Investors are keeping an eye on a series of conflicts taking place worldwide, but to this point, events have not recently resulted in a significant impact on the global economy or capital markets. In February, the destructive Russia-Ukraine war entered its third year with no end in sight and growing concerns about the state of Western support for Ukraine. In the Middle East, Israel continues military operations in the Gaza Strip following the surprise Hamas attack on Israel in October 2023. To this point, fears of an expanded Middle East conflict have not materialized, though there have been issues beyond Israel’s border.
The most notable fallout from the Israeli-Hamas conflict has been in the form of attacks by Yemen-based Houthi rebels on cargo ships in the Red Sea. There have been other incidents in neighboring countries as well, and the U.S. military has, in a limited way, also been pulled into the conflict, primarily focused around efforts to protect Red Sea shipping lanes.
Such events force government policymakers, central bankers and corporate leaders to contend with a unique variable on a scale not experienced in decades. The impact on capital markets, to this point, appears limited, as investors remain more focused on factors such as central bank policies, the interest rate environment, economic growth and corporate earnings. Is it possible that geopolitical conflicts will raise issues for the economy and capital markets as well?
A new phase of the Russia-Ukraine conflict?
An extended period where Russian and Ukraine troops battled along Ukraine’s eastern region with little progress for either side recently shifted when Russia claimed some territory that had been previously contested. Nevertheless, Russia’s army continues to encounter notable resistance in its effort to overtake additional portions of Ukraine. Entering its third year, neither side seems to be close to achieving its objectives. “Russia is struggling against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who had a former operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim a victory in Ukraine. Yet Putin has remained persistent in maintaining military pressure despite significant casualties that have accumulated over the war’s first two years.
“Putin went into the war convinced that he can prevail, and that all he needs to do is push harder,” says Bridges. Over the first two years of the war, the U.S. and other Western nations contributed significant financial aid and military equipment to support Ukraine’s army and its ongoing operations. In late 2023 and early 2024, additional U.S. funding ran into Congressional roadblocks, with some policymakers wishing to slow down or end funding for Ukraine. Agreement on providing additional U.S. funding and military aid to Ukraine remains up in the air. European nations continue to support Ukraine’s efforts, but aren’t in a position to provide military support comparable to what the U.S. offers. That raises more questions about the future direction of the conflict, but in the meantime, the fighting continues with Ukraine determined to prevent a further takeover of land.
Expanding conflict in the Middle East?
While tensions and small military skirmishes have frequently occurred in recent Middle East history, the situation intensified following the October 2023 attack on Israeli territory by Hamas. Israel responded with its own invasion of the Gaza Strip, using ground troops and massive aerial bombardment. In response, Houthi rebels have attacked commercial and military ships in the Red Sea, a major navigation waterway leading to the Suez Canal. The U.S. responded with attacks on Yemen, and other areas of conflict have emerged as well.
The primary concern is if the Israel-Hamas war extends more widely across the Middle East, possibly drawing more involvement from the U.S. and other nations. However, to this point, hostilities have been primarily limited to Israel and the Gaza Strip.
Geopolitical implications
One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance in 2023. Sweden will be added to the NATO alliance in 2024 after it gained the final approval it needed, from Hungary, in February. Along with military equipment to support Ukraine, western nations continue to apply severe economic sanctions on Russia. President Joe Biden announced stepped-up sanctions against Russia in late February 2024.