Wall Street surged on hopes of Gaza war ceasefire from pause

On Thursday, apart from the ongoing Gaza war, some focus of the market was also on Fed Chair Powell’s IMF speech, which turned out more hawkish than expected. This, along with a terrible US30Y bond auction (lower demand/few bidders even for $24B TSY auction/US debt), US bond yield surged again. Subsequently Wall Street Futures, Gold, and Silver stumbled despite a 4-hour daily humanitarian pause in the Gaza war and the increasing possibility of a 3-day ceasefire for the release of some hostages.

Various humanitarian groups have said the 4-hour pauses are inadequate and have repeated calls for a wider ceasefire and for more aid to be able to access the bombarded enclave. A well-known Middle East expert said: “Pauses are not a solution---what is needed is a ceasefire so that humanitarian aid can come in uninterrupted, that foreigners can leave the country, and maybe negotiations can take place. If this is only a pause to allow people to move from the North to the South, it did not work in the past, it will not work in the future. In four hours, people cannot come. They don’t have cars, they don’t have fuel. It’s not going to work. There is mounting pressure on Israel now to open up for a real ceasefire, a real truce for a day or two or three. I think that is coming in the next few days”.

On Thursday, U.S. President Biden said he was still pushing for longer pauses in Gaza to get captives released. But Biden’s request for a longer humanitarian pause was rejected by the Israeli PM. Overall, both Israel and the U.S. are under pressure globally and locally for the current stance of using excessive force without caring for the hostages/captives, even after considering the self-right of Israel to eliminate Hamas to ensure durable peace and safety for its citizens.

Middle East U.S. Diplomats are divided about U.S. policy for the Israel-Hamas/Gaza war, but they are also maintaining that till now, there are no signs of Iran or its proxies seeking escalation despite the exchange of fire between Israel and Hezbollah across the border with Lebanon: “We do not believe that a conflict involving Lebanon and Israel is in any way inevitable. The here-and-now reality is there is no indication on any side that there is an intent to precipitate a conflict or a war.”

Overall, Israel/IDF is now in the process of securing/controlling Gaza City completely including hospitals and other suspected hideouts of Hamas and may officially announce by Monday/weekend the full control of Gaza City and subsequent Ceasefire for at least 3-days for release of 10-15 hostages. U.S. CIA Director is personally involved in the overall negotiation process with Hamas through Qatar mediation and the backdoor negotiation is very active.

But what the world needs is a permanent two-state solution to this legacy problem of Gaza/Palestine/Hamas-Israel’s vicious cycle of violence/terrorism and war. Palestine/Gaza should be a full-scale sovereign state/country with its army and government rather than Hamas and the present state of anarchy. If it chooses to be a state of Israel, it has to be under Israel’s admin and security fully (like Indian-administered Kashmir or POK-Pak administered Kashmir or a separate Country like Taiwan-fully free from China). But such a permanent solution and subsequent peace & stability in the Middle East is also dependent on Iran and other proxies.

Qatar is also working with Saudi Arabia to stop Israeli attacks on Gaza. On Friday, Qatar’s Emir Sheikh met Saudi Arabia’s Crown Prince Mohammed bin Salman (MBS) in Riyadh shortly after arriving in advance of a summit of Arab leaders to be held Saturday. Qatar said its priorities were “to seek an immediate ceasefire, protect civilians, release prisoners, and work to limit the expansion of violence and the circle of conflict in the region”.

Norway has previously served as an interlocutor in the conflict, overseeing secret negotiations ahead of the signing of the 1993 Oslo Accords, which kicked off a series of now-defunct talks toward Palestinian self-rule. On Friday, Norwegian PM Store questioned how Israel’s actions in Gaza will create longer-term security, as promised by Israeli leaders: “The children who survive this hell in Gaza will not be reconciled in the future--- This is a war that I believe is being waged with a very strong military logic, but without a clear political idea of how it should end--- the only path forward is a two-state solution—the bit that’s not imminent-- the situation may get worse in the coming days”.

As per the latest opinion polls, most of the Israelis now do not trust PM Netanyahu to look after Israeli security after the 7th October Hamas terrorist attack. Israel is planning to stay in Gaza even after the war to secure its citizens back home, but the U.S. wants a complete withdrawal of IDF after the war, while an international force will be deployed in Gaza/Palestine instead. On Friday, Israeli PM Netanyahu reiterated that after the war, the besieged Gaza enclave would remain under Israeli security control.

Now from geopolitics to economics, after Thursday’s more hawkish-than-expected Powell speech/comments, Friday’s overall Fed talks were relatively less hawkish.

On Friday, Fed’s Bostic said:

·         Policy is effectively tighter as inflation falls and rates rise

·         We will continue to see spending and demand slow, it's going to take time

·         We got into restrictive territory about a year ago

·         There's still more work to be done on inflation

·         The Fed is well-positioned to let things happen

·         More monetary policy transmission is yet to come

·         I see 2024 GDP growth at 1.2% to 1.5%, a slowdown from now

·         There's still more work to be done on inflation

·         Fiscal policy is important in getting us to where we are now

·         Policy is effectively tighter as inflation falls and rates rise

On Friday, Fed’s Daly said:

·         We're likely to see a slower job market and lower growth

·         I don't see the economy falling into deep downturn

·         Policy is in a very good place

·         The risk of tightening and under-tightening are balanced

·         It's hard to know why yields are rising, there are likely multiple reasons

·         A strong economy & sideways inflation could warrant another hike

·         If inflation doesn't ebb further, the Fed would likely have to hike again

·         If financial conditions eased more, the Fed would need to take note

·         Bond yields are still up from where they were at the September FOMC meeting

·         I am not surprised by bond market volatility amid an uncertain outlook

·         The outlook for the economy is positive, but it's unclear if inflation will ebb as needed

·         I don't want to discount that the Fed is in a good place for policy

·         Too early to declare victory

·         I am unsure if the policy is restrictive enough in the current settings

·         Fed policy is significantly restrictive

·         We don't know if we're done hiking yet

·         I am not ready to say what the Fed's next move will be

·         It is too soon to declare victory over inflation

·         News on inflation has been good

On Friday, Wall Street Futures were also boosted by hopes of de-escalation of tech/cold war between the U.S. and China after the White House/China both confirmed that two Presidents (Biden and Xi) will meet at the sidelines of the APEC summit (14-17th October) at San Francisco. Biden will use meetings to communicate, avoid surprises and explain US policy to Xi. And Biden will underscore the desire for China to tell Iran not to escalate the Mideast crisis. Overall, Biden and Xi are to meet next week, and engage in 'in-depth discussions'.

On Friday, there was a report of a ransomware attack on the U.S. Treasury market as well as the Crypto market, which was boosted amid SEC/US BTC ETF optimism. As a result, U.S. bonds, which were already under pressure on subdued demand and higher supplies, slipped further.

On Friday, the U.S. Treasury Secretary Yellen said:

·         I haven't seen a Treasury market impact from the ICBC ransomware attack incident

·         The US and China agreed to try to speed up debt-relief progress

·         We would not want to see private sector decoupling from China based on misinformation

·         We are increasing our debt issuance along the long end of the curve but did that less in the most recent refunding, which seems to have had a favorable impact

·         China sees downward pressure on currency as a risk that could exacerbate capital outflows

·         China believes that it is forcefully addressing economic problems, prepared to take further actions

·         We do see evidence that there are Chinese firms that may be aiding in the flow of equipment to Russia as well as financial institutions

·         US seeks healthy economic relationship with China

·         Yellen expressed concern to China on critical mineral controls

·         Yellen also acknowledged significant risks to the global economy

·         Yellen emphasized that the United States seeks a healthy economic relationship with China that benefits both countries over time

·         US Treasury Secretary Yellen and China's He had candid, direct, and productive discussions

Market wrap:

On Friday, Wall Street was boosted by hopes of good relations between the US and China (positive for US MNCs and techs) and a Gaza war ceasefire (from a 4-hr pause to a 3-day ceasefire) coupled with less hawkish Fed talks. U.S. bonds slip again as a result of subdued demand and higher supplies coupled with ICBC ransomware disruption. Gold slid amid lower bonds and ease of Gaza war tensions.

On Friday, Wall Street was boosted by all the major 11 sectors led by techs, consumer discretionary, communication services, industrials, materials, banks & financials, real estate, energy, consumer staples, healthcare and utilities. Blue Chip DJ-30 jumped almost +390 points, broader SPX-500 surged +1.5%, while tech-heavy NQ-100 soared +2%, led by Microsoft, Apple, Alphabet, Amazon and Nvidia; Boeing also helped, while Walt Disney, Merck, Nike and J&J dragged.

Late Friday, Dow Future also slips to some extent (after the closure of the spot market) as Moody’s cut the outlook of US debt from positive to negative amid higher borrowing costs and surging fiscal deficits.

Moody’s said:

·         Changes outlook on United States' ratings to negative

·         Downside risks to the US fiscal strength have increased

·         The US fiscal deficits will remain very large

·         Debt affordability in the US to be significantly weakened

·         The US' long-term local- and foreign-currency country ceilings remain unchanged at AAA

·         Absent policy action fiscal strength will decline

·         Political polarization exacerbates fiscal risks

Technical trading levels: DJ-30, NQ-100 Future

Whatever the narrative, technically Dow Future (34340), now has to sustain over 34550 for any further rally to 34650-34855 and further to 35375-35875 in the coming days (if there is a Gaza ceasefire/Israel ends its intensifying surgical/military operation).; on the other side, sustaining below 34450/400-34300/34250, Dow Future may again fall to 33950/33650-33450/33150 and 32950/32650-32300/32200 and 32000/31750-31595/31190 and even 29400-28475 levels (in case of a wider major regional military conflict).

Similarly, NQ-100 Future (15600), now has to sustain over 15850 for any further rally to 5975/16075 in the coming days; otherwise sustaining below 15750/15600-15500/15450, may again fall to 15300 and again 15100/15000 and 14800/14600-14450/14300-14200/14100 and 14000/13800-13650/13500-13395/12990 and 12790/12400-12180/11650 and even 11000-10675 in the coming days. (under the worst scenario of Gaza regional war).

Whatever the narrative, technically Gold (XAU/USD: 1936) now has to sustain over 1932 for any recovery to 1950/1965 and 1980/1995-2008/2012 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 1932/1927-1923, may further fall to 1908/1904-1895/1885 and 1850/1810 in the coming days (if there was a Gaza war ceasefire).