Did Israel Cross the Rubicon?

Geopolitical risk is on the rise, think Ukraine, the Middle East and the South China Sea, and global leadership is?in decline. Both Ukraine and the South China Sea have been simmering for quite a while. Conflict in the Middle East, however, has been escalating rapidly. Over the past hours, the region has taken another, and possibly critical, step up the escalation ladder.

After effectively levelling most of Gaza in an attempt to root out Hamas, Israel recently turned its attention to Lebanon and Hizballah. Both Israel and Hizballah have been trading fire on the border since the October 7 Hamas attack on Israel. Hizballah claimed that the regular launching of rockets into northern Israel, which resulted in the evacuation of thousands of residents, was in support of Gaza and Hamas. Tensions, however, started rising in the past week when Israel turned its attention towards eliminating Hizballah’s leadership ranks. First, through an exceptional bit of planning, it detonated the pagers and walkie-talkies used primarily by members of Hizballah to avoid electronic surveillance. Next, it began a strategic bombing campaign targeting Hizballah weapons caches and senior leadership in Southern Lebanon.

Coming into the weekend, despite recent events, there was hope in the international community that a ceasefire between the two sides could be negotiated. The US, along with the EU and ten other countries, put forward a ceasefire proposal that they hoped would gain momentum. Prime Minister Netanyahu’s speech at the UN made clear that Israel was not ready to accept a ceasefire and stated - “If you strike us, we will strike you, there is no place. There is no place in Iran that the long arm of Israel cannot reach."

Shortly after Netanyahu’s speech, Israeli forces launch a strike in Beirut, targeting Hezbollah's central headquarters buildings. According to reports, the Israeli Air Force dropped two bunker-buster bombs on the Hezbollah command compound, destroying six buildings. After several hours of no news, it was reported that Hezbollah's leader Hassan Nasrallah was killed in the strike along with several other senior leaders.

Israel may have crossed the Rubicon with its decapitation strike. Clearly, all hopes for any ceasefire or secession of hostilities between the two are now all but gone. While Hezbollah has clearly suffered significant losses and will take some time to reconstitute its command-and-control structure, it seems highly unlikely that it and Iran will fail to?respond to such an audacious strike. All belief, as thin as it may have been, that the US could act as an honest broker and negotiate a deal between Israel and Hamas has also evaporated.

Up to this point in the crisis, Iran's responses to Israel’s actions (e.g., the killing of Ismail Haniyeh in Iran) have been highly choreographed and telegraphed to the United States and other allies, resulting in minimal damage to Israel. It is difficult to see this continuing under the current circumstances. Any Iranian or proxy response will most likely be without prior notice and result in a cycle of escalation, which could tip the region into war. Both parties are preparing for the worst. There have been reports that Iran's Ayatollah Khomeini has been moved to a secure location, and Israel has been preparing its embassies and citizens for an imminent response.

Immediately after the assassination of Hassan Nasrallah, the United States did not release a statement. However, several hours later, President Biden released a statement saying that?Israel’s strike killing Hassan Nasrallah was a “measure of justice” for the victims of his reign of terror. It appears the US was not advised of Israel's plan to strike against Hezbollah's leader; nonetheless, it supported Israel after the news. This has been the pattern throughout most of the conflict. While the US continues to support Israel, Prime Minister Netanyahu has disregarded all suggestions and proposals made by the Biden administration and pushed his agenda. Throughout this process, the United States has been losing credibility and moral leadership throughout the international community.

There can be little doubt that leadership in both Russia and China are watching these events with some degree of pleasure, seeing the United States' leadership position in the world diminished.

The global financial and commodities markets will clearly be on edge throughout the weekend and into the start of the week. All eyes will now turn to Iran and Hezbollah, waiting to see their response to the recent events. One thing is sure: it is doubtful that Iran and Hezbollah will coordinate their actions with Western nations – those days appear to be in the past. Consequently, the chances of an escalating cycle of violence leading to regional war have increased appreciably.

While crude oil and energy prices, in general, have been sliding as of late due to concerns about the global economy, we would expect to see prices reverse course in early trading as they digest the recent news and change in risk profile. Markets have all but ignored rising geopolitical risk and?focused exclusively on the risk of an impending economic slowdown and the potential for additional supply coming to the market as Saudi Arabia eases back on some of its voluntary production cuts. This weekend’s events may refocus the market on rising geopolitical risk and the possible loss of supply from major energy suppliers in the region. As supply disruption risk increases, so will price volatility. ??