Happy Columbus Day! It has been another wild week in the markets and geopolitics with the attack on Israel. We have included notes in the Oil & Energy section for readers.
Ah, the stock market! A place where numbers dance and twirl, telling tales of fortunes made and lost. This week, the financial stage was ablaze with a somewhat mixed ballet of indices, sectors, and economic data, each performer playing its part in a drama that unfolded under the watchful eyes of investors and analysts alike.
A Mixed Bag of Performances
The first week of the month was nothing short of a rollercoaster, with the S&P 500 and Nasdaq Composite dancing to a positive tune, registering gains of 0.5% and 1.6% respectively. However, not all indices joined the upbeat jive. The Dow Jones Industrial Average and Russell 2000 took a dip, declining by 0.2% and a more substantial 2.2% respectively.
The Vanguard Mega Cap Growth ETF (MGK) took the spotlight with a stellar performance, boasting a gain of 2.5%, contrasting sharply with the modest 0.5% gain of the S&P 500. Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) took a stumble, falling by 1.2%.
Sectorial Sway: The Ups and Downs
In the sectorial ballet, eight out of the 11 S&P 500 sectors pirouetted into the red this week. The energy sector, swaying with the fluctuations of WTI crude oil futures, took a 5.4% bow, influenced partly by concerns about weakening demand amidst a slower growth environment and higher interest rates. The consumer staples and utilities sectors didn’t fare much better, declining by 3.1% and 2.9% respectively.
On the flip side, the information technology and communication services sectors basked in the limelight, closing with impressive gains of 3.1% and 2.9% respectively.
The Economic Ballet: Data and Politics
The economic stage was adorned with various acts, from employment reports to political dramas. Nonfarm payrolls in September surprised the audience, increasing by a much stronger-than-anticipated 336,000, while average hourly earnings growth took a slight step back to 4.2% year-over-year from 4.3% in August.
Political curtains were drawn with a cloud of uncertainty as the House voted 216-210 to remove Kevin McCarthy as Speaker of the House, a move that is likely to complicate negotiations and potentially stall business until a new Speaker is elected.
Daily Acts: A Snapshot
- Monday: A familiar pattern with stocks struggling alongside rising market rates, with the S&P 500 subtly masking broad weakness beneath the surface.
- Tuesday: A struggle amidst rising market rates, with a bounce attempt in both the stock and bond markets quickly fading.
- Wednesday: A choppy session with the major indices finishing near their best levels, thanks in part to mega-cap performance.
- Thursday: A turbulent day with modest declines, as buyers hesitated ahead of the September jobs report.
- Friday: A day of recovery, with major indices closing out the session near their highs, and the S&P 500 climbing above the 4,300 level.
Pondering the Financial Ballet
- The Energy Sector’s Plunge: With an 8.8% decline in WTI crude oil futures to $83.04/bbl, the ISRAEL War is expected to cause a surge now to $100. Expect energy sector stocks to rise as well.
- Political Uncertainty: How will the unprecedented action of removing the Speaker of the House influence future political and economic landscapes?
- Rate Hike Expectations: With the recalibration of rate hike expectations following the employment report, how might this impact various sectors and overall market sentiment in the near future?
CALENDAR & MOVERS
- Wednesday: PPI (MoM) (September)
- Thursday: CPI (MoM) (September)
- Middle East Tensions
Inflation and the Fed: A Watchful Eye on the Economic Horizon
Ah, the ever-looming specter of inflation! This week, investors are poised to scrutinize the forthcoming release of the Consumer Price Index (CPI), anticipated to reveal a 0.4% month-over-month uptick for September. Wall Street is casting its bets on a 3.7% annual surge in headline inflation for the same month.
Meanwhile, the Core CPI, sidestepping the erratic nature of food and fuel prices, is projected to ascend at an annual rate of 4.2%, potentially marking the most modest annual swell since September 2021. This pivotal data will undoubtedly sculpt expectations surrounding the Fed’s impending maneuvers. Moreover, investors might just peer into the Fed’s future plans, with several officials, including Neel Kashkari, Mary Daly, and Christopher Waller, slated to speak throughout the week.
Earnings Season: A Financial Forecast in the Banking Sector
The curtain rises on the third-quarter earnings season later this week, with financial behemoths like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFG) gearing up to unveil their results on Friday. Investors will be all eyes and ears, keenly observing how banks navigate the sustained trajectory of towering interest rates, which have birthed extreme levels of unrealized losses on investments.
Analysts are banking on third-quarter earnings to shed light on whether the market can uphold its year-to-date gains as it sails into the year’s final quarter.
Consumers and Small Businesses: Peering into Economic Prospects
As we embark on the fourth quarter, investors are set to glean crucial insights into the U.S. consumer economy and the forecast for small businesses. The NFIB Small Business Optimism Index will shed light on the pulse of small businesses, especially considering the impact of pricing pressures and labor qualms.
On the consumer front, the University of Michigan’s Survey of Consumers is poised to offer investors a window into consumer confidence as we glide into the holiday season, traditionally marked by a spending spree.
Oil Prices and the Middle East: Navigating through Economic and Geopolitical Waves
After riding a significant surge in oil prices over the preceding few months, both Brent crude and U.S. West Texas Intermediate crude encountered notable weekly losses last week, teetering near double digits. Analysts harbor concerns that the ongoing dilution of global growth might cast a shadow on demand as we steer into the next year. However, escalating tensions and recent flare-ups of conflicts in Israel and the Middle East have rekindled fears about oil being ensnared in geopolitical strife, potentially triggering a short-term spike in oil prices.
Last week, the bond market experienced several noteworthy events. The 30-year Treasury yield surged to a 16-year high, breaking through the 5% threshold, propelled by a fresh round of selling in the Treasury market.
Economic factors have been cited as a key driver behind the recent escalation in long-term yields to new 16-year highs, with particular attention being drawn to the Consumer Price Index (CPI) and earnings in the upcoming week. In the municipal bond segment, yields rose substantially across the curve, and despite anticipated ongoing market volatility, most new issue deals were well received. Furthermore, mortgage rates soared, reaching their highest point in nearly 23 years, indicating a significant shift in the housing finance sector.
Oil & Energy
The weekend brought an almost surreal focus on Israel’s peace dialogues with Saudi Arabia, juxtaposed against the backdrop of an unforeseen attack from Gaza that resulted in hundreds dead, numerous captives, and thousands wounded. While the potential Israeli-Saudi deal carries both tangible and symbolic merits, the overarching objective of the peace process, dating back to 1978, is to establish a region devoid of perpetual war and violence – a goal that starkly contrasts with the current reality.
In the interim, financial markets are tasked with assimilating the fresh wave of violence into current valuations. Although tragic, markets exhibit limited concern for economic demand in Israel (ranked 28th in GDP in 2022 by the World Bank) or the West Bank and Gaza (ranked 120th), focusing instead on the implications for OPEC member, Iran. Iran, reported by The Wall Street Journal to have directly planned the attacks, may face intensified U.S. sanctions enforcement on its exports.
Goldman Sachs analysts note that the de-escalation of regional tensions prior to the weekend attacks had significantly influenced the rise in Iranian oil production, increasing by nearly half a million barrels per day over the past year. According to the bank’s data, a decline of 100,000 barrels per day in Iran’s production next year could elevate Brent crude prices by slightly more than $1 per barrel.
Currently, the likelihood of direct combat between Israel and Iran appears distant; even Hezbollah, the militia supported by Iran, has scarcely engaged with Israel on the northern border. Practical limitations for Israel also exist, such as the logistical challenge of reaching Iran, which would necessitate flying through either Iraq via Jordan or Saudi Arabia. Despite Saudi Arabia’s conflicts with Iran, it is unlikely to authorize an Israeli invasion through its territory. Neither country is keen on the prospect of incessantly exchanging missile fire.
If Hamas’ missiles can penetrate Israel’s Iron Dome defenses, what might Iran’s arsenal achieve? Dan Alamariu, chief global strategist at Montreal investment research firm Alpine Macro, estimates that an Israeli strike on Iran’s nuclear facilities could propel oil above $150 per barrel, assigning a 20% probability to this scenario.
In contrast, Marko Papic, the chief strategist at Clocktower Group, highlights that oil price fluctuations during major Israeli-Palestinian conflicts this century often prove inconsequential. He maintains an open-minded stance that this could change but acknowledges that, historically, “what happens in the Levant, stays in the Levant.”
It’s pertinent to note that this century’s data excludes the Yom Kippur war from 50 years ago. Gold Trends highlighted that in the seven years following that pan-Arabian attack on Israel, crude escalated from $5 to $50; interest rates soared from 6.5% to 18%; and gold surged from $42 to $875. After an initial turbulent year, stocks managed to stabilize.
Interestingly, it’s worth exploring the paradox that this event could, in the coming months, serve as a positive catalyst for stocks, potentially slowing or even reversing the steep decline in bonds. Stranger things have indeed occurred.
The initial market response included a dive in Israeli stocks, a surge in crude-oil prices (CL00), a rise in Treasury futures (TY00) (with the cash market closed for Columbus Day), an uptick in gold (GC00), and a drop in stock-market futures (ES00) (NQ00). However, oil has already retreated from its peak levels.
Gold & Precious Metals
The ascension of the greenback has not only disrupted oil but also adversely affected metals. Copper has experienced a decline for five straight sessions, now trading around USD 7,800 on the LME, with aluminum ($2200) and zinc ($2450) similarly trending downward. Beyond the dollar’s potency, recent data from China presents a mixed picture, especially September’s Caixin Manufacturing index, which, despite remaining in the expansion zone at 50.6 points, did not meet the anticipated 51.1 points. Regarding precious metals, the narrative persists: gold is being suppressed by soaring bond yields, struggling against positive real yields when, inherently, an ounce of gold yields no return. Gold is currently trading at around $1,820.
Bitcoin has dipped 1% since Monday, reverting to approximately $27,500 after briefly nudging $28,000 late last week. Concurrently, Ether has seen a more substantial decline, dropping 6% over the identical period and erasing the previous week’s gains. For the past seven months, specifically since mid-March, Bitcoin has oscillated between $25,000 and $30,000, providing no distinct market direction for investors. Amidst the ongoing ambiguity of regulatory compliance in the US, operators in the crypto-asset industry, along with numerous observers, are on standby, awaiting clearer insights to confidently engage with Bitcoin and its counterparts. Meanwhile, the trial of Sam Bankman-Fried, the former CEO of FTX, commenced this week, promising to occupy market activity discussions for the foreseeable future.