Geopolitical Tensions Shake U.S. Stocks, Gold, And Bonds

U.S. stocks closed lower after another volatile session amidst geopolitical tensions, with price swings of up to 1%.

Gold closed higher, while bond yields dropped as bond prices rose, and oil closed near $90.

The market eventually succumbed to the fear of a possible escalation of the conflict between Israel and the terrorist group Hamas, with the possibility of involving other middle east nations.

The S&P had its worst week in a month, falling more than 1% on Friday, and is now below its 200-day moving average.

Traders sought safe havens for their investments in Gold and treasuries, with the 10-year yield closing lower at 4.914% after reaching a high of 4.99%. Spot gold closed at $1981.

Cleveland Fed President Loretta Mester, known for her hawkish stance, indicated that the U.S. central bank is nearing the end of its aggressive tightening campaign.

She also signaled her preference for one more rate hike this year, depending on how the economy evolves. This view was echoed by Federal Reserve Chairman Jerome Powell, who emphasized that inflation remains high, and a rate cut is not being considered.

For the week, the Dow fell by 1.61% the S&P slipped by 2.39%, and the Nasdaq cratered by 3.16%.

Here are the closing levels on Friday, October 20th, 2023:

Last Change %Change
DOW JONES   33,127.28 -286.89 -0.86%
S&P 500 4,224.16 -53.84 -1.26%
NASDAQ 12,983.81 -202.36 -1.53%
U.S. 10Yr 4.914%
VIX 21.71 +0.31 +1.45

While my previous comments mentioned that earnings would drive the market direction, it now appears that the focus has shifted to geopolitical tensions in the Middle East. Reports of drone attacks on U.S. troops in Iraq and Syria did little to ease these concerns.

The fact that bond yields fell despite Powell’s hawkish comments suggests that investors are turning to bonds out of fear.

This strategy makes sense, particularly when you consider that the equity risk premium, the difference between the yield from equities and the risk-free rate, is currently negative across the yield curve.

So, buying bonds instead of equities helps protect capital while earning a better yield than “risky” equities.

Adding to the concern is the technical picture of the S&P trading below its 200-day moving average, which could exacerbate the situation.

It is worth noting that the market has appeared bearish in the past, with high levels of risk, yet buyers have consistently taken advantage of dips throughout the year. The most bullish investors tend to buy when others are selling, so it is premature to rule them out entirely.

However, staying on the sidelines may not be a viable option if selling continues to gain momentum. It is prudent to hedge against downside risk, just in case.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years. 

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