the game started.
And:
It is not true that markets ignore war. For instance, the value of the Israeli shekel is down sharply since Oct. 7, reflecting that many parts of the Israeli economy have come to a standstill, and that the country will experience more serious fiscal problems in the future. Just after the Hamas attack, there was an immediate 4% spike in oil prices, which is significant but not a game-changer.
There is a lot of evidence suggesting that markets incorporate other consequences of war. For instance, the Iraq war had sizeable impacts on US travel stocks, as well as shares in the Turkish and Israeli markets. So don’t think markets are asleep at the moment. The marginal investor is watching — and deciding not to overreact.
Worth a ponder, but do note the overall news is still absolutely terrible in humanitarian and moral terms.
The post What are markets telling us about the Middle Eastern war? appeared first on Marginal REVOLUTION.
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