Markets Brace for Geopolitical Tensions, Inflation Data, and Earnings Season

Global and Israeli markets are entering a busy week, navigating geopolitical developments, key macroeconomic data, and significant corporate earnings reports, particularly from the US. Tensions between the US and Iran remain high, impacting oil prices and government bond yields. While the US bond market will be closed Monday for Columbus Day, Wall Street will remain open. Investors are closely monitoring the fallout from the Houthi attack on King Khalid International Airport in Riyadh, Saudi Arabia. President Trump indicated he is considering joining Saudi Arabia in strikes against the Houthis, a move that could further escalate the situation. Upcoming Israeli elections and the US midterm elections in early November are also expected to contribute to market volatility. Key economic indicators this week include US consumer price index data on Wednesday and producer prices and retail sales on Thursday. On Friday, Federal Reserve Chairman Kevin Warsh is scheduled to speak at the International Monetary Fund's annual conference in Bangkok.

The earnings season officially kicks off with reports from major banks like JPMorgan Chase, Goldman Sachs, and Citigroup. However, focus will be on chipmakers ASML and TSMC, whose reports on Wednesday and Thursday, respectively, will test the strength of the AI sector. The Tel Aviv Stock Exchange (TASE) ended the previous week with significant declines, with the TA-35 index down approximately 3.7%, the TA-90 down 3.3%, and the TA-125 down 3.6%. The TA-35 reached a more than two-month low, the TA-125 a January low, and the TA-90 a more than one-year low. The defense index led the declines, falling nearly 8%, largely due to a sharp drop in Next Vision shares. In contrast, New York markets closed the past week with gains, with the S&P 500 up 1.2%, the Nasdaq up 0.6%, and the Dow Jones up 0.9%. The SOXX semiconductor ETF fell about 5% amid reports that OpenAI's annual recurring revenue (ARR) is significantly lower than market expectations.

Traders will be reacting to the escalating tensions between Saudi Arabia and the Houthis. The Israeli Shekel weakened about 0.2% against the dollar last week, trading at 3.06 shekels. The US Dollar Index (DXY) rose about 0.3% to 102.2 points, marking its fourth consecutive weekly increase. Oil prices climbed, with Brent crude up 2.4% to $104 a barrel and WTI crude around $92 a barrel, amid reports of increased Iranian attacks on tankers in the Strait of Hormuz. Traders are assessing the impact of a deal between President Trump and Russian President Putin to release over 4 million tons of diesel into global markets, as well as the potential consequences of the Houthi attack on Riyadh's airport. Saudi officials have requested urgent defensive support from the US. Analysts warn that an energy shock could become an inflationary shock, impacting transportation, production, and consumption costs, and complicating the Federal Reserve's efforts to control inflation. While traditional energy companies might benefit from high prices, airlines, transportation, and energy-intensive businesses could see profit erosion. Technology stocks may also suffer if rising oil prices lead to further increases in bond yields.

Regarding inflation data, Israel's September consumer price index, due Thursday, is expected to show a 0.3%-0.4% decrease, bringing the annual inflation rate to 1.7%-1.8%. In the US, the September consumer price index, due Wednesday, is projected to rise 0.6%, resulting in an annual inflation rate of 3.7%, with core inflation expected to increase 0.2% to 2.5% annually. Surprises in these figures could significantly impact interest rate expectations. Bloomberg economists Anna Wong, Eliza Winger, and Andrew Sacher noted that the inflation acceleration appears to be driven by localized hotspots rather than broad price pressures, allowing the Fed room to remain patient.

JPMorgan Chase is highlighting a "once-in-a-generation opportunity" in high-grade corporate debt due to the recent surge in global bond yields. Portfolio managers suggest that investors can now take on credit risk from top-rated companies and still achieve yields of 6.5%, without needing to lower credit ratings. This strategy is seen as particularly suitable for investors concerned about overexposure to AI and technology stocks. Experts advise considering corporate debt for its diversification benefits and historically attractive yields, which can help offset stock market volatility. While there is agreement on the opportunities in the bond market, differing views exist on recommended duration, with JPMorgan increasing exposure to longer-term bonds and others preferring shorter-term opportunities due to potential yield volatility. Analysts at UBS also commented, noting that while higher bond yields increase borrowing costs, they offer fair returns for investors after more than a decade of unusually low yields following the 2008 financial crisis.