Warning Signs: Markets Roiled by Geopolitical Unrest  

On October 7, the temperature rose on the geopolitical landscape by more than a few degrees.

Hamas’s brutal attack on Israel that killed scores of innocent Israeli citizens, including children and the elderly, caused Israel to declare war on the terrorist organization that runs Gaza.

In a world of bifurcated nuclear powers, another hot war in the Middle East poses dramatic risks.

Markets reflect the economic and geopolitical landscapes. Inflation, the war in Ukraine, deteriorating relations between the U.S. and China, and the war in Israel will roil markets. Crude oil prices rallied on supply concerns after falling to just above the $80 per barrel level. Gold has increased by over $100 per ounce since the attacks on Israel and Israel’s response.

Bonds stabilized above the lowest level since 2007, and the dollar index remained near the recent high. Meanwhile, the latest September consumer and producer price index data showed that inflation remains elevated.

Expect rising market volatility across all asset classes over the coming weeks and months. Jamie Dimon, CEO of JP Morgan Chase, told markets, “This may be the most dangerous time the world has seen in decades.”

Traders and investors will likely take a defensive approach to markets.

Gold and oil prices could soar

• Nearby NMYX crude oil prices recovered from $81.50 to over $86 per barrel. The U.S. Strategic Petroleum Reserve remains at the lowest level in four decades.
• OPEC+ members control oil prices and have expressed their opposition to Israel and the U.S.
• Gold futures put in a bullish key reversal pattern on the daily chart on Friday, October 6, the day before the attack on Israel.
• Gold futures were over $100 per ounce higher on October 17 at above $1,935 per ounce.

Inflation is above the Fed’s reach

• The latest CPI and PPI data showed inflation remains elevated. September retail sales were surprisingly robust.
• Geopolitical turmoil distorts commodity prices as it interferes with global trade.
• The Fed remains committed to pushing inflation to its 2% target.
• The Fed may be unable to increase the Fed Funds Rate and could pause its quantitative tightening program as the situation in the Middle East deteriorates. The newest conflict could spread far beyond Israel and Gaza’s borders.

Defense stocks could offer an investment haven

• Global military spending will dramatically rise.
• The war in Ukraine has depleted military supplies.
• The war in Israel will only increase the depletion of military hardware.
• Profits for defense contractors and military supply manufacturers will rise.

Defense stocks to consider

• General Dynamics (GD) is a leading U.S. defense contractor.
• Northrup Grumman Corp (NOC) is a leading global security company.
• Lockheed Martin Corp (LMT) is the world’s leading defense contractor for defense, space, intelligence, homeland security, and information technology.
• Boeing Company (BA) is a leading aerospace company and defense contractor.
• RTX Corporation (RTX) is another top defense contractor.

Defense ETFs that diversify risk

• FT Indxx Aerospace & Defense ETF (MISL) holds over one-third of its assets in the four leading U.S. defense contractors.
• The iShares U.S. Aerospace & Defense ETF (ITA) is highly liquid, with over $5 billion in assets under management.
• The SPDR S&P Aerospace & Defense ETF (XAR) has around $1.5 billion in assets.
• The Invesco Aerospace & Defense ETF (PPA) has over $2 in assets.
• The Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) is a short-term product that moves higher with defense sector stocks.
• Sadly, a defensive posture in the current environment favors the companies that produce the military hardware that supports the growing worldwide war and defense efforts.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!