Israel-Hamas War Shakes Middle East, Inflation Reawakens, Oil Surges: The Week In The Markets

Global geopolitical developments and domestic economic data shaped investor sentiment throughout the week, sparking fresh concerns regarding the outlook for growth and inflation.

Global Reactions Mount As Israel-Hamas Conflict Escalates

The week commenced with the eruption of conflict in the Middle East involving Israel and the Palestinian militant group Hamas. 

President Joe Biden condemned Hamas’ attacks, labeling them an “act of sheer evil.” The White House has confirmed 27 deaths of American citizens. 

Secretary of State Anthony Blinken flew to Israel for talks with Israeli Prime Minister Benjamin Netanyahu and President Isaac Herzog, reaffirming U.S. support for Israel “as long as America exists.”

Blinken also met with King Abdullah II of Jordan, Palestinian Authority President Mahmoud Abbas and Qatar Emir Tamim bin Hamad Al Thani in an effort to prevent the conflict from escalating further. Along the northern border between Israel and Lebanon, the Iran-backed militant group Hezbollah launched gunfire targeting several Israeli military posts. 

On Thursday, International Monetary Fund Managing Director Kristalina Georgieva expressed concerns about how the conflict could impact global oil markets, as instability in the Middle East, responsible for roughly one-third of global oil production, could disrupt supplies.

Resurgent US Inflation, Mortgage Rates Hit 23-Year Highs, Consumer Sentiment Dips

Higher-than-expected U.S. inflation figures have caught markets off guard and are complicating the Federal Reserve’s rate outlook. In September, the Producer Price Index surged 2.2% year-on-year, exceeding expectations of 1.6%.

During the same month, Consumer Price Index inflation rose by 3.7% year on year, surpassing the anticipated 3.6%.

Thirty-year mortgage rates have spiked above the 7.5% threshold, reaching their highest point in 23 years.

The resurgence of inflation and the elevated interest rates have weighed on consumer sentiment, as measured by the University of Michigan. 

Fed Signals Another Rate Hike Is Still Possible, But Market Appears Skeptical

According to the minutes from the September 2023 FOMC meeting, the majority of Fed policymakers leaned toward the likelihood of one more federal funds rate increase in an upcoming meeting, with some members suggesting no further hikes.

The Fed members unanimously agreed that policy should remain in a restrictive mode for an extended duration.

Notably, market participants are almost fully pricing in – they factor in a 92% probability according to CME Group Inc. CME’s FedWatch – that the Fed keeping rates unchanged at the Nov. 1 meeting.

M&A Activity Picks Up, Banks Report Strong Q3 Earnings

Important deals were finalized this week, including Exxon Mobil Corp.XOM’s acquisition of Pioneer Resources and Microsoft Corp. MSFT’s purchase of Activision Blizzard ATVI. Earnings season commenced with banks in the spotlight, as five major financial institutions reported earnings that surpassed expectations last quarter.

Market Highlights: Volatility Returns, Oil, Gold Stage Comeback

The CBOE Volatility Index, or VIX, rose 10% this week, with a notable 15% spike on Friday.

Gold, as tracked by SPDR Gold Trust GLD, spiked over 5% this week, marking its second-best week of the year, drawing safe haven flows from rising geopolitical risks.

West Texas Intermediate (WTI) oil price, as tracked by the United States Oil Fund USO, rallied nearly 6% on the week, staging the strongest weekly performance since end August.

Energy stocks outperformed all other sectors, with the the Energy Select Sector SPDR Fund XLE, up over 4% for the week.

What To Watch In The Week Ahead

Key economic highlights for the week include the retail sales report on Tuesday and housing data on Wednesday, along with speeches by various Fed officials. Federal Reserve Chair Jerome Powell is scheduled to address the Economic Club of New York on Thursday, just before the central bank enters its blackout period.

Corporate earnings are expected to take the spotlight, featuring Charles Schwab SCHW on Monday, followed by Johnson & Johnson JNJ, Bank of America BAC, Lockheed Martin Corp. LMT, Goldman Sachs GS, Bank of New York Mellon BK, United Airlines Holdings UAL, Prologis Inc. PLD, and Interactive Brokers Group Inc. IBKR on Tuesday.

Wednesday will see earnings reports from Tesla Inc. TSLA, Procter & Gamble Co. PG, Netflix Inc. NFLX, Abbott Laboratories ABT, Morgan Stanley MS, Elevance Health Inc. ELV, Lam Research Corp. LRCX, and US Bancorp USB.

Thursday’s lineup includes Danaher Corp. DHR, Philip Morris International PM, Blackstone Inc. BX, Union Pacific Corp. UNP, AT&T Inc. T, and Freeport-McMoran Inc. FCX, while Honeywell International Inc. HON, American Express Co. AXP, and Schlumberger N.V. SLB are scheduled for Friday.

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