🎙️ Retail Crime Epidemic

In times of crisis, whether economic or geopolitical (and often both), we’re reminded that financial markets, and the stock market in particular, do not perfectly mirror the emotions being felt…

The stock market, for example, is driven by one primary thing: Expectations about companies’ profitability in the coming quarters and years.

💭 Despite the horrific scenes plastered across the news recently, the S&P 500 was up today — short of a severe and lasting disruption to global oil markets, the implications for most American companies are limited.

More on the financial market impacts of the crises in Israel and Palestine below.

— Shawn and Matthew

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Israeli shekel gets $45 billion central bank pledge

• Oil prices jump after Hamas attacks Israel

• How retailers are trying to prevent widespread theft

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🇮🇱 Israeli Shekel Gets $45 Billion Central Bank Pledge

In the face of attacks from Hamas militants — a group deemed terrorists by the United States and European Union, and Israeli Prime Minister Benjamin Netanyahu’s declaration of war against them, Israel’s currency (the shekel) is facing intense volatility.

• When trading opened after the attack, the shekel promptly fell to its weakest exchange rate since 2016.

To stabilize the shekel’s exchange rate, Israel’s central bank intends to sell up to $30 billion worth of its holdings of foreign currencies, which would be used to purchase shekels in the open market, offsetting a wave of panic selling.

Swapping shekels: Additionally, the announcement carved out another $15 billion of support through currency swaps — a tool central banks sometimes use to temporarily exchange its local currency (in this case, shekels) for another major currency, like U.S. dollars.

How it works —

• With currency swaps, Israel’s central bank can directly inject U.S. dollars, for example, into the domestic financial system for those who want/need to access dollars.
  

• This allows the central bank to ensure that local banks and institutions have enough foreign currency to address their customers’ needs, reducing the number of people trying to exchange their shekels in currency markets.
  

• The central bank would later reverse the currency swaps once the panic selling has calmed and avoid permanently draining its foreign currency reserves.

Why it matters:

Still, the announced plan from policymakers to support the shekel provided only a brief reprieve. On Monday, in the vast global currency exchange market, the shekel was the world’s worst-performing currency, losing 2.6% of its value against the U.S. dollar.

• The Israeli central bank’s currency stabilization efforts are an “extraordinary intervention,” according to Bloomberg, marking the first currency intervention to boost the shekel since it was allowed to trade freely.

Another indicator of stress? For investors in the Israeli government’s debt, the cost to purchase insurance against the country defaulting reached the highest level since 2009 (known as ‘credit default swaps.’)

• Translation: The war’s uncertainty drives investors to buy financial protection; as more do so, the cost to purchase such insurance jumps.

What’s next: Israel’s central bank is generally considered to be a competent one. As they dust off their playbook for navigating crises, the hope is to minimize financial-market-induced disruptions in the nation’s $520 billion economy.

Read more

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🛢️ Oil Prices Jump to $89 Per Barrel After Hamas’s Attack

Besides currency markets, the oil market was the other big question on investors’ minds on Monday. After a summer rally, oil prices were finally cooling off. Now, escalating conflict in the Middle East has fueled a price jump of as much as 5%.

While oil approached $100 a barrel this summer, prices had been falling in the past week. Not anymore. 

• Israel produces a tiny amount of oil, but energy analysts say higher prices could last if fighting spreads throughout the region or Iran becomes actively involved. As a result, energy stocks soared in Monday’s trading session (the S&P 500 Energy index was up over 3%.)
  

• For safety reasons, Israel ordered Chevron to shut down natural gas production at one of its major offshore platforms nearby.
  

• This, and similar actions, as a byproduct of regional conflicts, disrupt global oil & gas flows, straining supply and pushing prices higher. That's why one Citi investment analyst commented, “War in the Middle East can be generically bullish for (oil).”

Slump no more: As we’ve been writing about in recent weeks, crude oil had a steady rally into the start of the fall. But prices slumped last week because of strong growth in oil output worldwide. The average price for a gallon of regular gasoline in the U.S. on Monday was $3.70, still 11 cents below a week ago. 

But now, another geopolitical problem is driving the price of oil higher, just like Russia’s invasion of Ukraine sent oil and natural gas prices upward early last year. 

Why it matters:

Broadly, financial markets tend to hate uncertainty — or more like perceived uncertainty — and geopolitical tension rarely means good news for stocks in the near term, except for defense stocks (the S&P 500 Aerospace & Defense index jumped some 5% on Monday.)

In this case, political tension likely means higher prices at the pump and prolonged challenges around inflation. 

Higher energy prices in 2022 became a leading reason for some of the highest inflation globally in decades. 

• Major producers Saudi Arabia and Russia exacerbated the issue by cutting supply.
  

• By late September this year, Brent crude, the international oil benchmark, sat above $97 a barrel. But the conflict could take up to 500,000 barrels of crude off the market daily, increasing prices.

Uneasy markets: As another analyst wrote: “Given the rising tension in the region and the risk that the conflict could spread, market participants will remain nervous until there is a clear de-escalation.”

Read more

MORE HEADLINES

💬 Live updates on the Israeli-Palestinian conflict

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🛰️ Amazon successfully launches its first internet satellite

🤝 Bristol-Myers Squibb to acquire Mirati in $5.8 billion deal

🏳️ Why Elon Musk may lose his latest battle with the SEC

QUICK POLL

On Friday, we asked: Do you use stock options in investing?

— 47% said “No”

— 31% said “Yes”

— 22% said “Not yet, but I want to”

🏬 How Retailers Prevent Theft & Reduce Crime

For at least the past several months, big stores of all types have been impacted by organized crime efforts and theft. Many Americans' favorite stores, from Walmart to Macy’s, Dick’s Sporting Goods, and Nordstrom, are targets. And it’s hurting their bottom lines. 

Executives at all these major stores blamed criminal networks for causing problems with inventories, causing some to close stores hit by theft and crime. 

• Home Depot uses closed-circuit TV cameras to monitor activity within all its stores.
  

• Yet, it’s still hard for retailers to stop complex retail crime. Even with help from law enforcement, it’s an intricate process to connect individual theft to larger groups. 

Retailers respond: To mitigate the issue, retailers invest in enhanced surveillance and security and their own crime investigations. Prosecutors nationwide also have heightened awareness of the issue that has become part of executives’ vocabulary during earnings calls this year. 

• “A successful organized retail-crime organization has to have somebody pulling the strings,” Home Depot’s VP of asset protection told The Wall Street Journal. 

Earlier this year, attorneys in Washington, Texas, and Pennsylvania said they had arrested or sentenced people who made millions of dollars stealing from retailers and then selling items on eBay and Facebook Marketplace, among other e-commerce sites. 

Manhattan’s District Attorney said his office is focused on prosecuting organized retail crime: “Those who steal cannot reap their profits without someone to resell.” 

Why it matters:

Organized crime has hit the balance sheet. 

In August, Dick’s Sporting Goods blamed “organized retail crime” for driving down its quarterly profits by nearly 25%. It was just the latest large retailer to feel the effects of the “epidemic” of theft nationwide. 

• Home Depot has set a trend by employing loss-prevention personnel to closely monitor security footage at its 2,322 stores in North America. 

Shrinking: Retailers use the term “shrink” to describe losses from theft and lost or damaged goods. The National Retail Federation reported that shrink accounted for $112.1 billion in losses last year, up from $93.9 billion in 2021. 

• Target, for instance, said there’s been a 120% increase in theft incidents involving violence or threats of violence this year. 

The solutions: Retailers are pouring money into surveillance, closing stores in areas hit hard by crime (San Francisco is one), and developing technology that renders power tools inoperable unless scanned and purchased. 

Read more

See you next time!

That's it for today on We Study Markets!

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