Stocks Slide as Middle East Conflict and Rising Treasury Yields Raise Concerns
Investor Caution Impacts Stock Market
Stocks took a tumble on Thursday as investors grew cautious amid the ongoing conflict in the Middle East and the significant increase in 10-year Treasury yields. This comes ahead of Federal Reserve Chair Jerome Powell’s remarks and a day filled with major company earnings reports.
Competing Themes in the Market
Investors find themselves grappling with two conflicting themes. On one hand, there is the expectation of persistently high interest rates, while on the other hand, the potential for a war that could disrupt global geopolitics looms. The certainty of no rate cuts from the Federal Reserve in the near future has caused 10-year Treasury yields to reach almost 5%, the highest level in 16 years, consequently impacting stocks.
Changing Investor Preferences
Simultaneously, investors have shifted their focus away from bonds as a safe-haven option and instead turned to gold, which is currently trading at its highest level in two months.
Influence of Third-Quarter Earnings Season
The ongoing third-quarter earnings season adds another layer of complexity to the market. Today, a range of major companies, including TSMC, Philip Morris, Blackstone, and Fifth Third Bancorp, will be revealing their results.
Global Shares and Treasury Yields
The MSCI All-World index, representing global shares, experienced a 0.25% decline, reflecting the 0.9% drop in Europe’s equity markets and the weakness across Asian markets. In contrast, U.S. Treasuries fell for the fourth consecutive day, resulting in a 6 basis point increase in the yield on the benchmark 10-year note, reaching 4.962%. This puts it on track for the largest one-week rise since April 2022, with a 34 basis point increase.
Factors Affecting Bond Yields
Traditionally, when investors seek safe-haven investments, bonds are the preferred choice. However, the current environment of rising interest rates and an influx of upcoming debt supply has created a different dynamic. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, highlights that the risk premium is now more evident in gold and the U.S. dollar rather than bond yields. This shift emphasizes the impact of supply and demand and the expectation of rates remaining higher for a longer duration.
Market Outlook and Powell’s Speech
U.S. stock index futures experienced a 0.2% decline, with Tesla’s shares falling 4.6% in pre-market trading due to a drop in gross margins. Conversely, Netflix saw a rise of nearly 13% following a surge in subscriber numbers. The market eagerly awaits Federal Reserve Chair Jerome Powell’s speech at the Economic Club of New York, where he will discuss the economic outlook.
Gold and Volatile Oil Prices
Gold prices increased by 0.24% to $1,952 per ounce, reaching a two-month high due to concerns surrounding the Middle East conflict. The region remains volatile following an explosion at Gaza’s Al-Ahli al-Arabi hospital, which Palestinian officials claim was an Israeli airstrike. Meanwhile, oil prices fell as the Organization of the Petroleum Exporting Countries (OPEC) showed no support for Iran’s call for an oil embargo on Israel. Additionally, the United States plans to ease sanctions on Venezuela, allowing more crude oil to enter the market. These developments have contributed to the recent volatility in crude futures.
Oil Futures and Market Volatility
Oil futures, the backbone of global oil trades, experienced a 0.6% decline to $90.96 per barrel after a 2% increase the previous day. Meanwhile, futures dropped 0.2% to $88.16. October has proven to be the most volatile month for oil trading since November 2021, as indicated by an index of oil volatility.
