S&P 500 Gains as Israel-Hamas War Worsens, Earnings Flow

Also, two-year T-notes, gold, crude oil and euro futures

1. S&P 500 E-mini futures (/ES): +0.62%
2. Two-year T-note futures (/UB): -0.10%
3. Gold futures (/GC): +0.54%
4. Crude oil (/CL): -2.01%
5. Euro futures (/6E): +0.35%

The worst October for U.S. equity markets in six years is winding down, but traders aren’t throwing in the towel just yet. Geopolitical tensions remain high as Israel’s ground invasion of Gaza has begun, although a more measured approach is lifting hedges: Bonds are down across the curve, and energy prices are reeling. Further to this point, both the Japanese yen and U.S. dollar, the liquid safe havens, are pulling back as traders seek exposure to higher yielding assets.

Stocks are trading higher as investors digest the past week’s earnings results, which turned out to be meaningfully better. The year-over-year earnings growth rate for the S&P 500 is now +2.7%, the first positive quarter since 3Q ’22. Nevertheless, the mix of cross asset performance is foreboding. U.S. Treasury yields are moving higher again, which has been toxic for U.S. equity index futures in recent weeks. Another push higher by yields could undercut the Russell 2000 (/RTYZ3) and the Nasdaq 100 (/NQZ3), which are the top two performers today.

The bond market is selling off despite some risk-taking in equity markets, which began overnight in Europe as traders shrugged off military actions in Gaza, which appear to be more limited than previously feared. Still, we could be in for a volatile week, with the Federal Reserve and several other central banks set to announce policy decisions. The policy-sensitive two-year note futures (/ZTZ3) fell this morning ahead of the decision, which kept the underlying yield above the 5% mark.

Gold prices (/GCZ3) are attempting to clear fresh multi-month highs as prices rise about 0.5% this morning despite higher bond yields and rising equity prices. The move seems technically driven, with traders writing off geopolitical tensions in the Middle East as Israel conducts what appear to be limited ground operations in Northern Gaza. Technically speaking, holding above the 2,000 level should keep bullish sentiment intact.

Crude oil prices (/CLZ3) fell about $1.50 per barrel, or 1.75%, this morning as prices continued to trade within a range established last week. Energy traders continue to assess conditions on the ground in Israel and Gaza to gauge the potential for a widening conflict. For now, it appears the geopolitical risk trade is fading as Israeli defense forces conduct surgical raids. Oil traders are watching economic data this week, including Chinese PMI figures due Tuesday.

The Euro Dollar (/6EZ3) advanced Monday as the dollar pulled back ahead of a busy week for central banks. The move appears to be driven by a broader pullback in dollar strength as traders move back into risk assets amid easing tensions in the Middle East. The Eurozone will see CPI and GDP data cross the wires on Tuesday. Elsewhere, the Federal Reserve, Bank of Japan and the Bank of England are set to announce rate decisions this week.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater 

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