Stocks Fall as Middle East Jitters Spark Risk Aversion in Asset Markets

Rich Asplund - Barchart - Fri Oct 20, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.87%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.46%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.19%.

Stocks this morning are moderately lower, with the S&P 500, Dow Jones Industrials, and Nasdaq 100 stock indexes falling to 2-week lows. Stock index futures are moderately lower as concern the conflict between Israel and Hamas may widen to a regional conflict has sparked risk aversion in asset markets. The U.S. Pentagon said it is seeing an increase in drone attacks in Iraq and Syria against American interests, and a U.S. destroyer on Thursday shot down cruise missiles launched by Yemen-based Houthi militants toward Israel. Crude prices jumped to a 2-1/2 week high today on the heightened geopolitical risks, and gold rallied to a 2-3/4 month high as investors flock to safe-haven assets.

In the Middle East, the leaders of Saudi Arabia and the United Emirates are meeting today in Riyadh in an attempt to contain the spread of the Israeli-Hamas conflict throughout the Middle East. Qatar’s Emir has also arrived in Riyadh ahead of a broader economic summit between Gulf Arab states and southeast Asina countries. Iran and its proxy forces in Lebanon, Iraq, and Yemen have warned they could retaliate against Israel if Israeli troops enter Gaza.

On the positive side for stocks is the mostly better-than-expected Q3 corporate earnings results. Of the 86 companies in the S&P 500 that have announced earnings results through Friday morning, 74% beat the consensus estimates.

Comments from Philadelphia Fed President Harker suggest he favors a Fed pause on rate hikes when he said the FOMC should allow policy actions taken so far to continue to work and then closely watch data before making any decisions on moving the policy rate in either direction.

Atlanta Fed President Bostic said the U.S. economy's long-term trend is moving in a positive way, and he doesn't think the Fed will cut interest rates before the middle of 2024.

The markets are discounting a 2% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 23% 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.

U.S. and European bond yields are lower. The 10-year T-note yield is down -9.5 bp at 4.895%. The 10-year German bund yield is down -4.6 bp at 2.885%. The 10-year UK gilt yield is down -2.0 bp at 4.653%.

Overseas stock markets are lower. The Euro Stoxx 50 is down -1.29%. China’s Shanghai Composite Index closed down -0.74%. Japan’s Nikkei 225 today closed down -0.54%.

Today’s stock movers…

Regional bank stocks are falling today after Regions Financial reported Q3 FTE net interest margin of 3.73%, below the consensus of 3.85%, and after Comerica reported Q3 net interest margin of 2.84%, weaker than the consensus of 2.88%. As a result, Regions Financial (RF) is down more than -13%, and Comerica (CMA) is down more than -6%. Also, Huntington Bancshares (HBAN) is down more than -4%, and Zions Bancorp (ZION), Fifth Third Bancorp (FITB), and Citizens Financial Group (CFG) are down more than -3%. In addition, KeyCorp (KEY), M&T Bank (MTB), and US Bancorp (USB) are down more than -2%.

Schlumberger (SLB) is down more than -3% after reporting Q3 revenue of $8.31 billion, below the consensus of $8.32 billion.

Tesla (TSLA) is down more than -2% in pre-market trading after China tightened export controls on some categories of graphite, a key material in EV batteries.

American Express (AXP) is down more than -2% to lead losers in the Dow Jones Industrials after reporting Q3 provision for credit losses of $1.23 billion, above the consensus of $1.18 billion.

Intuitive Surgical (ISRG) is down more than -5% after reporting Q3 revenue of $1.74 billion, weaker than the consensus of $1.77 billion.

Hewlett Packard Enterprise (HPE) is down more than -4% after forecasting 2024 adjusted EPS of $1.82-$2.02, well below the consensus of $2.14.

Interrepublic Group of Cos (IPG) is down more than -2% after reporting Q3 adjusted EPS of 70 cents, below the consensus of 73 cents.

AT&T (T) is up more than +3% to lead gainers in the S&P 500 after CFRA upgraded the stock to hold from sell.

Cognizant Technology Solutions (CTSH) is up more than +1% to lead gainers in the Nasdaq 100 after Citigroup upgraded the stock to buy from neutral with a price target of $80.

Freight transportation stocks are climbing today after Knight-Swift Transportation Holdings reported Q3 total revenue of $2.02 billion, well above the consensus of $1.90 billion, and raised its full-year cash capex estimate to $700 million-$750 million from a previous estimate of $640 million-$690 million. As a result, Knight-Swift Transportation Holdings (KNX) is up more than +10%. Also, CH Robinson Worldwide (CHRW), CSX Corp (CSX), Schnieder National (SNDR), and Werner Enterprises (WERN) are up more than +1%.

Jazz Pharmaceuticals Plc (JAZZ) is up more than +1% after Bloomberg News reported the company is exploring strategic options, including a potential sale.

General Motors (GM) is up more than +1% after a top union negotiator said the company and the UAW are moving toward an agreement to end the month-long strike.

Across the markets…

December 10-year T-notes (ZNZ23) this morning are up +21 ticks, and the 10-year T-note yield is down -9.5 bp at 4.895%. Dec T-notes today are moving higher as a slide in the S&P 500 to a 2-week low has boosted some safe-haven demand for T-notes. Also, comments today from Philadelphia Fed President Harker boosted T-notes when he said he favors a Fed pause on rate hikes. In addition, concerns the conflict between Israel and Hamas could spread throughout the Middle East has boosted safe-haven demand for T-notes.

The dollar index (DXY00) today is down by -0.05%. The dollar today is slightly lower as a decline in T-note yields is weighing on the dollar. Also, dovish comments today Philadelphia Fed President Harker undercut the dollar when he said he favor the Fed continuing its pause on rate hikes. Losses in the dollar are limited as a slide in stocks has boosted the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is up by +0.10%. Dollar weakness today has sparked short covering in the euro. EUR/USD was also under pressure today after German producer prices in September fell by a record, a dovish factor for ECB policy. Signs of strength in the Eurozone economy are bullish for the euro after Eurozone Sep new car registrations rose for the fourteenth consecutive month.

German Sep PPI fell a record -14.7% y/y (data from 1977), a larger decline than expectations of -14.1% y/y.

Eurozone Sep new car registrations rose +9.2% y/y to 861,000, the fourteenth consecutive month registrations have increased.

USD/JPY (^USDJPY) today is up by +0.07%. The yen today dropped to a 2-1/2 week low against the dollar. The yen was under pressure on today’s dovish comments from BOJ Governor Ueda, who said, “The BOJ will keep monetary easing patiently to achieve its 2% inflation target in a stable and sustainable manner.” Losses in the yen were limited after Japan Sep CPI ex-fresh food and energy rose more than expected, a hawkish factor for BOJ policy, and after T-note yields declined.

Japan Sep national CPI eased to +3.0% y/y from +3.2% y/y in Aug, right on expectations. Sep national CPI ex-fresh food and energy eased to +4.2% y/y from +4.3% y/y in Aug, stronger than expectations of +4.1% y/y.

December gold (GCZ3) today is up +20.6 (1.04%), and Dec silver (SIZ23) is up +0.714 (+3.10%). Precious metals prices this morning are moderately higher, with gold posting a 2-3/4 month high and silver posting a 1-month high. Precious metals are climbing on increased safe-haven demand due to concerns the Israeli-Hamas conflict will widen. Also, a weaker dollar and lower global bond yields today are bullish for metals. In addition, today’s slide in global equity markets has sparked safe-haven buying of precious metals. On the negative side is the continued liquidation of long gold positions by funds after long gold holdings in ETFs fell to a 3-1/2 year low on Thursday.

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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.