Israeli forces launch ground offensive in Lebanon as markets eye escalation

Israel has launched a ground incursion into Lebanese territory, with markets once more on edge over the conflict between the Jewish state and the Iran-backed Hezbollah militant group.

In a statement early on Tuesday, Israel's Defense Forces said they had begun "limited, localized and targeted ground raised" against targets in southern Lebanon that they say pose an "immediate threat to Israeli communities in northern Israel." The Israeli air and artillery forces are supporting the offensive, the IDF said.

The ground incursion marks a shift in the Jewish state's military attention away from the Gaza Strip, where it has been carrying out a retaliatory campaign in response to Oct. 7 terror attack carried out by Palestinian militant group Hamas.

Iran-backed Hezbollah and Israel, meanwhile, have been trading cross-border fire 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 Sept. 27, rattling the group's command structure, and follows a devastating bombing campaign that NBC News reports has killed more than 1,000 people in Lebanon and displaced 1 million people to date.

As recently as last week, Western allies were urging Israel to consider a 21-day cease-fire across the Lebanon-Israel 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 stressed that Israel's latest operations "build on the ongoing measures taken to eliminate Hezbollah leadership and to degrade Hezbollah's offensive capabilities."

In comments carried by the Hezbollah-aligned Al Manar media outlet, the group's officials denounced the Israeli airstrikes and called on the United Nations for relief supplies. Hezbollah said that claims that Israel had entered Lebanon are "false," reporting no "direct ground clashes," according to a Google-translated statement.

Conflict within Lebanon's home territory compounds a debilitating financial crisis that has gripped the country since 2019, after the hemorrhage of dollar liquidity.

Israel's own economy, meanwhile, is showing the strain of multiple military campaigns. Its central bank is expected to hold interest rates — currently at 4.5% — unchanged until the second half of next year and trim its 2025 growth forecast as a result of the ongoing conflict, Reuters reported Bank of Israel Governor Amir Yaron as saying on Tuesday.

Globally, markets have so far weathered nearly a year of unyielding conflict in the oil-rich Middle East, after Hamas' Oct. 7 attack triggered Israel's military campaign in the Gaza Strip and retaliatory cross-border strikes from Lebanon, along with Yemeni Houthi attacks disrupting commercial transit through the Red Sea.

Historically sensitive to geopolitical tremors, oil prices have resisted long-term spikes, reined in by the specter of waning global demand and potential supply increases.

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

"The strike by Israel in Lebanon that killed Hezbollah's leader represents a major escalation of hostilities in the Middle East and all eyes are now on the next actions by Israel and Iran. On its own, this escalation would point to higher oil prices and inflation. But it comes at a time when OPEC+ is shifting tack on policy towards higher production, limiting the upside risk to oil prices, inflation and hence interest rates," Capital Economics analysts said in a note.

Questions linger as to whether the hostilities will draw in other states from the Gulf Cooperation Council (GCC), including key regional U.S. ally Saudi Arabia, historically partisan to the Palestinian cause — but so far militarily uninvolved in ongoing Middle East conflict.   

"In our view, GCC remains on the sideline and only provides humanitarian aid to Gaza and Lebanon. And it seems like Iran is still lacking the will and military capacity to respond and is not prepared to risk instability at home as it enters an uncertain leadership transition," Jaap Meijer, head of research at Arqaam Capital, told CNBC's Dan Murphy on Tuesday.

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

However, ongoing fire exchanges between Israel and Yemen — including fresh Houthi drone attacks against Israeli military posts in Eilat and Tel Aviv, according to the militant group's Spokesperson Yahyaa Saree — raise the risk of further maritime incidents in the Red Sea. Ambrey Intelligence had reported incidents against two vessels in the key transit area bridging Asia-Pacific and the Mediterranean by London midday on Tuesday.