Geopolitical Risks Weigh on Investor Sentiment

The Hamas attack on Israel has sharply increased geopolitical risks with one more war in an already tense world that could lead to a widespread conflagration in the Middle East. One of the first diplomatic consequences of this conflict is the decision taken by Saudi Arabia to suspend its discussions on normalizing its relations with Israel. In this explosive context, the Middle Eastern stock markets finished the week in the red. The Tel Aviv 125 stock index plunged 6.50% while the Tadawul All Share index which tracks the performance of all companies listed on the Saudi Stock Exchange fell 1.66%.

Wall Street’s main indices closed in mixed order with the S&P 500 gaining 0.45% (+12.72% year-to-date) and the Nasdaq Composite losing 0.18% (+28.10% YTD). The labour market continued to surprise to the upside as the initial jobless claims were short of expectations. Additionally, U.S. consumer prices experienced a slight surge in September (monthly increase of 0.4% compared to the predicted 0.3%). However, this was still a decrease from the 0.6% rise of the previous month.

In Europe, the MSCI EMU edged down 0.20% week-over-week (+6.36% YTD). German inflation fell sharply in September, hitting its lowest level since the outbreak of the war in Ukraine. In the UK, the FTSE 100 was up 1.40% (+1.98% YTD), boosted by energy and mining stocks. In Asia, Japan’s Nikkei jumped by 4.26% (+23.84% YTD). On the flip side, the Shanghai Composite slid 0.72%, thus bringing its year-to-date performance into negative territory (-0.04%).

Against the background of rising geopolitical risks, government bonds and precious metals served as a safe haven, also helped by accommodative comments from several members of the Fed. The yield on the 10-year U.S. Treasury lost 17 basis points to 4.63% and its German equivalent, 14 basis points to 2.74%. Gold snapped a three-week losing streak, with a weekly gain of 5.31% at $1,927.40/Oz.

Energy and defense stocks shine

Oil prices remained firm on fears of disruptions in the Middle East (WTI crude up 5.92%). Last week saw a decrease in gasoline inventories in the U.S., following the largest build in almost two years the previous week. Stocks of distillates continued their decline as well. Furthermore, Exxon Mobil (XON: +2.52% over the week) said Wednesday it agreed to buy shale rival Pioneer Natural Resources (PXD: +4.57% over the week) for $59.5 billion in an all-stock deal, or $253 per share. The energy sector rebounded strongly (+4.51%), erasing a good portion of last week's losses.

Aerospace and defense stocks such as Northrop Grumman Corp (NOC: +15.81% over the week) and Lockheed Martin Corp (LMT: +10.06%) pushed the industrials sector higher (+1.00% over the week) after five weeks of losses.

The utilities and real estate sectors were also on the ascendancy, up 3.61% and 2.26% respectively, putting an end to three weeks in negative territory.

The tech sector was flat (+0.16%), pushed lower by semiconductor companies. The White House is considering more alternatives to block Chinese companies from acquiring artificial intelligence chips from U.S. companies. Nvidia (NVDA) was down 0.66%, while Intel Corp (INTC) slid 0.61%, the Israel-Hamas war threatening its plan for a chip-making factory in Israel. Furthermore, it’s worth noting that Microsoft Corporation (MSFT: +0.14%) completed its $69 billion acquisition of video game maker Activision after receiving final approval from the UK Competition and Markets Authority.

Lastly, the consumer discretionary sector closed in the red (-0.68%), weighed down by Tesla stocks (TSLA: -3.61%) as the EV maker’s grip in China seems to be decreasing, as data from the China Passenger Car Association indicates a 10.9% drop in its sales last month compared to the same period the previous year.

Keep a close eye on the latest market moves with the weekly updated league tables dedicated to fixed income ETFs.