Trade Alert

Trading the Israel-Hamas conflict

_{Posted by Club Member TomTD 11.10.23}

Kneejerk market reactions will likely see higher prices for Oil, Gold, US Treasury Bonds, USD, and US defense stocks.

But, once the initial shock of the moment passes, I’m somewhat skeptical that each of these trades will keep working.

The supply of US treasury bonds from new issuance could keep a lid on Treasury bond prices. And, higher real interest rates may put downward pressure on gold prices.

Oil is more complex. If the Israel-Hamas conflict spirals and begins to destabilize the region, I could see oil prices rising to above $95 as the markets start pricing in the risk of oil supply disruption.  But Brent is already at $87, so the upside to this trade isn’t very compelling relative to the downside risk, E.g., global oil demand being weaker than forecast, or more “dark” supply coming out of Russia, or limited disruption of supply from the conflict, etc. Additionally, OPEC has about 4m barrels of excess production capacity, so in theory, there is capacity from within OPEC to step in should there be any supply disruption (e.g., in Iran) resulting from the conflict. That being said, there’s probably very little political will for OPEC to increase supply here (OPEC wants higher oil prices too!)

I’m more constructive on US defense stocks (e.g., Lockheed Martin, Northrop Grumman). This will likely be a protracted conflict, so these stocks should continue to see market support. Initiating new positions here.

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