Market Snapshot: Stocks shake off Israel-Gaza war fears to end higher after remarks by Fed officials

What drove markets

Declines for equities were pared in morning trade after remarks by Dallas Federal Reserve Bank President Lorie Logan were seen as indicating a surge in long-term Treasury yields may mean the central bank has less need to further raise interest rates. Stocks extended early afternoon gains after remarks by Fed Vice Chair Philip Jefferson that also highlighted a rise in long-term yields.

Jefferson said that a sharp rise in long-term yields could be the result of investors concluding that the underlying momentum of the economy was stronger than previously thought and the Fed would need to keep rates higher for longer. But it could also arise from changes in investor attitudes toward risk and uncertainty.

“Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy. I will be taking financial market developments into account along with the totality of incoming data in assessing the economic outlook and the risks surrounding the outlook and in judging the appropriate future course of policy,” Jefferson said.

Logan, in a speech, said that if interest rates “remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate. However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more.”

Jefferson’s call to proceed carefully in a sensitive period for risk management “conveys no urgency to hike again,” said Krishna Guha, economist at Evercore ISI, in a Monday afternoon note.

Still, it was defense stocks that led the rebound. The iShares U.S. Aerospace & Defense ETF
ITA
rose 4.5% to close at $108.72.

The attack by Hamas on Israel raised fears of a broader conflict, sending crude prices higher and spurring haven-related support for gold, the dollar and U.S. Treasury futures.

The cash Treasury market was closed on Monday for Columbus Day and Indigenous Peoples’ Day, but futures
TY00,
-0.06%
indicated falling benchmark yields.

See: Gold, U.S. dollar rally as investors flock to havens as Israel-Hamas war escalates

U.S. stocks saw only modest pressure, however.

“Global risks have clearly risen but in the short term, the U.S. remains the global safe haven, given the weakness in the economies of China and Europe, and should result in funds flows in our direction, though it may make things more vulnerable to earnings disappointments and subdue the rally on positive earnings surprises,” said Louis Navellier, founder of Navellier & Associates

Commodities Corner: Here’s what will drive oil prices as Israel-Hamas war continues

The price of Brent crude
BRN00,
-0.54%,
the global energy benchmark, rose 4.2% amid concerns that oil supplies from the region may be compromised. Crude fell back significantly last week, however, after trading near $100 a barrel in September.

Read: Tom Lee points to uncomfortable upside for U.S. stocks of Israel-Hamas conflict

Meanwhile, the U.S. producer and consumer prices data for September will be published on Wednesday and Thursday, respectively, with further evidence of easing price pressure required to cement no more rate increases by the Federal Reserve this year.

Then Friday sees the start proper of the third-quarter company-earnings season, when big banks such as JPMorgan Chase
JPM,
-0.23%,
Citigroup
C,
+0.42%,
and Wells Fargo
WFC,
+0.03%
present their results.

Earnings Watch: Q3 earnings are here: S&P 500 heads toward year of profit declines as JPMorgan, and Delta report this week

Companies in focus

• Shares of defense contractors, including RTX Corp. 
  RTX,
  +4.62%
  and Lockheed Martin Corp.
  LMT,
  +8.93%,
  rose after the surprise attack on Israel by Hamas over the weekend.

• Energy companies, including Marathon Petroleum Corp.
  MPC,
  +2.37%
  and Occidental Petroleum Corp.
  OXY,
  +4.53%,
  saw shares rise as crude prices rallied.

• Walt Disney Co.
  DIS,
  +2.12%
  was in focus after The Wall Street Journal reported, citing sources, that activist investor Nelson Peltz’s Trian Fund Management has upped its stake in a bid to get several more seats on the company’s board. Shares rose 2.1%.