[New York Stock Market] Rising Together on Falling Treasury Yields... Oil Prices Decline

The three major indices of the U.S. New York stock market closed slightly higher on the 10th (local time) as geopolitical risks continued due to the armed conflict between Israel and Hamas, with government bond yields falling. International oil prices, which surged the previous day, fell slightly.

On this day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 33,739.30, up 134.65 points (0.40%) from the previous session. The large-cap-focused S&P 500 index rose 22.58 points (0.52%) to 4,358.24, and the tech-heavy Nasdaq index ended the day up 78.61 points (0.58%) at 13,562.84.

Currently, all 10 sectors in the S&P 500, except for energy-related stocks, rose. Utilities, materials, consumer discretionary, and consumer staples sectors all increased by more than 1%. PepsiCo showed a 1.88% gain after releasing better-than-expected quarterly results and raising future guidance. Electric vehicle maker Rivian jumped nearly 5% after UBS upgraded its investment rating. Palantir Technologies rose over 1% on news of a $250 million contract with the U.S. Army. Airlines such as United Airlines and American Airlines, which had plunged the previous day due to the Israel-Hamas conflict, rebounded. Meanwhile, major energy-related stocks, which had risen the previous day, showed slight declines.

[Image source=Reuters Yonhap News]

Investors monitored movements in government bond yields and oil prices to assess financial market uncertainty stemming from the Israel-Palestine war. The death toll from the war, which began with Hamas's surprise attack on Israel, is estimated to have exceeded 1,800 within four days of the outbreak. U.S. President Joe Biden strongly condemned Hamas's surprise attack on Israel as "sheer evil" in a speech that afternoon.

Amid heightened geopolitical risks from the Middle East, safe-haven demand strengthened, pushing up government bond prices. In the New York bond market, the benchmark 10-year yield fell to around 4.65%. The 2-year yield, sensitive to monetary policy, dropped to about 4.95%. Government bond yields move inversely to bond prices. Gold, a representative safe-haven asset, showed a slight gain.

Mona Mahajan, Chief Investment Strategist at Edward Jones, told CNBC, "The decline in government bond yields broadly supported the stock market," adding, "The fact that bond yields have surged and peaked over the past few weeks may provide relief to the market. There is growing hope that the Federal Reserve's tightening cycle is coming to an end."

Raphael Bostic, President of the Federal Reserve Bank of Atlanta and considered a dove (favoring monetary easing) within the Fed, emphasized the importance of the Fed's response amid uncertainties caused by the Israel-Hamas war in his speech that day. He said, "This is an unexpected new event," adding, "It makes everyone rethink where the market and partners are headed." Considering his recent public remarks that further rate hikes are unnecessary, this can be interpreted as a concern that excessive tightening could trigger an unnecessary recession. These dovish comments, along with statements from Fed Vice Chair Philip Jefferson and Dallas Fed President Lori Logan the previous day, helped support the stock market on this day.

On the other hand, some analysts suggested that the current situation increases the likelihood of a U.S. recession. In an investor memo, Yadani Research said, "The prospect of a prolonged war in the Middle East is increasing the possibility of a U.S. recession," noting that the chance of a recession before the end of 2024 has risen from 25% to 30%. Especially if the war expands to include Hezbollah, the Lebanese armed group supported by Iran, the impact could be greater. Yadani Research predicted, "Stronger sanctions on Iranian oil could push oil prices above $100 per barrel, potentially triggering a global recession."

The International Monetary Fund (IMF) also indicated that the current situation could negatively affect the global economy. Pierre-Olivier Gourinchas, IMF Chief Economist, said, "(It is) too early to make an economic assessment," but added, "There is a risk of an energy supply shock. This could drive up oil prices, fuel inflation, and slow growth." In its World Economic Outlook (WEO) update, the IMF forecasted that global economic growth would slow from 3.5% last year to 3.0% this year and 2.9% next year. The growth forecast for next year was revised down by 0.1 percentage points from the July prediction of 3.0%.

This week, key economic indicators such as the Consumer Price Index (CPI) and remarks from Fed officials are also scheduled. Wall Street estimates that the September CPI, to be released on the 12th, rose 0.3% month-over-month and 3.6% year-over-year, a slowdown from the previous month's increases of 0.6% and 3.7%, respectively. The Producer Price Index (PPI) for September, released earlier, is also expected to have eased. The minutes of the September Federal Open Market Committee (FOMC) meeting will be released on the 11th.

The market largely expects a rate hold in November. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the morning of this day, federal funds futures reflected an over 86% probability that the Fed will hold rates steady in November. The probability of a "baby step" (a 0.25 percentage point rate hike) was around 13%. There are two remaining FOMC meetings this year, in November and December.

Meanwhile, starting this week, earnings announcements from major banks such as JPMorgan, Wells Fargo, and BlackRock, as well as other companies listed on the New York stock market, will begin in earnest. Following PepsiCo on this day, Delta Air Lines, Domino's Pizza, Walgreens, and others will release earnings this week. Strong corporate earnings are expected to exert upward pressure on the stock market.

International oil prices fell slightly. On this day at the New York Mercantile Exchange, the November delivery West Texas Intermediate (WTI) crude oil price closed at $85.97 per barrel, down 41 cents (0.47%) from the previous session. This is interpreted as a wait-and-see stance while assessing supply disruption risks due to the Israel-Hamas war.