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Barchart
Rich Asplund

Stocks Under Pressure from Middle East Turmoil

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.36%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.65%.

Stocks this morning are moderately lower as geopolitical concerns sparked risk-off sentiment in asset markets after the militant group Hamas attacked Israel over the weekend, leaving more than 1,100 dead.  European government bond yields are lower as investors flock to the safety of government debt, although trading in the U.S. Treasury market is closed today for the Columbus Day holiday.

The attack by Hamas on Israel sent crude oil prices soaring by more than +3% on concern the conflict could widen and threaten crude supplies from the Middle East.  The U.S. sent a group of warships to the eastern Mediterranean.  The Wall Street Journal reported that Iranian security officials helped Hamas plan Saturday’s surprise attack, which raises the risks there may be retaliation measures against Iran. 

On the positive side for stocks, today’s surge in crude prices has sparked a rally in energy stocks.  Also, the surprise attack by Hamas on Israel over the weekend has fueled gains in defense stocks.

Dovish comments today from Dallas Fed President Logan, a known hawk, are supporting stocks.  Logan believes the recent jump in long-term Treasury yields may mean less need for the Fed to raise interest rates again, saying, "Higher term premiums result in higher interest rates for the same setting of the fed funds rate, all else equal.  Thus, if premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening."

The markets are discounting a 14% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 27% chance for that +25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in the second half of 2024 in response to an expected slowdown in the U.S. economy.

European bond yields are moving lower.  The 10-year T-note is not trading today, with the U.S. Treasury market closed for the Columbus Day holiday.  The 10-year German bund yield fell to a 1-1/2 week low of 2.774% and is down -10.3 bp at 2.781%.  The 10-year UK gilt yield fell to a 1-week low of 4.483% and is down -7.5 bp at 4.499%. 

Overseas stock markets are lower.  The Euro Stoxx 50 is down -0.98%.  China’s Shanghai Composite Index closed down -0.44%.  Japan’s Nikkei 225 today was closed for a holiday.

Today’s stock movers…

Cruise line operators are retreating today as travel stocks take a hit on the conflict in the Middle East.  Carnival (CCL) is down more than -6% to lead losers in the S&P 500.  Also, Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises Ltd (RCL) are down more than -4%. 

Airline stocks are under pressure today as most international carriers suspended flights to Israel following the surprise attack by Hamas over the weekend.  United Airlines Holdings (UAL), American Airlines Group (AAL), and Delta Air Lines (DAL) are down by more than -5%.  Also, Alaska Air Group (ALK) is down more than -3%, and Southwest Airlines (LUV) is down more than -3%. 

Paramount Global (PARA) is down more than -3% after Needham & Co cut its price target on the stock to $15 from $28.

Walmart (WMT) is down more than -1% to lead losers in the Dow Joines Industrials after a three-year probe by Mexican investigators concluded the company had abused its market power. 

Moderna (MRNA) is down more than -5% to lead losers in the Nasdaq 100 after Bloomberg Intelligence said the company would need a “significant acceleration in inoculations” in Q4 of its Covid vaccines to achieve its guidance range of $6 billion to $8 billion. 

Datadog (DDOG) is down more than -4% after Bank of America downgraded the stock to neutral from buy.

Illumina (ILMN) is down more than -3% after Bloomberg reported that the European Union vetoed the company’s $7 billion takeover of Grail Inc amid concerns the deal would have hampered competition.

Fidelity National Information (FIS) is down more than -3% after Truist Securities cut its price target on the stock to $50 from $60. 

Defense stocks are rallying today after the surprise attack by Hamas on Israel over the weekend.  Northrop Grumman (NOC) is up more than +8% to lead gainers in the S&P 500.  Also, Lockheed Martin (LMT), L3Harris Technologies (LHX), General Dynamics (GD), and Huntington Ingalls Industries (HII) are up more than +6%.  In addition, RTX Corp (RTX) is up more than +3%.

Energy stocks and energy service companies are climbing today, with the price of WTI crude up more than +3%.  As a result, Marathon Oil (MRO) and Hess Corp (HES) are up more than +5%.  Also, ConocoPhillips (COP), Devon Energy (DVN), Exxon Mobil (XOM), Occidental Petroleum (OXY), and Schlumberger (SLB) are up more than +4%.  In addition, Chevron (CVX) is up more than +3% to lead gainers in the Dow Jones Industrials.

Zscaler (ZS) is up more than +6% to lead gainers in the Nasdaq 100 after Barclays upgraded the stock to overweight from equal weight.

Motorola Solutions (MSI) is up more than +3% after Bank of America started coverage of the stock with a buy recommendation and a price target of $330.

Kinder Morgan (KMI) is up more than +2% after Goldman Sachs reinstated coverage of the stock with a buy recommendation and a price target of $20.

Across the markets…

December 10-year T-notes (ZNZ23) this morning are up +26 ticks at a 1-week high, although the U.S. cash Treasury market is closed today for the Columbus Day holiday.  T-notes have support from safe-haven demand due to geopolitical risks after the surprise attack by Hamas militants on Israel over the weekend.  Dovish comments from Dallas Fed President Logan also gave T-notes a boost when she said the recent jump in long-term Treasury yields may mean less need for the Fed to raise interest rates again.

The dollar index (DXY00) today is up by +0.21%.  The dollar is moving higher today on increased safe-haven demand after Israel declared war on Hamas.  The stock slide today has also boosted the liquidity demand for the dollar.  The dollar fell back from its best levels on comments from Dallas Fed President Logan, who said higher Treasury yields may mean less of a need for the Fed to raise interest rates.

EUR/USD (^EURUSD) today is down by -0.32%.  A stronger dollar today is weighing on the euro.  Losses in EUR/USD are limited by hawkish comments from ECB Vice President Guindos, who said interest rates are likely to stay at their current levels for some time.

Today’s Eurozone economic news was mixed for the euro.  On the negative side, German Aug industrial production fell -0.2% m/m, slightly weaker than expectations of -0.1% m/m.  Conversely, Eurozone Oct Sentix investor confidence fell -0.4 to -21.9, a smaller decline than expectations of -24.0.

ECB Vice President Guindos said the ECB must stay vigilant on inflation, and interest rates are likely to stay at their current levels for some time "due to the evolution of oil prices, the depreciation of the euro, and the evolution of unit labor costs.

USD/JPY (^USDJPY) today is down by -0.35%.  Ramped-up geopolitical risks have sparked safe-haven buying of the yen after the surprise attack by Hamas militants on Israel over the weekend.  Also, a rally in T-note prices today is supportive of the yen.  Trading activity in the yen is muted, with Japanese markets closed today for the Health Sports Day holiday.   

December gold (GCZ3) today is up +13.9 (+0.75%), and Dec silver (SIZ23) is up +0.042 (+0.19%).  Precious metals prices this morning are moderately higher, with gold and silver posting 1-week highs.  Precious metals are climbing on increased safe-haven demand today as global stocks retreated on geopolitical risks after Hamas militants attacked Israel over the weekend.  Also, dovish comments today from Dallas Fed President Logan gave precious metals a boost when she said the recent jump in long-term Treasury yields may mean less need for the Fed to raise interest rates again.  A stronger dollar today is limiting the upside in precious metals.  Also, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low last Friday. 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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