Israeli forces launch ground operation in Lebanon, sparking market concerns of escalation.

• The Israeli Defense Forces announced that they had commenced "limited, localized, and targeted ground operations" against targets in southern Lebanon.
• The recent Israeli attack occurred following the assassination of Hezbollah leader Hassan Nasrallah on Sept. 27, disrupting the organization's leadership.
• Hezbollah and Israel have been trading cross-border fire since last year.

The conflict between Israel and the Iran-backed Hezbollah militant group has led to a ground incursion by Israel into Lebanese territory, causing markets to be on edge once more.

On Tuesday, Israel's Defense Forces announced that they had started a limited ground operation in southern Lebanon against targets they claim pose an immediate threat to Israeli communities in the north. The Israeli air and artillery forces are supporting the offensive, the IDF stated.

The ground incursion signifies a change in the Jewish state's military focus from the Gaza Strip, where it has been responding to the Oct. 7 terror attack by the Palestinian militant group Hamas.

Since last year, Hezbollah and Israel have been exchanging cross-border fire, with Hezbollah declaring support for the Palestinian cause and Israel responding.

The Israeli offensive in Lebanon was triggered by the assassination of Hezbollah leader Hassan Nasrallah on Sept. 27, which disrupted the group's leadership and followed a devastating bombing campaign that NBC News reports has resulted in over 1,000 deaths and 1 million displaced people in Lebanon.

Last week, Western allies urged Israel to consider a 21-day cease-fire along the Lebanon-Israel border.

Israeli Defense Minister Yoav Gallant emphasized in a Google-translated social media post that he discussed Israel's latest operations with U.S. counterpart Lloyd Austin and highlighted that these operations are an extension of the efforts to eradicate Hezbollah leadership and diminish its military capabilities.

Hezbollah officials condemned Israeli airstrikes and requested relief supplies from the United Nations, stating that Israel had not entered Lebanon and there were no direct ground clashes, according to a Google-translated statement.

Market impact

The financial crisis in Lebanon has worsened due to internal conflicts, which have been ongoing since 2019 and have resulted in a severe shortage of dollar liquidity.

The ongoing conflict is putting a strain on Israel's economy, causing its central bank to hold interest rates at 4.5% and trim its 2025 growth forecast, according to Bank of Israel Governor Amir Yaron, who made the statement on Tuesday.

Nearly a year of conflict in the oil-rich Middle East has been endured by global markets, resulting from Hamas' attack on Israel in October, which led to a military campaign in the Gaza Strip and retaliatory cross-border strikes from Lebanon, as well as Yemeni Houthi attacks disrupting commercial transit through the Red Sea.

Oil prices have remained resistant to long-term spikes due to geopolitical concerns and the possibility of increased supply and decreased demand.

At 2:50 p.m. London time on Tuesday, Brent crude futures with December expiry were trading at $73.10 per barrel, up 2.1% from the previous settlement. Meanwhile, the front-month November WTI contract was 2.27% higher at $69.70 per barrel.

The killing of Hezbollah's leader in Israel's strike in Lebanon has led to a significant increase in hostilities in the Middle East, and now all attention is focused on the next actions by Israel and Iran. This escalation, on its own, could result in higher oil prices and inflation. However, it occurs at a time when OPEC+ is changing its policy towards higher production, which may limit the potential impact of this escalation on oil prices, inflation, and interest rates, according to Capital Economics analysts in a note.

The ongoing conflict in Yemen has raised concerns about whether it will lead to the involvement of other states from the Gulf Cooperation Council (GCC), including Saudi Arabia, a key U.S. ally and a historically partisan supporter of the Palestinian cause, despite its military inactivity in the ongoing Middle East conflict.

According to Jaap Meijer, head of research at Arqaam Capital, GCC continues to remain on the sidelines and only offers humanitarian aid to Gaza and Lebanon. Furthermore, it appears that Iran is still lacking the necessary will and military capability to respond and is not prepared to risk instability at home as it enters an uncertain leadership transition.

According to the initial reaction on the 7th of October attacks, the GCC market was initially sold off but quickly recovered, as the market knew that the GCC would not be involved in the conflict between Israel and Iran.

The ongoing fire exchanges between Israel and Yemen, including fresh Houthi drone attacks against Israeli military posts in Eilat and Tel Aviv, increase the likelihood of additional maritime incidents in the Red Sea. According to Ambrey Intelligence, two vessels were reported to have been targeted in a key transit area linking Asia-Pacific and the Mediterranean by midday on Tuesday.