US equity markets react to Israel-Hamas conflict

Surprise attack prompts a somber mood in financial markets

Hamas' surprise attack on Israel over the weekend, which brought horrific images and stories and prompted Israel to declare war, has resulted in a somber mood in markets today.

Following this morning’s re-opening, the immediate reaction was a flight to safety across multiple asset classes, with the US dollar, crude oil, gold, and bonds all rallying while S&P futures fell -0.90%, giving back a good chunk of Friday's gains.

Uncertainty looms as tension escalates

In terms of what comes next, it's not easy to say.

This century, Israeli-Palestinian conflicts, including the 2006 Lebanon war, have not had a long-lasting impact on global equity markets. Providing the conflict remains contained, this is likely to be the case again, with the main fallout being higher crude oil prices, stemming from downside risks to Iranian production and the reduced probability of Israeli-Saudi normalisation.

However, if the Iranian-backed Hezbollah movement gets involved, a wider war that embroils both the US and Iran could quickly spin out of control, similar to the Yom-Kippur War of 1973 and the Iranian Revolution of 1979. Both events resulted in disruptions of oil supplies from the region, sending prices significantly higher and equities tumbling lower.

S&P 500 technical analysis

Since early September, we have opined that the S&P 500 was missing another leg lower into the 4250/00 support region as the third wave of a correction that started from the high in July.

Last week, we saw encouraging signs of basing ahead of the 200-day moving average at 4205, enabling the S&P 500 to reclaim uptrend support at 4250 from the October 3491 low. If the S&P 500 can continue to hold above the 200-day moving average and then close above the August 4335 low, we would move to a bullish bias, looking for a retest of the July highs.

If the S&P 500 were to see a sustained break below the 200-day moving average at 4208/00, it would negate the view that the pullback from the July high has been corrective and warns that an impulsive Wave III is underway towards 3900.

S&P 500 daily chart

Nasdaq technical analysis

Much like the S&P 500, we have opined that the Nasdaq was missing another leg lower towards 14,200/000 as part of the correction that started in July. Earlier reporting can be found here and here.

The Wave C pullback from the early September 15,618 high (of a three-wave Elliott Wave ABC correction) has yet to reach the ideal pullback zone and appears to be missing a final leg lower (minor Wave V).

Should the pullback play out as expected, we then expect to see a recovery, which would see the Nasdaq test and break the highs of July and possibly set up a test of the bull market 2021, 16,764 high.

Nasdaq daily chart

• _{TradingView: the figures stated are as of 09 October, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}