Geopolitical Risks Weigh on the Overall Market Despite Strong Bank Earnings Results

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.35%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.03%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.82%.

Stocks this morning are mixed, with the Dow Jones Industrials posting a 2-1/2 week high.  The broader market is under pressure today due to concerns the conflict between Israel and Hamas could widen after the Israeli military urged evacuation of the northern part of Gaza in preparation for a possible ground invasion of the territory. Crude prices are up sharply by more than +4% on concern the Israel-Hamas conflict may spread, potentially disrupting Middle East crude supplies.

Concern that the conflict between Israel and Hamas will spread in the Middle East is another negative factor for stocks after Iran’s foreign minister said Hezbollah militants could open a new front in the Israeli war if the blockade of Gaza and attacks there on civilians continue.  Hezbollah said it was “fully prepared” for any action against Israel when “the time comes.” 

Strength in bank stocks is keeping the Dow Jones Industrials in positive territory after Citigroup, JPMorgan Chase, and Wells Fargo reported better-than-expected Q3 earnings results.  Also, energy stocks are climbing, with WTI crude oil up more than +3%.

U.S. economic news today was mainly bearish for stocks after the University of Michigan U.S. Oct consumer sentiment index fell -5.1 to a 5-month low of 63.0, weaker than expectations of 67.0.  Inflation expectations also rose and weighed on stocks after the University of Michigan U.S. Oct 1-year inflation expectations unexpectedly rose to +3.8%, higher than expectations of no change at 3.2%.  Also, the Oct 5-10-year inflation expectations rose to +3.0%, higher than expectations of no change at 2.8%.  On the positive side, the Sep import price index ex-petroleum fell -0.3% m/m, weaker than expectations of -0.1% m/m.

Dovish comments today from Philadelphia Fed President Harker kept T-note yields lower and were supportive for stocks when he said disinflation is underway and "I believe that we are at the point where we can hold rates where they are."

The markets are discounting an 8% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 34% 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 is down -6.0 bp at 4.637%.  The 10-year German bund yield is down -4.2 bp at 2.745%.  The 10-year UK gilt yield is down -2.5 bp at 4.398%.  

Overseas stock markets are lower.  The Euro Stoxx 50 is down -1.31%.  China’s Shanghai Composite Index closed down -0.64%.  Japan’s Nikkei 225 today closed down -0.55 %.

Today’s stock movers…

Dollar General (DG) is up more than +9% to lead gainers in the S&P 500 after announcing the return of former CEO Vasos to lead the company for the foreseeable future. 

Progressive Corp (PGR) is up more than +7% after reporting Q3 EPS of $1.89, better than the consensus of $1.68. 

JPMorgan Chase (JPM) is up more than +3% to lead gainers in the Dow Jones Industrials after reporting Q3 investment banking income of $1.61 billion, better than the consensus of $1.48 billion and raised its full-year net interest income estimate to $88.5 billion from a prior estimate of $87 billion. 

Wells Fargo (WFC) is up more than +3% after reporting Q3 revenue of $20.86 billion, above the consensus of $20.16 billion. 

Citigroup (C) is up more than +3% after reporting Q3 FICC sales and trading revenue of $3.56 billion, stronger than the consensus of $3.25 billion. 

UnitedHealth Group (UNH) is up more than +3% after reporting Q3 revenue of $92.40 billion, stronger than the consensus of $91.15 billion.

Energy stocks and energy service providers are moving higher, with WTI crude up more than +3% on concerns of the Israel-Hamas conflict spreading, potentially disrupting Middle East crude supplies.  As a result, Diamondback Energy (FANG) is up more than +2% to lead gainers in the Nasdaq 100.  Also, ConocoPhillips (COP), Hess Corp (HES), Exxon Mobil (XOM), and Marathon Petroleum (MRO) are up more than +2%.  In addition, Devon Energy (DVN), Occidental Petroleum (OXY), Schlumberger (SLB), and Chevron (CVX) are up more than +1%.

Hormel Foods (HRL) is down more than -5% to lead losers in the S&P 500 after Oppenheimer said initial guidance for the company’s full-year outlook could be below consensus after comments the company made at its investor day conference.

Boeing (BA) is down more than -3% to lead losers in the Dow Jones Industrials after it said it was expanding the scope of its inspections of the aft pressure bulkhead structure on the 737 Max 8 jets, possibly slowing deliveries even further. 

Fortinet (FTNT) is down more than -3% after Barclays downgraded the stock to equal weight from overweight.   

JD.com (JD) is down more than -3% to lead losers in the Nasdaq 100 after Morgan Stanley downgraded the stock to equal weight from overweight.

PNC Financial Services Group (PNC) is down more than -2% after reporting Q3 revenue of $5.20 billion, weaker than the consensus of $5.33 billion.

Smart Global Holdings (SGH) is down more than -40% in pre-market trading after forecasting Q1 adjusted EPS of $0 to up 30 cents, well below the consensus of 40 cents. 

Netflix (NFLX) is down more than -1% after Wolfe Research downgraded the stock to peer perform from outperform. 

Across the markets…

December 10-year T-notes (ZNZ23) this morning are up +12 ticks, and the 10-year T-note yield is down -6.0 bp at 4.637%. Dec T-notes today are moving higher on the increase in safe-haven demand amid signs that Israel is preparing for a ground assault on Gaza.  Also, dovish comments today from Philadelphia Fed President Harker boosted T-notes when he said, "I believe that we are at the point where we can hold rates where they are."  In addition, easing price pressures is supportive for T-notes after the Sep import price index ex-petroleum fell more than expected.  T-notes fell back from their best levels after the University of Michigan U.S. Oct inflation expectations unexpectedly rose.  Also, today's 10-year breakeven inflation rate climbed to a 2-week high of 2.369%. 

The dollar index (DXY00) today is up by +0.10%.  An increase in safe-haven demand is boosting the dollar today on concerns the conflict between Israel and Hamas could widen after Iran’s foreign minister said Hezbollah militants could open a new front in the Israeli war if the blockade of Gaza and attacks there on civilians continue.  Gains in the dollar were limited after the University of Michigan U.S. Oct consumer sentiment index fell more than expected to a 5-month low.

EUR/USD (^EURUSD) today is down by -0.16%.  A stronger dollar today is weighing on the euro.  Also, comments today from ECB President Lagarde undercut EUR/USD when she signaled additional ECB rate hikes may be on hold when she said, “We are seeing tightening of financing conditions like it has never happened before.” Losses in the euro were limited after Eurozone Aug industrial production rose more than expected.

Comments from ECB President Lagarde signaled additional ECB rate hikes may be on hold when she said, “We are seeing tightening of financing conditions like it has never happened before,” and the ECB will gauge the impact of prior rate hikes that are still feeding through the financial system.

Eurozone Aug industrial production rose +0.6% m/m, stronger than expectations of +0.2% m/m and the biggest increase in 4 months.

USD/JPY (^USDJPY) today is down by -0.09%.  The yen today is moderately higher as T-note yields decline. Also, ramped-up geopolitical concerns in the Middle East have boosted some safe-haven demand for the yen.

December gold (GCZ3) today is up +46.0 (+2.44%), and Dec silver (SIZ23) is up +0.806 (+3.67%).  Precious metals prices this morning are sharply higher, with gold posting a 2-1/2 week high and silver posting a 2-week high.  Concerns that the conflict between Israel and Hamas could escalate throughout the Middle East has sparked safe-haven buying of precious metals after Iran’s foreign minister said Hezbollah militants could open a new front in the Israeli war if the blockade of Gaza and attacks there on civilians continue.  Also, lower global bond yields today are bullish for precious metals.  Gold garnered support on increased demand as an inflation hedge after the University of Michigan U.S. Oct inflation expectations unexpectedly increased. 

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