Hamas’s barbaric massacre of Israelis on 7 October and Israel’s subsequent military campaign in Gaza to eradicate the group, has introduced four geopolitical scenarios bearing on the global economy and markets. As is often the case with such shocks, optimism may prove misguided.

In the first scenario, the war remains mostly confined to Gaza with no regional escalation beyond the small-scale skirmishes with Iranian proxies in countries neighboring Israel. Indeed, most players now prefer to avoid a regional escalation. The Israel Defense Forces’ Gaza campaign significantly erode...