In today’s Morning Markets report, we observe a retreat in stock markets as geopolitical tensions escalate in the Middle East. December E-Mini S&P 500 futures (ESZ23) are down by -0.71%, while the Dec Nasdaq 100 E-Mini futures (NQZ23) have slipped by -0.88%.
The decline in stock index futures can be attributed to increased risk-off sentiment fueled by heightened geopolitical concerns. Over the weekend, the militant group Hamas launched an attack on Israel, resulting in over 1,100 casualties. Investors are seeking refuge in European government bonds, causing yields to drop. Notably, the U.S. Treasury market is closed today for the Columbus Day holiday.
Hamas’s attack on Israel has had a ripple effect on global oil markets, with crude oil prices surging by more than +3%. The fear of a potential wider conflict disrupting crude supplies from the Middle East has prompted the U.S. to deploy warships to the eastern Mediterranean. The Wall Street Journal has reported Iranian involvement in helping Hamas plan this surprise attack.
Markets are currently pricing in a 22% probability of the Federal Open Market Committee (FOMC) raising the funds rate by +25 basis points at the next FOMC meeting ending on November 1. Moreover, there’s a 40% chance of a +25 basis point rate hike at the subsequent meeting concluding on December 13. After these potential hikes, the market anticipates the FOMC to initiate rate cuts in the second half of 2024, in response to an expected U.S. economic slowdown.
Across the Atlantic, European bond yields are trending lower, with the 10-year German bund yield touching a 1-week low of 2.828% and now down by -1.7 basis points at 2.867%. Meanwhile, the 10-year UK gilt yield has dipped by -0.5 basis points to 4.568%.
Global stock markets are facing headwinds, with the Euro Stoxx 50 down by -0.76%. The surprise attack by Hamas on Israel has particularly affected travel and leisure stocks, leading to a temporary halt in global airline flights to Israel. However, the market saw a rally in defense stocks, including Saab, Rheinmetall, and Leonardo, all of which surged by at least 5%. Additionally, energy stocks benefited from the +4% increase in crude prices.
Today’s economic news in the Eurozone was mixed for stocks. German industrial production in August declined by -0.2% month-on-month, slightly worse than the expected -0.1%. Conversely, Eurozone Sentix investor confidence for October fell by -0.4 to -21.9, which was a smaller decline than anticipated (-24.0).
European Central Bank (ECB) Vice President Guindos emphasized the need for vigilance on inflation, suggesting that interest rates are likely to remain at their current levels for an extended period due to factors such as oil price fluctuations, euro depreciation, and unit labor cost developments.
In China, the Shanghai Composite Stock Index reopened after a week-long holiday, dropping to a 6-week low with a -0.44% decline. Travel and tourism stocks suffered due to disappointing Golden Week holiday data, indicating weakness in consumer spending. Property stocks also retreated as home sales during this typically strong period decreased. Crude prices rose by +4%, contributing to a recovery in energy stocks.
Foreign investors continue to offload their Chinese stock holdings as mainland markets reopened after the Golden Week holiday. On this note, overseas funds sold a net worth of 7.5 billion yuan ($1 billion) in onshore shares via trading links with Hong Kong, marking the highest level since September 25.
In pre-market U.S. trading, several sectors are experiencing shifts. Airline stocks are under pressure, with United Airlines Holdings (NASDAQ:UAL), American Airlines Group (AAL), and Delta Air Lines (NYSE:DAL) all declining by over -2% due to international flight suspensions to Israel.
Cruise line operators, including Carnival (NYSE:CCL), Norwegian Cruise Line Holdings (NCLH), and Royal Caribbean Cruises Ltd (NYSE:RCL) are also down by more than -1% as travel stocks are impacted by the Middle East conflict.
Technology stocks with exposure to Israel, such as Applied Materials (AMAT), Check Point Software Technologies (NASDAQ:CHKP), Fortinet (NASDAQ:FTNT), Intel (NASDAQ:INTC), and Nvidia (NASDAQ:NVDA), have declined by more than -1% following the Hamas attack.
Datadog (NASDAQ:DDOG) has tumbled by over -4% in pre-market trading after a downgrade by Bank of America from buy to neutral.
On a brighter note, energy stocks and energy service companies are making gains in pre-market trading, driven by a +3% increase in WTI crude prices. Consequently, ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), Devon Energy (NYSE:DVN), Diamondback Energy (NASDAQ:FANG), Marathon Oil (NYSE:MRO), Occidental Petroleum (NYSE:OXY), and Valero Energy (NYSE:VLO) are all up by more than +2%.
Defense stocks, including Lockheed Martin (NYSE:LMT), RTX Corp (NYSE:RTX), Northrop Grumman (NYSE:NOC), and L3Harris Technologies (NYSE:LHX), have gained more than +3% in pre-market trading following the Hamas attack on Israel.
Lastly, Lennox International (NYSE:LII) is up by over +1% in pre-market trading after receiving a double upgrade from Goldman Sachs, moving from sell to buy. Oracle (NYSE:ORCL) has also risen by more than +1% in pre-market trading after Evercore ISI upgraded the stock from in line to outperform.
In the earnings calendar for today (October 9, 2023), investors will be keeping an eye on reports from Applied Digital Corp (NASDAQ:APLD) and Waldencast plc (NASDAQ:WALD).
Featured Image: Freepik @ chandlervid85
Author Faith Yakubu 
