The Red Sea is on fire, and that's bad news

<p>The recent upsurge in Houthi and
Hezbollah attacks on ships in the Red Sea has prompted the world's two largest
container shipping lines, Moller-Maersk and Hapag-Lloyd, to halt transit.</p><p>Subsequently, two oil majors have
insisted on adding a clause to their contracts allowing them to divert their
vessels through Africa if they deem the waters near Yemen unsafe.</p><p>Now, most of the major shipping lines,
responsible for more than 60% of the world's container transport, have given up
using the Bab-el-Mandeb Strait and the Suez Canal, respectively.</p><p>What
will be the result of all this?</p><p>Locally, this could <a href="https://www.nytimes.com/2023/12/19/business/red-sea-suez-canal-shipping.html" target="_blank" rel="follow">turn into an economic disaster</a> for Egypt. Thirty percent of the world's container
traffic passes through the Suez Canal, generating some $10 billion a year in
tolls for Egypt.</p><p>In addition, the conflict in the
neighboring Gaza Strip threatens to disrupt tourist stocks and natural gas
imports. As a result, prices will rise in the country, while people's incomes
will fall. </p><p>In the long term, this could lead to
social unrest.</p><p>On a larger scale, it could lead to
widespread trade disruption and increased logistics costs, triggering another
round of price hikes and forcing central banks to delay <a href="https://uk.advfn.com/newspaper/igorkuchma/71933/banks-leave-interest-rates-unchanged" target="_blank" rel="follow">changes in monetary
policy</a>.</p><p>What
do countries plan to do in response?</p><p>No one wants to jeopardize the progress
made in the <a href="https://www.investopedia.com/ask/answers/111314/what-methods-can-government-use-control-inflation.asp" target="_blank" rel="follow">fight against inflation</a>. So, it is no surprise that the United States has officially
announced the launch of Operation Prosperity Guardian to ensure safe navigation
in the Red Sea.</p><p>To achieve this, an international naval
coalition comprising the United States, the United Kingdom, Canada, Italy,
France, the Netherlands, Spain, Seychelles, and Bahrain has formed. </p><p>These ships will escort merchant ships
and protect them from Houthi attacks.</p><p>In response to his U.S. counterpart
Austin's announcement of the launch of an operation, Yemen's Defense Minister
Al-Atifi declared, "We will turn the Red Sea into your graveyard." </p><p>What
next?</p><p>The Houthis will continue to send drones
and rockets. These drones and missiles will be successfully intercepted 99% of
the time. However, unfortunately, 1% of the time, the targets will still be
hit.</p><p>Further down the road, this could become
a new trigger for the continuation of the bloody conflict. And there is a
possibility that, again against its will, Iran will sooner or later be drawn
into it.</p><p>What
should an investor do?</p><p>Usually, when the geopolitical situation
worsens, gold (<a href="https://www.tradingview.com/symbols/XAUUSD/" target="_blank" rel="follow">XAUUSD</a>) tends to benefit. Oil could also have seen a
significant rise, but the markets see no real reason to do so for now.</p><p>Yes, some 7 million barrels of oil pass
daily through the Red Sea from north to south and vice versa. If logistics were
to change for a long time, spot prices could rise by $3 to $4 per barrel.</p><p>The good news is that there is still
capacity to reroute shipments, so Goldman Sachs analysts do not expect the
situation in the Red Sea to have much influence on oil prices.</p>

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