The bond market experienced a rally as investors sought out safe havens due to concerns over a potential ground invasion by Israel in Gaza. This led to a 10-basis point drop in the 10-year Treasury yield and a 7-basis point decline in the German 10-year yield. Additionally, crude oil prices surged over 4% as fears grew that the escalating conflict could disrupt the Middle East and impact global supply. Bloomberg Economics warned that if the conflict were to draw in Iran, it could push crude oil prices up to $150 per barrel and cause a $1 trillion reduction in global economic output. The prospect of higher US interest rates also weighed on investor sentiment, with the odds of a Federal Reserve rate hike increasing to about 40%.
Despite these concerns, US stocks found some support as major banks began reporting positive earnings results. JPMorgan Chase, Citigroup, and Wells Fargo all saw gains in premarket trading. Importantly, data showed that import prices rose less than expected in September, which helped boost market sentiment. However, the dollar slipped amidst the market volatility. In Europe, the Stoxx Europe 600 index dropped by 0.8%, with travel and leisure shares leading the decline. Energy sector stocks were the only ones in the green, benefiting from the rise in oil prices. Asian markets also struggled, with Hong Kong and mainland Chinese shares underperforming due to weaker-than-expected consumer and producer prices. China’s trade data was slightly better than expected, and there are talks of the government forming a state-backed stabilization fund to boost confidence in the stock market.
Looking ahead, this week will see important events such as the release of the University of Michigan consumer sentiment index and a meeting of G20 finance ministers and central bankers as part of the IMF gathering. Friday will also feature speeches from ECB President Christine Lagarde and Fed’s Patrick Harker. Overall, geopolitical risks, potential interest rate hikes, and mixed economic indicators continue to shape market movements.
