Global equity markets wrapped up a volatile week with mixed results as the world assessed the implications of the Israel-Gaza war and the potential for it to escalate in the weeks ahead. Israel is in preparations for an expected ground invasion after the military ordered more than a million people to evacuate Gaza last week. Amid the geopolitical strife and uncertainty, investors sought safe-haven assets such as U.S. Treasuries, which pushed the 10-year Treasury yield down to 4.63% from 4.79% in the week prior, and gold, which pushed up the price of the precious metal by over 5% last week. U.S. equities notched a relatively muted response as the S&P 500 and Dow Jones managed to eke out gains of 0.5% and 0.8% last week and the Nasdaq Composite slid 0.2%. Energy and defense stocks were among the strongest performers, each up 4.5% on the week. Meanwhile, international equities climbed by 1.2% per the MSCI All Country World ex-US index.

As the conflict in the Middle East unfolds, the key to future market reactions is how broad the conflict becomes. Crude oil continues to be the most sensitive investment that could emit shocks through other markets by reigniting both inflation and economic demands fears simultaneously. If Iran is confirmed as a major actor in the attacks, the U.S. and its allies would likely impose stricter sanctions against the country, which now produces more than 3 million barrels per day of crude oil.

An energy supply shock would further complicate the fight against inflation, which has recently seen slowing progress following sharp price growth moderation through the first half of the year. Core CPI (excluding food and energy) accelerated for a second straight month in September with an 0.4% increase over August (up 4.1% year-over-year). Headline CPI also rose 0.4% in September (3.7% year-over-year), above expectations for a 0.3% increase, as rising energy prices pose a lingering upside risk to inflation expectations.

The concerning aspects of the September CPI report are not enough to cause the Fed to hike 0.25% at its next meeting in a few weeks, but it does keep another Fed hike in this cycle on the table. The FOMC meeting minutes, like the dot plot released at the last meeting, suggest a majority are still leaning toward further tightening. However, the tightening of financial conditions from the recent surge in long-term rates could give the Fed permission to leave the funds rate unchanged in a few weeks so that it can see what the impacts are on economic growth.

On the corporate earnings front, third quarter earnings season kicked off on a strong note last week with positively received results from major banks including JPMorgan, Citigroup and Wells Fargo. The big focus on the results from the large banks were better-than-expected credit trends with charge-offs and provisions for potential credit losses coming in below forecasts, easing concerns of the potential for deteriorating credit conditions amid higher rates. Net interest income also positively surprised despite continued deposit pressures. The S&P 500’s third quarter results overall are on track to post the first positive year-over-year increase in a year.

In the week ahead, earnings season will ramp up with over 10% of the S&P 500 on the docket to report results including heavyweights like Bank of America, Johnson & Johnson, Lockheed Martin, Netflix, Procter & Gamble, and Tesla to name a few. Market participants will also wade through important economic updates including September retail sales, industrial production, and housing activity as well as a full agenda of speeches from Federal Reserve members headlined by a speech by Jerome Powell at the Economics Club of New York on Thursday.