Dow slips on Gaza war panic and Fed’s higher for longer talk

On Tuesday, Wall Street Futures were almost flat, while US bond yield jumped to over +4.8% on hotter-than-expected US retail sales and subdued demand for US debts. Gold edged up on Israel-Hamas/Gaza war tensions. Moreover, techs dragged Wall Street as the U.S. put more restrictions on AI chip exports to China. Overall, Wall Street Futures were stable on hopes of an Israel-Hamas truce rather than an all-out war over Gaza as Biden/U.S. is trying for an amicable solution. Dow Future was also dragged on simmering geopolitical tensions as Israel allegedly bombed a civilian hospital in Gaza, killing at least 500 people. But Wall Street was also boosted by hopes of a Fed pause/pivot.

On Wednesday, all focus was on Biden’s Israel visit to gauge whether Israel calls for any ceasefire/truce or continue the Gaza operation to release 199 hostages. But Wall Street Futures again stumbled after it became almost clear that Israel would not relent until it secured those 199 hostages. Lebanon's Hezbollah announces that Wednesday is a day of unprecedented anger against Israel, and Biden's visit to Israel. Oil jumped as Iran's Foreign Minister called for oil embargo against Israel. Also, Russia's Oil Exports via Western Ports are set to decline in November as refineries finish maintenance.

On Wednesday, the U.S. imposed new sanctions on Hamas and its investments. The US Treasury said:

·         Sanctions aim to root out Hamas sources of revenue in the West Bank and Gaza

·         Sanctions targets include individuals managing assets in a secret Hamas investment portfolio

On Wednesday, U.S. President Biden said:

·         The US will make sure Israel has what it needs to defend itself

·         The US stands with Israel

·         The Pentagon has shown evidence Israel didn't hit the hospital

·         There is no US offer for troops if Hezbollah starts war on Israel

On early Wednesday, the UN Secretary-General Guterres said at China’s Belt and Road Forum:

·         I call for an immediate humanitarian ceasefire

·         I appealed to Hamas for the unconditional release of hostages; and to Israel to allow immediate access to humanitarian aid for Gaza

·         Infrastructure is a crucial pathway; we can and must turn the infrastructure emergency into an opportunity

·         Kazakhstan President at Belt and Road forum: In the next three years we plan to build 1300 km of railways, we will build the first cross-border railway on China's border and establish new land ports

·         China's President Xi at Belt and Road Forum:

·         Will remove foreign investment access restrictions in the manufacturing sector

·         China will put forward a global initiative for artificial intelligence governance

·         In 2024-2028, China's total trade in goods and services is expected to exceed $32 and $5T respectively

·         China will deepen reform in state-owned enterprises, digital economy, intellectual property and government procurement

·         Ideological confrontation, geopolitical rivalry, and bloc politics are not a choice for us; what we stand against are unilateral sanctions, economic coercion, and decoupling of AI

·         This network has boosted the flow of goods, capital, technology, and human resources into the countries involved

·         The Belt and Road cooperation has progressed from sketching the outline to filling in the details, blueprints turned into real projects

·         Russian President Putin: I talked for 3 hours with China’s President Xi. We discussed Ukraine and the Middle East

On early Wednesday, Wall Street Futures also slipped after hotter-than-expected economic data (GDP, retail sales and industrial production) from China as it may prevent more stimulus from both monetary and fiscal authorities in the coming days. Also, China’s property firm Country Garden defaulted on its bond coupon/interest payment. 

On Wednesday China Stats Bureau said:

·         Chinese Retail Sales YoY Actual 5.5% (Forecast 4.9%, Previous 4.6%)

·         Chinese Unemployment Rate Actual 5% (Forecast 5.2%, Previous 5.200%)

·         Chinese GDP QoQ SA Actual 1.3% (Forecast 0.9%, Previous 0.8%)

·         Chinese GDP YoY Actual 4.9% (Forecast 4.5%, Previous 6.3%)

·         Chinese Industrial Output YoY Actual 4.5% (Forecast 4.4%, Previous 4.5%)

·         Positive effects emerged due to the policy support of the property sector

·         If China's Q4 YoY GDP growth could hit above 4.4%, the full-year target of around 5% could be achieved

·         There is still room for urbanization in China, underpinning persistent and high-speed development of China's property sector

·         The positive momentum of China's economic recovery is more obvious in Q3

On Wednesday, Fed’s Harker reiterated calls for an extension of pause on interest-rate increases:

·         Let’s see how things evolve over the next few months

On Wednesday, Fed’s Waller said:

·         We still have one rate hike penciled in, which will be driven by the data if it happens, or when

·         No one expects any kind of rate cut soon

·         We need to see how inflation progresses in 6-12 months, and then see about cutting rates

·         If we saw inflation coming down to 2.5%, the Taylor rule would say to cut rates

·         I don't want to address rate cuts when hikes have not stopped

·         We can run our balance sheet down a total of $2 to $2.5T and keep reserves ample

·         It's too soon to tell if more policy action needed

·         I'll be patient in waiting for the data to document how spending evolves

·         Time will tell if higher rates dampen business spending, or subsidies and onshoring increase it

·         I anticipate an unusually tight labor market to continue loosening, but I am watching closely

·         I see clear progress on inflation, there are a couple of reasons to be concerned that progress may not continue

·         If the real economy slows, we can hold the policy rate steady

·         More action on policy rates would be needed if demand and economic activity keep up with the recent pace

·         The past few months data is overwhelmingly positive for the Fed's employment, inflation goals

·         I will be watching how recently risen longer-term rates evolve and impact financial conditions, economic activity

·         It is too soon to tell if more policy rate action is needed

·         We can wait, watch, and see before making definitive moves on the policy path

·         Higher long rates for whatever reason put in tightening

·         Consumer spending has been surprising and doesn't seem to be pulling back

·         I'm still hopeful that rate hikes will slow spending and inflation

·         Events in the Middle East are horrific but it's hard to see much impact on the US macroeconomy

·         The data shows job market can cool via the reduction in job vacancies and not necessarily a loss of jobs

·         Balance sheet reduction was priced in a long time ago, all the Fed is doing now is fulfilling that expectation

On Wednesday, Fed’s Williams said:

·         I'm not declaring victory over inflation, but I see progress

·         Still have a ways to go to get inflation back to the target

·         There still seems to be more potential excess consumer savings than people think

·         Inflation has come down quite a bit

·         Fed officials' forecasts show rates falling next year

·         The Fed needs restrictive monetary policy for a while to cool inflation

·         AI will fundamentally change the work we do

·         I am not convinced yet that the neutral interest rate has risen

Meanwhile, the latest Poll of economists indicated:

·         The Fed to keep the fed funds rate on hold in the 5.25%-5.50% range on November 1st, said 90 of 111 economists

·         The bigger risk is that the first Fed funds rate cut comes later than expected, said 26 of 28 economists

·         The majority are expecting a Fed rate cut by mid-2024 reduced to 55% from 71% in the previous poll as some delay forecast

·         The Fed is to wait until at least Q2 before cutting rates, said 91 of 111 economists

Fed’s latest Beige Book was less hawkish than expected:

·         Several districts reported a decrease in the number of firms expecting significant price increases moving forward

·         Labor market tightness continued to ease across the nation

·         Consumer spending was mixed, especially in auto & general retail

·         Most districts indicated little to no change in economic activity since the September report

·         Prices continued to increase at a modest pace overall

As per some reports Israeli PM Netanyahu has won private backing from U.S. President Biden to press ahead with a ground invasion of Gaza. Biden reportedly told Netanyahu he remained ‘fully in support’ of Israel’s plans in a closed-door meeting. Biden will address the nation on the response to Hamas' terrorist attacks against Israel and Russia's war against Ukraine at 8 pm US Eastern time on Thursday, 19th October, which is 0000 GMT.

Market wrap:

On Wednesday, Wall Street Futures slid on lingering uncertainty about the Israel-Hamas Gaza war trajectory, the Fed’s ‘higher for longer’ policy and mixed/subdued corporate report card/updates. Blue chip the Dow Jones (DJ-30) slid more than -330 points lower and the broader SPX-500 tumbled -1.3%. The tech-heavy Nasdaq (NQ-100) stumbled -1.6% led by losses from Nvidia (-4%), Tesla (-4.8%) and Amazon (-2.5%). On the earnings front, Morgan Stanley tumbled as profit shrunk. United Airlines slid on guidance warning as the company said a halt in flights to Israel and high fuel (ATF) costs would hurt Q4CY23 profits. In contrast, P&G surged after reporting quarterly earnings and revenue that topped analysts’ expectations but volumes fell for the 6th consecutive quarter. Nvidia and AMD extended the plunge after restrictions were announced on the sale of AI chips to China on Tuesday.

On Wednesday, Wall Street was boosted by energy (higher oil), and consumer staples, while dragged by healthcare, utilities, techs, communication services, financials, real estate, consumer discretionary, industrials, and materials.

Technical trading levels: DJ-30, NQ-100 Future, Gold and oil

Whatever may be the narrative, technically Dow Future (33825) now has to sustain above 34350 levels for a further rally to 34500-34600 and further to 34825-35070/200-415/850 levels; otherwise, sustaining below 34300, Dow Future may again fall to 34150/34000-33900/33700 and further to 33600/33450-33200-32950 and 31700-31500 levels in the coming days.

Similarly, NQ-100 Future (15036) now has to sustain over 15500 levels for a further rally to 15750/900-16000/655 in the coming days; otherwise, sustaining below 15450/400-15300/200, may again fall to 15000-14700, and further to 14500-14300/175-100/13890 and 13650-13125 levels

Gold (XAU/USD: 1950) now has to sustain above 1935-1940 for any further rally to 1965/1975-1990/2020 and 2080 levels; otherwise, sustaining below 1930-1925, may again fall to 1918/1910-1900/1895 and 1885/80 -1870/60-50/40 and 1825/1810-1798*/1770 level in the coming days.

Similarly, oil (87.25) now has to sustain over 86.50 for 88.30-89.00 for a further rally to 92.00/95.00-100.00/105.00; otherwise sustaining below 88.50-87.50, the oil may again fall to 84.00/82.00-80.50/77.75 in the coming days.