Stocks Rally on Slightly Reduced Geopolitical Risks in the Middle East

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Monday closed up +1.06%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.93%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +1.18%.

Stocks on Monday posted moderate gains, with the Dow Jones Industrials climbing to a 3-week high.  Stocks rose Monday as diplomatic efforts to contain the Israel-Hamas conflict eased geopolitical concerns and improved market sentiment.  The markets are also looking to Q3 corporate quarterly earnings results that ramp up this week, with 10% of the stocks in the S&P 500 expected to report.

The U.S. and its allies are ramping up diplomatic efforts to contain the conflict between Israel and Hamas.  President Biden is considering visiting Israel himself, and German Chancellor Scholz is expected to arrive in Israel on Tuesday.  Also, Jordan King Abdullah II is in Italy, where he’s expected to meet with Italian Prime Minister Meloni to discuss the crisis. Meanwhile, U.S. Security Advisor Sullivan said the U.S. had warned Iran through back-channel talks about the risk of escalation of the war.

In an interview with Sky News, U.S. Treasury Secretary Yellen said higher interest rates in the U.S. may persist while also saying the U.S. economy is "in a good place." 

The U.S. Oct Empire manufacturing survey general business conditions fell -6.5 to -4.6, a smaller decline than expectations for a level of -6.0.

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 37% 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 on Monday moved higher.  The 10-year T-note rose +9.8 bp to 4.710%. The 10-year German bund yield rose +4.8 bp to 2.785%.  The 10-year UK gilt yield rose +9.5 bp to 4.481%. 

In a measure to boost liquidity, the People's Bank of China (PBOC) on Monday added a net 289 billion yuan ($39.6 billion) into the financial system via the medium-term lending facility, the largest monthly injection of cash into the financial system since December 2020.

Overseas stock markets on Monday settled mixed.  The Euro Stoxx 50 closed up +0.33%.  China’s Shanghai Composite Index closed down -0.46%. Japan’s Nikkei 225 today closed down -2.03%.

Today’s stock movers…

Lululemon Athletica (LULU) closed up more than +10% to lead gainers in the Nasdaq 100 after S&P Dow Jones Indices announced the stock will replace Activision Blizzard in the S&P 500 before the opening of trading on Wednesday.

News Corp (NWSA) closed up more than +4% after activist Starboard Value said it had built a “sizable” stake in the company and plans to push for strategic and governance changes to the company. 

Charles Schwab (SCHW) closed up more than +4% after reporting Q3 bank deposits of $284.4 billion, above the consensus of $268.8 billion. 

Arista Networks (ANET) closed up more than +3% after Evercore ISI added the stock to its tactical outperform list with a price target of $200.

Dexcom (DXCM) closed up more than +3% after Leerink Partners reinstated coverage of the stock with a recommendation of outperform and a price target of $110. 

Allstate (ALL) closed up more than +3% after Reuters reported that Trian Fund Management had built up a stake in the company.

Pfizer (PFE) closed up more than +3% despite cutting its full-year revenue forecast after Leerink Partners said the company’s cost-cutting measures are a positive for the stock. 

Hubbell Inc (HUBB) closed up more than +3% after S&P Dow Jones Indices announced the stock would replace Organon in the S&P 500 before the opening of trading on Wednesday. 

Microsoft (MSFT) closed up +1.5% after Piper Sandler named the company its highest conviction large-cap stock to own over the rest of the year with a price target of $400. 

Moderna (MRNA) closed down more than -6% to lead losers in the S&P 500 and Nasdaq 100 after Pfizer cut its full-year forecasts due to weaker-than-expected demand for its Covid-19 products. 

Henry Schein (HSIC) closed down more than -2% after it said some of its manufacturing and distribution units experienced a cybersecurity incident.

Organon (OGN) closed down more than -2% after S&P Dow Jones Indices announced that Hubbell Inc would replace the stock in the S&P 500 before trading on Wednesday. 

Walgreens Boots Alliance (WBA) closed down more than -2% to lead losers in the Dow Jones Industrials after Moody’s Investors Service warned it may cut the company’s Baa3 investment grade rating, the lowest tier above junk, citing a continued decline in earnings. 

Target (TGT) closed down -0.53% after data from Bloomberg Second Nature shows observed sales for the company in the week ending Oct 8 fell -10% from a year earlier. 

Across the markets…

December 10-year T-notes (ZNZ23) Monday closed down -16.5 ticks, and the 10-year T-note yield rose +9.8 bp to 4.710%.   Dec T-notes Monday retreated lower as diplomatic efforts to contain the Israel-Hamas conflict boosted stocks and curbed safe-haven demand for T-notes.  Also, hawkish comments Monday from U.S. Treasury Secretary Yellen weighed on T-notes when she said higher interest rates in the U.S. may persist for a while.  In addition, the smaller-than-expected decline in the U.S. Oct Empire manufacturing general business conditions index was bearish for T-notes.  Finally, an increase in inflation expectations was bearish for stocks after the 10-year breakeven inflation rate rose to a 3-week high Monday at 2.388%.

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