Israeli forces launch ground offensive in Lebanon as markets fear escalation

Israel has launched a ground attack on Lebanese territory, with markets jittery about the possibility of a serious escalation in the conflict between the Jewish state, the militant Hezbollah group and Iran itself.

In a statement early Tuesday, the Israel Defense Forces said it had begun “limited, localized and targeted ground operations” against targets in southern Lebanon that it said posed an “immediate threat to Israeli communities in northern Israel.” Israeli air and artillery forces are supporting the offensive, the IDF said.

A senior White House official, meanwhile, told NBC News on Tuesday that the US had seen signs that Iran was preparing to launch a ballistic missile attack on Israel “imminently.”

Any direct attack by Iran on Israel “will have serious consequences for Iran,” the official said.

Oil prices rose sharply on Tuesday, with Brent crude futures due in December trading at around $73.83 a barrel at 3:30 p.m. London time, up 3% from the previous settlement period. The previous November WTI contract was 3.3% higher at $70.34 a barrel.

Israel's ground invasion of Lebanon marks a shift in the Jewish state's military attention away from the Gaza Strip, where it has waged a retaliatory campaign in response to the Oct. 7 terror attack by the Palestinian militant group Hamas.

Iran-backed Hezbollah and Israel, meanwhile, have been engaged in cross-border firefights since last year, when the Lebanese group declared solidarity with the Palestinian cause.

The Israeli offensive in Lebanon comes after the Jewish state assassinated Hezbollah chief Hassan Nasrallah on September 27, shaking the group's command structure, and follows a devastating bombing campaign that killed more than 1,000 people in Lebanon, according to NBC News killed and 1 million people displaced by date.

Just last week, Western allies called on Israel to consider a 21-day ceasefire on the Lebanese-Israeli border.

In a Google-translated social media post, Israeli Defense Minister Yoav Gallant said he had spoken with his U.S. counterpart Lloyd Austin and emphasized that Israel's recent operations “build on the ongoing actions taken to target the Hezbollah leadership “to eliminate and weaken Hezbollah’s offensive capabilities.”

In comments published by Hezbollah-allied media outlet Al Manar, the group's representatives condemned the Israeli airstrikes and called on the United Nations to provide aid. According to a statement translated by Google, Hezbollah said claims that Israel had invaded Lebanon were “false” and had not reported any “direct clashes on the ground.”

The conflict in Lebanon's home territory deepens the debilitating financial crisis that has gripped the country since 2019 after dollar liquidity plummeted.

Israel's own economy, meanwhile, is suffering from the strain of multiple military operations. The central bank is expected to keep interest rates – currently at 4.5% – unchanged until the second half of next year and cut its 2025 growth forecast due to the ongoing conflict, Reuters reported on Tuesday, as the Bank of Israel governor, Amir Yaron said.

Globally, markets have so far weathered nearly a year of unrelenting conflict in the oil-rich Middle East after Hamas' Oct. 7 attack sparked Israel's military campaign in Gaza and cross-border retaliation from Lebanon, as well as Yemeni Houthi attacks disrupting commercial transit through the Red Sea .

Because oil prices have historically been sensitive to geopolitical shocks, they have resisted long-term spikes tempered by the specter of slowing global demand and potential supply increases.

“Israel's attack in Lebanon, which killed Hezbollah's leader, represents a significant escalation of hostilities in the Middle East and all eyes are now on Israel and Iran's next actions. This escalation alone would point to higher oil prices and inflation.” But it comes at a time when OPEC+ is changing its policy towards higher production, limiting upside risk to oil prices, inflation and therefore interest rates,” analysts at Capital Economics said in a note.

The question remains whether the hostilities will also involve other states from the Gulf Cooperation Council (GCC), including the US's important regional ally Saudi Arabia, which has traditionally been on the side of the Palestinians but has not yet joined in militarily the ongoing Middle East conflict.

“In our view, the Gulf Cooperation Council remains on the sidelines and only provides humanitarian assistance to Gaza and Lebanon. And it appears that Iran still lacks the will and military capacity to respond and is unwilling to risk instability at home while assuming an uncertain leadership transition,” said Jaap Meijer, head of research at Arqaam Capital told CNBC's Dan Murphy on Tuesday, before the U.S. official's comments to NBC News were reported.

“We think, as we saw in the initial reaction on the 7th^Th of the October attacks: the GCC [market] was initially sold but quickly recovered as the market knows that the Gulf Cooperation Council will not be involved in this conflict between Israel and Iran,” he added.