Gold and oil slumped for an imminent Lebanon war ceasefire

·         Wall Street surged; Israel-US may announce a temporary 60-day Lebanon war truce/ceasefire by Tuesday

·         Wall Street was also boosted as Trump’s proposed next US TSY Secretary is being seen as Wall Street-friendly, deficit hawk, and moderate, who can ‘manage’ Trump’s potential bellicose policies

Gold surged last week on escalating Ukraine war tensions and Putin’s nuke rhetoric; Gold recovered from around 2535 to almost 2720 last Friday (22nd November). Previously, Gold stumbled from life time high area of 2795 to 2535 after it became clear that Iran may not retaliate against Israel as Trump is set to take charge of the White House. The US President-Elect Trump may fill up the global leadership vacuum at the White House created by senile Biden and Trump’s bellicose tweets are enough for ‘disgruntled’ leaders of US allies such as Ukraine’s President Zelensky, the ‘smartest salesman of the year—takes barely ten minutes to convince Biden for approval of a grant of millions of dollars. Even Netanyahu may be forced for an imminent Gaza/Lebanon war ceasefire deal under Trump.

On early Asian Session Monday, Gold and oil stumbled, while Wall Street and European Futures also got some boost after a report that Israel said to agree in principle to Lebanon's ceasefire offer, though some issues remain. Netanyahu's consults reportedly focused on how to sell the agreement to the public; the US envoy was said to have warned if no truce now, sides would have to wait for Trump. But by the mid-European session, Gold and oil again got some boost (short covering), while Wall Street Futures slipped after Trump’s comments against Iran for nuclear agreement issues.

There were also reports of heavy fighting between Israel-Hezbollah/Lebanon and even civilian buildings/high-rises in South Lebanon were flattened. Israel may have also intended to step up its strikes on Hezbollah targets in Beirut to damage as much of its capabilities as possible before a deal was finalized.

On Monday, soon after the US session started, Gold, and oil again slumped, while Wall Street Futures surged after the US confirmed an imminent Lebanon/Hezbollah war ceasefire:

As per TOI reports, Lebanese and Israeli officials reached an agreement on the terms of a ceasefire deal that would put an end to the conflict between Hezbollah and Israel Lebanese and Israeli officials reached an agreement on the terms of a ceasefire deal that would put an end to the conflict between Hezbollah and Israel, Axios reported early Monday, citing a US official: "We think we have a deal. We are on the goal line but we haven't passed it yet. The Israeli cabinet needs to approve the deal on Tuesday and something can always go wrong until then." The agreement will include a US-led monitoring committee to oversee implementation and address violations.

On Sunday, Israeli media reported that PM Netanyahu approved a ceasefire deal "in principle," adding that several agreement issues are still to be resolved. Furthermore, the Israeli military told Netanyahu that the time was right for a ceasefire since it had achieved its goal of destroying Hezbollah's infrastructure on the Israel-Lebanon border.

As per the latest TOI reports late US season, Monday:

·         Israel set to okay 60-day Lebanon truce Tuesday, but pledges to act against Hezbollah

·         The threat of US action at the UN played into Jerusalem’s decision-making; even if reluctantly, ministers will get in line behind the cessation of hostilities

·         Israel decided it had no choice but to accept a ceasefire, out of fear that US President Biden’s administration could punish Israel with a UNSC resolution in its final weeks before leaving the White House

·         Israel is also missing capabilities it needs from the US, including 134 D9 bulldozers

·         Netanyahu will convene the high-level security cabinet in Tel Aviv on Tuesday evening to approve a 60-day ceasefire with the Hezbollah

·         Israel was accepting a cessation of hostilities, not an end to the war on Hezbollah: We don’t know how long it will last---It could be a month, it could be a year”

·         Israel’s freedom to act in Lebanon after the ceasefire is guaranteed by a letter between it and the US

·         The Israel Defense Forces will be able to operate not only against those trying to attack Israel but also against Hezbollah’s attempts to build up its military power: “We will act”

·         Lebanon’s deputy speaker of parliament said on Monday that there are “no serious obstacles” left to beginning the implementation of the US-proposed truce

·         One sticking point on who will monitor the ceasefire was resolved in the last 24 hours by agreeing to set up a five-country committee, including France, chaired by the US

·         Earlier, Israel has been insisting that France not be part of the agreement or be a member of the international committee that will monitor a deal’s implementation, due to its perceived hostility toward Israel

·         But once France indicated on Friday that it would not be committing to the arrest of PM Netanyahu, in the wake of arrest warrants issued against him by the International Criminal Court (ICC) — only then did Israel “take note” of the decision and Israel was willing to accept French involvement

·         Truce won’t include a buffer zone, will let south Lebanon residents return home

·         Israeli Far-right political parties & allies warned against the emerging Lebanon ceasefire as Hezbollah barrages continue

·         Biden & France’s President Macron are to announce a Hezbollah ceasefire deal within 36 hours

·         The US believes that the gaps have been narrowed significantly but there are still steps that we need to take

·         The US doesn't believe it has an agreement yet on Lebanon

·         The US is hopeful that it can get to an agreement on Lebanon but it needs both parties to get to a yes

On Monday, UST10Y bond prices surged, and yield edged down -0,.14% to 4.27%, buoying Wall Street Futures and undercutting Gold as President-Elect Trump selected former hedge fund manager Bessent as the next US Treasury Secretary under his admin:

·         Billionaire and former donor of Democrats, Bessent is also a former Wall Street guy and thus seen as ‘Wall Street Friendly’

·         Wall Street hopes that Bessent can moderate some of Trump’s hawkish campaign promises on tariffs and immigration that may boost inflation

·         Deficit Hawk: Bessent has a target of 3% GDP growth, reducing the deficit to 3% of GDP

·         Oil Drill/fracking savvy:  Targeting increasing US oil production by 3 mbpd

As the next US Treasury Secretary, Bessent’ Priorities are:

·         Making Trump's first-term tax cuts permanent

·         Eliminating taxes on tips, social security benefits, and overtime pay

·         Enacting tariffs and cutting spending will also be a focus

·         Maintaining the status of the dollar as the world’s reserve currency

·         Moderately hawkish on tariffs on a selected basis

·         Tariffs can’t be inflationary because if the price of one thing goes up unless you give people more money, then they have less money to spend on the other thing, so there is no inflation

·         The inflation comes through either increasing the money supply or increasing the government spending, and that’s what happened under Biden

On Monday, Fed’s Goolsbee said:

·         We're closer to the median on neutral rate estimates

·         I caution against focusing on inflation in any one-month

·         Rates have a fair way to go before they get to neutral

·         Interest rates will be lower by the end of 2025

Conclusions:

As US core inflation almost stalled in H2CY24 around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed may pause in December’24 to asses more data and Trump policies on inflation and employment. As per Taylor’s modified rule, considering the desired real REPO rate of +1.0%, core CPI inflation targets of +2.3%, unemployment targets of 3.5%, and real GDP growth targets of 3.0% and expected 2024 average levels, the Fed should cut REPO rate from present +5.0% to 4.0% by Dec’25. But the Fed may cut -25 bps in Dec’24 too to frond load rate cuts and be able to be ahead of the curve despite core disinflation almost stalled in H2CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

The projected Fed rate cut of 25 bps in Dec’24 may not be assured as US core disinflation may have stalled in Q4CY24 too, while average unemployment remains around 4.0%. Fed may also give a pause in Dec’24 even after favorable data in November for any cuts as the Fed may also want to see Trump 2.0 policies, especially immigration and threatened deportations, which may again tighten the labor market and boost inflation.

Fed Chair Powell may also pause in December’24 and resume cutting again from March’24 after analyzing/digesting potential Trump policies and also to keep President Trump in a ‘good mood’ by not cutting rates ‘unnecessarily too much’ under Biden Presidency.

Thus, apart from economic data issues, political compulsion may also Powell not to take such a huge risk and irritate Trump by going for an ‘unnecessary’ cut in December’24. Thus Fed may cut in December’24 and may continue to cut every alternate meeting (QTR end with a fresh SEP/Dot-plots) in 2025-26 to H1CY27 for a longer-term terminal repo rate around 3.0% against projected core inflation (CPI+PCE) around 2.0%; this will translate a real REPO rate +1.0%.

Bottom line:

Fed may pause in December’24 after cutting 75 bps cumulative in September and November’24. And then depending upon actual core inflation and employment trajectory, if there is no major surprise on any side, the Fed will gradually cut rates from March’24 for every alternate meeting (QTR end) till at least H1CY27. Fed may cut cumulative 100 bps each in 2025-26 and 59 bps in 2027 for a longer-term neutral repo rate of 3.00%. The market is still now discounting around 53% of the 25 bps Fed rate cut in December’24. Although it stumbled from around 85% in the last two weeks after less dovish Fed talks including comments by Powell, the Fed may ensure around 0% by December 1st week before going for a blackout for the 18th December FOMC meeting. Thus  Wall Street Futures and Gold may slip in the days ahead and the market/Fed will now focus on November NFP/BLS job data before the blackout period and also core inflation data during the blackout period.

Market Impact:

On Monday, Wall Street Futures surged, while haven assets like Gold, and Silver plunged on the prospect of an imminent temporary truce/ceasefire between Hezbollah/Lebanon and Israel/US. Also, Trump’s selection of Bessent as the next US Treasury Secretary boosted UST, dragged USD/US bond yields to some extent, and buoyed US stocks, while undercutting Gold. Oil, Gold and also Wall Street Futures wobbled on hopes & hopes of an imminent Lebanon war ceasefire.

On Monday, blue-chip Dow Jones Industrial Average (DJ-30) surged over +1% and scaled a new life time high almost at 44900, while tech-heavy NQ-100 and broader SPX-500 futures edged up +0.3%. Wall Street was boosted by real estate, consumer discretionary, materials, healthcare, communication services, industrials, banks & financials, consumer staples, and utilities, while dragged by energy (lower oil amid hopes on an imminent Lebanon war ceasefire and Trump’s policies of ‘drill-baby drill’).

On Monday big techs were mixed; Amazon and Alphabet surged, while Nvidia and Netflix slumped. In corporate news, Macy’s plunged after delaying its Q3 earnings release due to an investigation uncovering over $100 million in hidden expenses. Bath & Body Works surged on upbeat guidance, while MicroStrategy plunged after announcing a record $5.4 billion Bitcoin purchase. Wall Street was also dragged by Chevron, Walmart, Salesforce, Travelers, and Amgen, while boosted by Boeing, United Health, Nike, Caterpillar, Apple and JPM.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44850) now has to sustain over 45100-45200 for any further rally to 45500-46000 in the coming days; otherwise sustaining below 45000/44750-44650/44200, DJ-30 may again fall to 43900/43300-42600/41600 in the coming days.

Similarly, NQ-100 Future (21150) has to sustain over 21500 for a further rally to 21700/21900-22050/22500 and even 23000 levels in the coming days; otherwise, sustaining below 21450-21350, NQ-100 may again fall to 20950/20850-20500/20300 and 20000/19800-19650/19350 in the coming days.

Technically, SPX-500 (CMP: 6000), now has to sustain over 6100 for any further rally to 6150/6200-6350/6500 in the coming days; otherwise, sustaining below 6075/6050, may again fall to 6000/5950-5900/5850 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2600) has to sustain over 2595 for a recovery to 2635/2675-2700/2715 and further 2725/2750-2775/2795 in the coming days; otherwise sustaining below 2590-2565, Gold may further fall to 2550/2500-2470/2450 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2100 levels if Trump indeed can mediate both Gaza and Ukraine war ceasefire by early 2025.