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Risks rise but markets hold steady

market snapshot

13 October 2023 |
The conflict in Israel and Gaza has not moved markets… yet.

Fast reading: 

  • Equity indices and bond yields remain largely unchanged on news from Israel and Gaza.
  • VIX and MOVE ‘fear’ indices stable although oil ticks up.
  • Q3 earnings season poses more questions than answers.

Markets held steady this week despite conflict in Israel and Gaza and the resulting increase in geopolitical risk in the Middle East.

The blue-chip S&P 500 Index fell less than 100bps on news of Hamas’s 7 September incursion into Israel and rose thereafter to finish in positive territory by week’s close. Yields on US 10-year treasuries rose marginally from the start of the week to reach 4.65% by 13 October1.

The VIX and MOVE volatility indices mirrored the relative lack of response in the wider market with only the oil price offering gains as West Texas Intermediate crude climbed to US$85.92 a barrel2 (see chart below).

VIX and MOVE Indices*, WTI crude: One month change

Even so, Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, notes that the world has now entered ‘risk-off’ territory as investors watch a further conflict in the middle east unfold.

“Geopolitics now hangs heavy in the air,” he says. “Volatility may still spill into equity markets as tensions rise. Sustained, upward pressures on oil prices will drive global inflation and reinforce a cautionary response to updates from the Fed.”

Nevertheless, Grant points to some areas of positivity as, in the midst of elevated investor risk aversion, equities tilt higher and treasury yields climb down from the highs of previous weeks. “The expectation is that we’re through the worst of the rate climbs. That said, expectations continue to be split between the higher-for-longer camp and those anticipating rate cuts in mid-2024.”

Against an uncertain backdrop, the Global Equities team views mega-cap growth stocks as well placed to benefit from their quality balance sheets and exposure to tech. Says Grant: “We stress the importance of due diligence on supply chains and exposures as polarisation in global politics can cause dramatic shifts in a company’s operations, which will become clearer as earnings season commences.”

Geopolitics now hangs heavy in the air. Volatility may still spill into equity markets as tensions rise.

On the subject of the upcoming Q3 earnings season, Stephen Auth, Chief Investment Officer for Equities at Federated Hermes, notes that questions rather than answers are at the forefront of investors’ minds.

“Has inflation truly peaked or was the US PPI print for September a worrisome sign that another bout of inflation lies ahead,” he asks. “Is the Fed truly done? And even so, how long can the economy handle ‘higher for longer’? When – if ever – will higher rates really start to show up in economic growth? Is China ever going to rebound or is it entering its own version of Japan’s ‘lost decade’? Does Artificial Intelligence help or hinder these trends? What about rising geopolitical risks? And most importantly, what will earnings be like in this environment? Will higher nominal GDP mean higher earnings ahead, or will cost pressures drive down margins and pull earnings lower, not higher?”

With macro concerns fading, Auth notes that the mixed pressures implied above could generate differing outcomes within and across industries, and importantly across companies. “As ever, winners and losers will emerge,” he concludes. “And we expect this quarter’s earnings season to begin to drive this point home.”

For further insights on global equities, please see: Global Equity ESG, H1 2023 Report.

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