'Dr. Doom' Nouriel Roubini says markets aren't fully pricing in the risk of a massive conflict in the Middle East

• "Dr. Doom" Nouriel Roubini warned markets haven't fully priced in the conflict in Middle East.
• Investors expect Israel to go into Gaza and get rid of Hamas, he said, but there's still risk of broader conflict.

"Dr. Doom" economist Nouriel Roubini warned that investors haven't fully priced in the risk of the Israel-Hamas war expanding into a wider regional conflict.

In an interview with Bloomberg in Marrakesh, Morocco, Roubini, a professor at New York University and the chief executive of Roubini Macro Associates, said investors expect Israel will have no choice but enter Gaza and get rid of Hamas.

Markets are pricing in a baseline scenario in which "Israel occupies Gaza, it's going to get ugly, but the conflict remains contained," he said. "That's why oil prices haven't done very much."

Over the weekend, militants from Hamas launched a surprise attack on Israel, killing more than 700 people and taking civilians and military personnel hostage. Meanwhile, on Thursday reports said Israel exchanged artillery fire with Syria.

Markets so far have mostly responded to other economic influences besides the Israel-Hamas war, such as the Federal Reserve and the potential for more rate hikes.

Yet, risks remain beyond the baseline outcome of Israel occupying Gaza. A "downside scenario" could mean Iran and Lebanon get involved too, Roubini said.

"If that were to be the case, of course the supply of oil from the Gulf gets disrupted and you get a spike in oil prices and then the economic impact would be huge," the economist maintained, adding that rising oil prices could spur a "stagflationary shock."

"It's not the baseline scenario," he said, "but it's a risk."

He said its not yet known how high the risk is, but "markets seems to be discounting the possibility of a massive conflict for now."