Stocks Tumble on Renewed Middle East Risks

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.78%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.50%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.85%.

Stocks this morning are moderately lower on the risks of an escalation in the Israeli-Hamas war after an explosion at a Gaza hospital complicated diplomatic efforts to contain the conflict.  After the bombing, the leaders of Jordan, Egypt, and the Palestinian Authority canceled their scheduled summits with President Biden, who landed in Israel today.

Hamas immediately blamed Israel for the explosion, but Israeli military authorities today offered evidence that the explosion was caused by an errant Hamas missile, not by Israeli aerial bombing.  Also, the White House today said that the “current” U.S. intelligence assessment is that Israel was “not responsible” for the Gaza hospital blast based on “overhead imagery, intercepts and open source information.”

Airline stocks are lower after Unite Airlines Holdings warned that the Israeli-Hamas war and higher jet fuel costs would weigh on earnings. Also, Morgan Stanley is down more than -7% after reporting weaker-than-expected Q3 wealth management revenue.  A jump in the 10-year T-note yield to a new 16-year high today is bearish for stocks.

Crude prices are up more than +1% at a 2-week high, which boosts energy stocks.  Crude prices jumped after Iran’s foreign minister called for an oil embargo against Israel. 

Today’s U.S. housing news was mixed for stocks.  U.S. Sep housing starts rose by +7.0% to 1.358 million units, which was weaker than expectations for an increase to 1.383 million. However, Sep building permits fell by -4.4% to 1.473 million units, slightly stronger than expectations for a larger decline to 1.453 million units.

Weekly U.S. MBA mortgage applications fell -6.9% in the week ended Oct 13 to 166.9, the weakest reading in 28 years.  The mortgage purchase sub-index fell 5.6% to its lowest level in 28 years, and the refinancing sub-index fell -9.9%.  The average 30-year fixed mortgage rate rose +0.3 bp to 7.70%, the highest in 23 years.

The markets are discounting a 12% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 48% 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 higher.  The 10-year T-note yield rose to a 16-year high of 4.923% and is up +8.5 bp at 4.919%.  The 10-year German bund yield rose to a 1-1/2 week high of 2.934% and is up +3.8 bp at 2.920%.  The 10-year UK gilt yield rose to a 2-week high of 4.664% and is up +13.8 bp at 4.650%. 

Overseas stock markets are mixed.  The Euro Stoxx 50 is down -1.19%.  China’s Shanghai Composite Index closed down -0.80%.  Japan’s Nikkei 225 today closed up +0.01%.

Today’s stock movers…

Albemarle (ALB) is down more than -9% to lead losers in the S&P 500 after Bank of America Global Research downgraded the stock to underperform from neutral.

Morgan Stanley (MS) is down more than -7% after reporting Q3 wealth management net revenue of $6.40 billion, below the consensus of $6.58 billion. 

Airline stocks are under pressure today after United Airlines flagged a sharp profit decline should flights to and from Israel remain grounded due to the Israel-Hamas conflict.  As a result, United Airlines Holdings (UAL) is down more than -8%.  Also, American Airlines Group (AAL), Delta Air Lines (DAL), and Alaska Air Group (ALK) are down more than -4%. 

JB Hunt Transport Services (JBHT) is down more than -8% after reporting Q3 EPS of $1.80, weaker than the consensus of $1.83.

Northern Trust (NTRS) is down more than -5% after reporting Q3 net interest income of $469.4 million, below the consensus of $473.3 million.

Lucid Group (LCID) is down more than -8% to lead losers in the Nasdaq 100 after CFRA downgraded the stock to sell from hold with a price target of $4.

Nvidia (NVDA) is down more than -3% after it warned that new U.S. rules on chip exports to China could hinder product development and cause other difficulties. 

Sherwin-Williams (SHW) is down more than -3% after Bank of America Global Research downgraded the stock to underperform from neutral.

Citizens Financial Group (CFG) is down more than -3% after reporting Q3 revenue of $2.01 billion, weaker than the consensus of $2.04 billion.

Nasdaq Inc (NDAQ) is up more than +5% to lead gainers in the S&P 500 after reporting Q3 net revenue of $940 million, stronger than the consensus of $933.7 million.

Abbott Laboratories (ABT) is up more than +3% after reporting Q3 net sales of $10.14 billion, better than the consensus of $9.81 billion. 

Procter & Gamble (PG) is up more than +2% to lead gainers in the Dow Jones Industrials after reporting Q1 organic revenue rose +7.00%, stronger than the consensus of +5.83%.

Travelers Cos (TRV) is up more than +2% after reporting Q3 net premiums written of $10.49 billion, above the consensus of $10.36 billion.

Floor & Decor Holdings (FND) is up more than +2% after S&P Dow Jones Indices said the company will replace Vicor Corp in the S&P MidCap 400, effective on Friday’s open.

Energy stocks and energy service providers are moving higher, with the price of WTI crude up more than +1% at a 2-week high.  As a result, Valero Energy (VLO), Occidental Petroleum (OXY), Hess Corp (HES), Phillips 66 (PSX), Exxon Mobil (XOM), Diamondback Energy (FANG), and Marathon Oil (MRO) are up more than +1%. 

Across the markets…

December 10-year T-notes (ZNZ23) this morning are down -11 ticks, and the 10-year T-note yield is up +8.5 bp at 4.919%. Dec T-notes today dropped to a 16-year nearest-futures low, and the 10-year T-note yield climbed to a 16-year high of 4.923%.  An increase in inflation expectations is bearish for T-notes after the 10-year breakeven inflation rate today climbed to a 2-3/4 month high of 2.449%.  Also, supply pressures are weighing on T-notes as the Treasury will auction $13 billion of 20-year T-bonds later today. Geopolitical risks in the Middle East and weakness in stocks today are limiting losses in T-note prices on increased safe-haven demand for government debt.

The dollar index (DXY00) today is up by +0.12%.  The dollar is moderately higher today.  Geopolitical risks in the Middle East are boosting safe-haven demand for the dollar after an explosion at a Gaza hospital that killed hundreds complicated diplomatic efforts to contain the Israeli-Hamas conflict.  Also, the weakness in stocks today has boosted the liquidity demand for the dollar.

EUR/USD (^EURUSD) today is down by -0.31%.  Strength in the dollar today is undercutting the euro.  Also, dovish comments today from ECB Governing Council member Stournaras weighed on the euro when he said the turmoil in the Middle East had shifted the balance against any further tightening of ECB monetary policy.

Today’s economic news was bearish for EUR/USD after Eurozone Aug construction output fell -1.1% m/m.

USD/JPY (^USDJPY) today is down by -0.01%.  The yen today is little changed.  A jump in Japanese government bond yields strengthened the yen after the 10-year T-note yield today rose to a 10-year high of 0.820%. Also, comments today from former BOJ member Sakurai gave the yen a boost when he said the BOJ may scrap its negative interest rate policy by the end of the year to adjust the currently excessive level of monetary easing.  Higher T-note yields today limited the upside in the yen.   

December gold (GCZ3) today is up +29.0 (+1.50%), and Dec silver (SIZ23) is up +0.075 (+0.33%).  Precious metals prices this morning are moderately higher, with gold climbing to a 2-1/2 month high and silver posting a 2-1/2 week high.  Concerns about the escalation of the Israeli-Hamas conflict have boosted the safe-haven demand for precious metals as hopes for a diplomatic resolution to the conflict deteriorated after a deadly explosion at a Gaza hospital.  Also, an increase in inflation expectations boosted demand for gold as an inflation hedge after the 10-year U.S. breakeven inflation rate today rose to a 2-3/4 month high.  A stronger dollar today and higher global bond yields are limiting the upside in precious metals.  Also, long liquidation pressures are weighing on gold after long gold holdings in ETFs fell to a 3-1/2 year low on Tuesday.

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