U.S. stock futures experienced a decline early Monday as a surge of violence in the Middle East weighed on investor sentiment. The weekend witnessed an attack by Hamas on Israel, causing global markets to adopt a risk-off approach and raising concerns of a broader conflict.
Positive Performance Before the Weekend
Before the escalation of tensions, the Dow Jones Industrial Average (DJIA) climbed by 288 points or 0.87% to reach 33,408. Similarly, the S&P 500 (SPX) saw a gain of 50 points or 1.18% and closed at 4,309. The Nasdaq Composite (COMP) also experienced an increase of 212 points or 1.6%, finishing at 13,431.
The rise in geopolitical tension has had its expected negative impact on investor sentiment. Richard Hunter, the head of markets at Interactive Investor, mentioned that such events typically unsettle investors, leaving them apprehensive about the presence of further uncertainties.
Concerns over Oil Supply Disruptions
The price of Brent crude (BRN00) surged nearly 4% as the shocking attacks in Israel raised concerns about potential disruptions in oil supply from the region. There are worries that if additional countries become involved in the conflict, the situation may worsen.
Susannah Streeter commented, “Investors are assessing the potential for the conflict to disrupt supply in the Middle East, if other countries are drawn in.” This ongoing evaluation has caused the price of oil to soar.
Global Markets React
U.S. stock futures dove as most European and Asian bourses experienced sell-offs. Traders sought refuge in perceived safe havens like gold (GC00), the U.S. dollar (DXY), and government bonds such as the German bund (BX:TMBMKDE-10Y).
Though the U.S. Treasury market is closed on Monday for Columbus Day and Indigenous Peoples Day, futures trading suggests that benchmark yields are declining.
While geopolitical risk tends not to have a prolonged impact on markets, experts like Jim Reid, a strategist at Deutsche Bank, mention the possibility of second-order effects that may emerge in the coming weeks, months, and even years as a result of the recent events.
Monetary and Corporate Issues Take Center Stage
Traders are shifting their focus to monetary and corporate issues this week, following a positive reaction in the markets to the nonfarm payrolls report released on Friday. Despite the strong report, traders believe it will not have a significant impact on Fed policy.
On Wednesday and Thursday, the U.S. producer and consumer prices data for September will be published. These reports are crucial in providing further evidence of easing price pressure, which would solidify the expectation of no more rate hikes by the Federal Reserve this year.
The eagerly awaited third quarter company earnings season kicks off on Friday. Major banks like JPMorgan Chase, Citigroup, and Wells Fargo will be presenting their results. However, analysts have recently become less confident about corporate profitability. According to John Butters, senior earnings analyst at Factset, aggregate S&P 500 earnings are projected to decline by 0.3% for the year to Q3 2023. Should this materialize, it would mark the fourth consecutive quarter of falling earnings.
Monday does not bring any U.S. economic updates; however, there will be commentary from Federal Reserve officials. Dallas Fed President Lorie Logan is scheduled to deliver remarks at 9 a.m., followed by Fed Governor Philip Jefferson at 12:50 p.m.
Fundstrat’s head of research, Tom Lee, points out that the Fed should consider the potential downside risks posed by the Israel-Gaza war. He believes that any drop in consumer confidence or disruption in the global economy could negatively impact the U.S. economy. Despite this concern, Lee suggests that the expected decrease in interest rates should support stocks.
In conclusion, traders will closely monitor monetary indicators and corporate earnings this week, while being mindful of potential geopolitical risks and their impact on the economy.