Once again, geopolitics rules

The
futile back-and-forth talks between Israel and HAMAS representatives on a
ceasefire in Gaza and the release of Israeli hostages have finally «yielded»
results.

Today,
Israel urged tens of thousands of Gaza residents, who are barricaded in eastern
Rafah, to evacuate to a humanitarian zone in the face of the imminent
possibility of a military operation in the city.

Not even
the pleas of Western nations, especially Belgium’s call for trade sanctions
against Israel, have been able to sway Jerusalem. The EU could follow suit.

Specifically,
the EU Council could use Israel’s non-compliance with the human rights
provisions of the Association Agreement with the EU as a reason to impose
sanctions.

Incidentally,
last week, the Biden administration ended the shipment of U.S.-made ammunition
to Israel, Axios reported, citing two Israeli officials.

However,
the threats yielded a different result than the desired, as evidenced by the
latest escalation. Hopes for a positive outcome are slim, especially since
Israel’s military cabinet unanimously approved the Rafah operation on May 5.

The
Israeli Prime Minister has stated that pressure from other world leaders will
not deter his country’s efforts to defend itself. He has made it clear that
“if Israel has no choice but to act alone, it will.”

And if
the operation goes ahead?

Well,
depending on how you look at it, it’s another humanitarian catastrophe,
potentially resulting in the loss of hundreds or even thousands of lives. And
economically, it doesn’t bode well either.

Speaking
of markets, following Israel’s order to evacuate Palestinians from Rafah, oil
and gold prices soared, while Bitcoin suffered a
setback, and the dollar index barely moved.

As for
the future, if escalation occurs, it could spell trouble for the entire region,
even without triggering a full-blown war.

The
severity of the impact, however, depends on neighboring countries, particularly
Iran, Lebanon, and possibly even Turkey. If they decide to intervene, market
reactions will be much more severe.

So what
is an investor to do?

The key
is not to panic or rush into decisions. In other words, don’t rush to buy shares of arms manufacturers or the dollar
immediately.

It is
worth noting that previous escalations and their effects on global markets were
temporary and limited. More of the same could happen this time.

However,
in a worst-case scenario, analysts recommend maintaining a portfolio allocation
to defensive assets such as gold. But again, do not go full YOLO.

This article was written by FL Contributors at www.forexlive.com.