The major averages emerging from a losing session, with rising Middle East tensions dampening risk appetite and investor enthusiasm for the new trading period. Stock futures declined on Wednesday morning as traders prepared for potential further losses at the start of October. Technology stocks were the worst performers on Tuesday. Investors are looking forward to gaining insights into private payrolls through ADP’s Employment Survey. Additionally, Friday’s nonfarm payrolls report is anticipated to significantly influence market direction and the Federal Reserve’s upcoming rate decisions as it begins its rate-cutting cycle.

European stocks edged slightly higher as investors tried to overlook the escalating tensions in the Middle East. The oil and gas sector saw a notable increase of 2.42%, while travel and leisure stocks dipped by 0.25% due to airlines diverting flights away from the conflict zone. Defense companies experienced gains amid rising conflict risks. Despite reporting revenues and profits that exceeded expectations for the first half, shares of British sports retailer JD Sports fell by 3.5%.

Hong Kong’s Hang Seng index surged over 6%, reaching a 22-month high and marking its sixth consecutive day of gains, driven by recent stimulus policies. Meanwhile, markets in mainland China were closed for the Golden Week holiday and will remain so for the rest of the week. In contrast, Australia’s S&P/ASX 200 dipped slightly by 0.13% to close at 8,198.2. South Korea’s Kospi experienced a more significant decline of 1.22%, ending at 2,561.69, while the small-cap Kosdaq slipped 0.23% to 762.13. Japan’s Nikkei 225 also saw a notable drop of 2.18%.

Economic Calendar

Earnings Calendar

Notable reports for Thursday before the bell include CAG & RPM. After the bell reports include LEVI.

News & Technicals’

Stephen Roach, a senior fellow at Yale Law School’s Paul Tsai China Center, warns that markets are at risk of being “whipsawed” due to the combination of regional conflict in the Middle East and rising unemployment in the United States. The situation in the Middle East intensified on Tuesday when Iran launched a ballistic missile attack on Israel following the killing of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon. Roach noted that the markets are likely to be uncertain about their direction, as the conflicts in the Middle East contribute to inflationary pressures just as global central banks are beginning to ease monetary policy.

The strike affecting ports along the East and Gulf coast could drive up prices for food, automobiles, and various other consumer goods, though the overall economic impact is expected to be modest. Key industries are likely to face significant challenges including coal, energy, and agricultural products. However, there are potential mitigations to the strike’s impact. West Coast ports are expected to absorb some of the freight that would typically be handled by the eastern ports. Additionally, some companies had foreseen the disruption and stockpiled goods in advance.

Nike has withdrawn its full-year guidance and announced the postponement of its investor day, originally scheduled for November. Despite beating earnings expectations by 18 cents, the company fell short on revenue as it focuses on refining its product assortment and revamping its innovation strategy. Additionally, Nike is preparing for a leadership transition with a new CEO set to take the helm.

In a Tuesday interview with CNBC’s Jim Cramer, Chipotle CSO Jack Hartung discussed the company’s business in California following a price increase in April. Hartung noted that there is “macro resistance” from consumers to inflation across the industry. He emphasized that the situation in California is more about broader economic impacts rather than specific resistance to Chipotle’s price hike. Hartung pointed out that restaurant transactions are down across the board, indicating a wider trend affecting the entire restaurant industry.

Clearly the rising Middle East tensions have added a dose of uncertainty and volatility to the price action but so far, the bullish patterns in the DIA, SPY and QQQ remain intact. In truth, yesterday pullback relieved a lot of overbought pressure and may well prove to have been a healthy relief.  Remember, it’s the follow-though that matters and with the sharply declining market breadth that could be tough to achieve.  Stick with the trend but be ready with a plan to protect your capital if or when Israel retaliates.

Trade Wisely,

Doug