Israel/Hezbollah War Risks
The probability of an Israel/Hezbollah war in the next 12 months has move up from low to modest probability, but would be a high impact event geopolitically and for global markets. For global markets, a distinction would be drawn between an Israel/Hezbollah war that did not involve Iran/U.S. and one that did – the latter could see an oil price spike. We judge the risk of Iran and U.S. involvement to still be low.
Hezbollah are claiming that the 1 wave of retaliation against Israel for the killing of a Hezbollah leader has been completed. At one level Israel and Hezbollah do not want a war beyond the weekend show of strength by both sides. For Israel the Gaza war and retrieving hostages will remain the key in the coming weeks and months, with the U.S. trying to pressure Hamas and Israel for a ceasefire. For Hezbollah, a war is high risk, given Israel strong military.
Nevertheless, the probability of an Israel/Hezbollah war in the next 12 months has move up from low to modest probability, but would be a high impact event geopolitically and for global markets. The weekend events have shown that both sides are on high alert, which in itself risks preemptive action. Additionally, Hezbollah is reported to have 100-120k missiles by military think tanks, which could sustain 3-5k missiles being fired per day. This would make an Israel/Hezbollah war brutal very quickly, which would unnerve global markets.
Additionally, any Israel/Hezbollah war could see Houthi rebels in Yemen and militias in Syria and Iraq become involved, which could quickly spiral the war across a number of Middle East countries. The 3 round of countries is Iran and U.S. Iran does not want a war with Israel, as the new president is focused on curtailing domestic unrest over cost of living and freedoms. Additionally, it would be a missile war given the distance between Israel and Iran and given the weak Iran air force, but a missile war could escalate very quickly and cause material damage. Nevertheless, Iran could get drawn into a war, if Israel decide to be preemptive against Iran’s military capabilities. Iran entry then risks a domino that could draw in the U.S.
For global markets, a distinction would be drawn between an Israel/Hezbollah war that did not involve Iran/U.S. and one that did. The market ramifications of a war excluding Iran and U.S. would be a multi-day flight to safety that hurt equities and benefits U.S. Treasuries but the impact would be temporary and prone to reversal once the fighting stopped. However, if Iran and the U.S. become involved then oil price volatility could become greater, as one tactic could be to squeeze oil transit through the straits of Hormuz to squeeze the U.S. and the West in economic terms. This could in turn produce a larger economic and markets impact. However, we would still judge this second scenario to be low risk, given Iran reluctance to fight a war with Israel.