Monday Market Minute | Oct 16, 2023

Israel-Hamas conflict introduces geopolitical risk as oil prices spike

What Moved

The Hamas attack on Israel on October 7 and Israel's subsequent military response introduced a new source of geopolitical uncertainty into global markets. Oil prices spiked above $90 USD per barrel on fears of regional escalation involving Iran, which could disrupt Strait of Hormuz shipping lanes. Canadian energy stocks rallied on the commodity move, while bond markets saw modest flight-to-quality flows. The TSX energy sector was the week's outperformer, while rate-sensitive sectors pulled back on the inflation implications of higher energy costs.

Why It Matters

For Canadian private markets investors, the geopolitical shock was a reminder that exogenous risks could disrupt even well-constructed portfolio positioning. The oil price spike, if sustained, threatened to reintroduce energy-driven inflation that could extend the BoC's hold period or, in a worst case, trigger additional hikes. Canadian infrastructure investors with energy exposure benefited from the commodity move. Private credit portfolios faced an indirect risk: if energy costs fed through to borrower operating expenses, debt service coverage could narrow in energy-intensive sectors.

Signal to Watch

Whether the conflict would remain contained or escalate to involve Iran directly, which would represent a materially different risk scenario for energy prices, inflation, and central bank policy globally.

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