Geopolitical risk returns in the Middle East

I have just returned from two weeks of holiday, and I have a lot on my mind. First things first, on the war between Israel and Hamas; emotions are running high and as a result, the quality of initial opinion and analysis is clouded and governed by hard-held priors. That always make for a treacherous information environment, especially in a situation as complex as is the conflict between Israel and its border states, not to mention the political situation in the Middle East as a whole. I am making the following initial assumptions. As long as it is Israel and Hamas pounding each other to a pulp—with devastating consequences mainly in Gaza as the IDF brings the heat—markets will eventually stop caring. The obvious risk is that a bloody conflict between Hamas and Israel spills over into wider military conflict in the Middle East. It is grim irony that Iran recently warned how a heavy-handed response by Israel “could spiral out of control and ricochet into far-reaching consequences”. Teheran is right, and I suspect that it is exactly what it, Hamas, other key actors in the Middle East, not to mention Russia, want. In the end, I don't think this is particularly complicated from Hamas' perspective. They're cynically trying to pull Israel into a heavy-handed attack on Gaza, which riles up the rest of the region against Israel. Iran obviously is fully on board with this, and has said as much already. The grim reality of the whole situation then is that it is the desperate initial condition in Gaza, which partly creates the foundation for such a wild gambit by Hamas in the first place. Generally, I am assuming—which admittedly is a big assumption—that many of the large players in the Middle East would happily pounce on a weakened Israel if they fancied themselves. It is exactly because of this that the US have dispatched two aircraft carriers in the region to make sure they don't, but it could get dicey, all the same. If that happens, markets would have to more seriously discount a sustained and potentially uncontrollable rise in geopolitical tensions.

From Israel’s point of view, my initial reading of the position is guided by two observations. In the first instance, Israel need to respond to a cruel and criminal terrorist attack on its people, and it needs to do so with force. Such is the situation that Israel find itself in, after all. Its security situation and geographic position are such that it needs to meet strength with strength less it wants to be perceived as ripe for the taking, as it were. In short, a heavy-handed counter response from Israel is not just an (obvious) case of responding in kind to a terrorist attack, something that other countries and governments would be equally inclined to, if in the same position. Secondly, and following from that, Hamas’ attack has exposed the flaw in Israel’s defensive posture up until now. I am not here taking a view on whether the success of the attack exposes a critically intelligence error by Mossad, IDF or some other agency in Israel; I am not in a position to evaluate that. Rather, I am talking about the idea that hiding under the Iron Dome while maintaining surveillance and troops on the border between Gaza and Israel doesn’t work. It doesn’t work exactly because of the success of Hamas’ attack. Israel cannot live with the reality that such an attack is possible, and as a result it has to go on the offensive.

Whatever happens next, I hope we can leave room for nuanced analysis and opinion. I will.