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Stocks reversed losses Monday to finish higher, even as the burgeoning Middle East conflict added a dose of geopolitical risk to the interest rate and inflation concerns already facing markets.

At the close, the Dow Jones Industrial Average (^DJI) was up 0.6%, or almost 200 points. The S&P 500 (^GSPC) also gained about 0.6%, while the tech-heavy Nasdaq Composite (^IXIC) edged up nearly 0.4%.

Islamist militant group Hamas launched a large-scale attack on Israel on Saturday, prompting a declaration of war in response. That has rattled markets, as investors worry that another full-blown conflict could join the war already being waged between Russia and Ukraine.

"Geopolitical risk doesn't tend to linger long in markets, but there are many second-order impacts that could come through in the weeks, months, and years ahead from this weekend's developments," Deutsche Bank strategist Jim Reid said.

Oil prices jumped to start the week amid speculation that key crude-producing countries in the region could be pulled into the fray. WTI crude oil futures (CL=F) and Brent crude futures (BZ=F) traded over 4% higher as fighting entered its third day. Meanwhile, safe havens gold (GC=F) and government bonds were in demand.

Defense-related stocks saw some of the biggest moves upward Monday. Lockheed Martin (LMT) was up almost 9%, Northrup Grumman (NOC) jumped over 11%, and General Dynamics (GD) rose over 8%, among others.

Investors have been increasingly facing up to the reality that borrowing costs are likely to stay higher for longer, with the surprisingly hot September jobs report on Friday just the latest data to make the case for more restrictive policy.

The recent rise in bond yields to 16-year highs shook investors who were already worried about the impact on the economy of further rate hikes and put pressure on stocks.

But it could give the Fed a reason to pause hiking, given some of its officials believe the bond rout is likely to tighten credit considerably. Trading in US Treasuries was closed on Monday for the US holiday.

The next crucial economic indicator up is the Consumer Price Index (CPI) for September, due on Thursday and expected to show a small drop in headline inflation. The release this week of minutes from the Fed's last meeting should also provide more insight into policymakers' thinking about the path of interest rates.

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