Tensions in the Middle East are flaring up again

Earlier this week, it looked like the situation in the region might have calmed down a bit, but then came a new shock: a massive pager explosion in Lebanon with more than 2,000 injured by the blasts. 

As expected, Hezbollah has vowed to respond firmly to what some are calling an act of hybrid warfare and announced that it will continue its operations in support of Gaza, as it has been doing. 

This makes the hope that U.S. Secretary of State Antony Blinken's tenth visit to the region will bring about some positive change seem even more distant. Still, that does not mean it is a lost cause. 

As the saying goes, hope springs eternal. 

The good news is that the market does not seem to expect recent events to lead to anything worse. For example, energy prices, such as WTI and Brent, have not skyrocketed. 

Nor has there been a mad rush into the dollar. In fact, the DXY index fell the day after the attack, and XAUUSD was virtually flat. This suggests that investors are not rushing into safe havens. 

So there won't be a big war after all? 

Let's hope so. At the moment, investors do not seem to be preparing for the worst, but Tuesday's events will not be the last. That said, we can expect more triggers for an escalation. 

The real question is not if it will happen but when. With the U.S. election campaign in full swing, efforts will likely be made to “freeze” the conflict temporarily. 

Some suggest that if the “wrong” candidate wins, the situation could flare up again with a snap of the fingers. However, this is a hypothetical scenario: things could play out differently. 

The Middle East is governed by its own rules, so it is not wise to rely too much on the current lukewarm market reaction, as the situation could change abruptly at any moment. 

What if the Middle East explodes? 

First, this would result in more human casualties. As of September 8, 2024, more than 42,000 people (40,972 Palestinians and 1,478 Israelis) have died in the war between Israel and Hamas. 

Second, if the conflict spreads and other countries become involved, it could disrupt oil supplies through the Strait of Hormuz, where 30% of the world's seaborne crude oil passes. 

As a result, oil prices could soar, and the dollar could sharply strengthen, causing investors to flee to safe-haven assets such as US Treasuries and gold.