Stocks surged on Trump-Xi friendly talk and Gaza war ceasefire

·         Wall Street set to scale lifetime high next week on hopes of less hawkish Trump 2.0 tantrum and Gaza war ceasefire optimism

·         Gold may slip on Gaza war ceasefire; Fed may not cut in Q1CY25 despite soft core CPI and retail sales data for Dec’24

·         At around $200 TTM EPS for Q3CY24, and 6000 levels SPX-500, the TTM EPS is now around 30, at extreme bubble zone against average fair PE 22, and EPS growth around 10%

Wall Street Futures surged Wednesday on renewed hopes of the next Fed rate cut from May instead of July. Also, hopes of an imminent Gaza war ceasefire boosted stocks to some extent along with an upbeat report card from banking major JPM. But last-minute reported hurdles by Hamas and domestic coalition political compulsion are also delaying approval of the Gaza war ceasefire and hostage exchange deal by the Israeli Parliament, boosting Gold, and undercutting stocks. On Thursday, Wall Street and also Gold got some boost on softer than expected US retail sales and jobless claims, which may keep the Fed on more dovish rate cut paths; i.e. 100 bps rate cumulative cuts in 2025 against current sot-plots projections of 50 bps.

On Friday, Wall Street Futures surged on hopes of a less hawkish Trump 2.0 tantrum after incoming US President Trump called Chinese President Xi and had a friendly talk. Trump Truthed: “I just spoke to Chairman Xi Jinping of China. The call was a very good one for both China and the U.S.A. I expect that we will solve many problems together, and start immediately. We discussed balancing Trade, Fentanyl, TikTok, and many other subjects. President Xi and I will do everything possible to make the World more peaceful and safe!”

It’s now almost clear that contrary to general market expectations, Trump 2.0 would be less hawkish compared to Trump 1.0 bellicose policies, especially trade, teaching, and cold war against arch-rival/competitor China and even Russia, amid the growing influence of Tesla/Twitter/SpaceX CEO Musk. The world’s richest Billionaire Musk has good relations and business interests with China. Musk has reportedly also been in close contact with Russian President Putin since the start of the Ukraine war and also has a big business plan in Russia with Star Link satellite-based broadband. Thus it’s expected for his business interest or any larger ‘conspiracy’ by China & Russia, Musk & Co will ensure a moderate Trump 2.0 tantrum. And in any way, whatever the narrative, a less war-savvy and practical Trump 2.0 regime may be more dovish than his often bellicose comments from trade/tariffs, immigration/deportations, and even techs. Thus Trump 2.0 may be less hawkish than expected and thus heavy US MNCs and techs got some boost Friday.

On Friday, European indices, especially export-heavy German Dax 40 also surged on less hawkish Trump 2.0 optimism and an imminent start of the Gaza war ceasefire & hostage deal from Sunday (19th Jan’25). On Thursday (16th Jan 25), after days of suspense, Israel and Hamas finally agreed to the Gaza war ceasefire and hostage deal, marking a significant step toward peace after 15 months of hostilities. The Israeli security cabinet approved the deal on 17th January, with the full cabinet's endorsement anticipated shortly by Saturday. Israel and Hamas reached a ceasefire agreement, mediated by Qatar and the US, after 15 months of conflict.

Key components of the Gaza war ceasefire agreement and other developments:

·         Hostage and Prisoner Exchange: An initial release of 33 Israeli hostages by Hamas is set to begin on Sunday (19th Jan’25). In return, Israel will free hundreds of Palestinian prisoners. This exchange is part of a broader plan to release all hostages and detainees in subsequent phases.

·         Phased Ceasefire: The agreement outlines a three-phase process, starting with a 42-day truce. The first phase focuses on the immediate exchange of hostages and prisoners. Subsequent phases aim for a complete withdrawal of Israeli forces from Gaza and steps toward a permanent end to the conflict. The first phase includes the release of 33 Israeli hostages and a partial withdrawal of Israeli forces from populated areas in Gaza.

·         Humanitarian Aid: The ceasefire will facilitate a significant increase in humanitarian assistance to Gaza, addressing the urgent needs of the civilian population affected by the prolonged conflict.

·         Ongoing Violence: Despite the announcement of the ceasefire on Thursday, Israeli airstrikes continued in Gaza, resulting in significant civilian casualties even after the agreement was made public. This ongoing violence and Israel’s domestic political compulsion raise concerns about the stability of the ceasefire in the coming days.

·         Skepticism about Longevity: Some geopolitical analysts express doubts about the sustainability of the ceasefire without a broader political process. Concerns have been raised about Israel's commitment to fully withdraw its forces and adhere to the terms of the agreement. There are fears that political pressures within Israel could lead to renewed military actions against Hamas after initial hostages are released.

·         International Response: Humanitarian organizations welcomed the ceasefire agreement and pledged to enhance their operations in Gaza, emphasizing the need for unrestricted humanitarian access to alleviate suffering caused by the conflict.

·         On Saturday Twenty-four members of Israel’s cabinet approved the ceasefire deal with Hamas, while the eight that opposed the ceasefire comprised two members from Netanyahu’s Likud party, and three members each from far-right parties Otzma Yehudit and Religious Zionism.

·         Israel’s Justice Ministry has released the names of 737 Palestinians slated to be released from Israeli prisons in exchange for Israeli captives in Gaza as part of the first phase of the ceasefire, which comes into effect on Sunday.

·         Israeli attacks allegedly continued across Gaza despite the imminent ceasefire, including a strike on a tent shelter for displaced Palestinians.

·         A Houthi political bureau member has said the truce between Israel and Hamas “ends the war but does not end the conflict”, and the Yemeni group will end its military operations when Israel’s aggression against Gaza stops.

·         During the first phase, Israel and Hamas are supposed to hold negotiations regarding the terms of the second phase during which the remaining living hostages will be released. The mediators will serve as guarantors to ensure that the parties remain at the table until an agreement on the second phase is reached, allowing the ceasefire to extend. The second phase would conclude with a permanent ceasefire.

·         Fifty-five percent of the public wants the deal to continue, even though that means ending the war.

·         Twenty-seven percent of the public believes the war should resume after the first phase while 18% say they don’t know.

This agreement was brokered with the mediation of Egypt, Qatar, and the US, reflecting a concerted international effort to halt the violence and initiate a path toward lasting peace. While the ceasefire represents a hopeful development, the situation remains dynamic, and the successful implementation of the agreement will require continued commitment from all key stakeholders. This situation remains fluid, with further developments expected as both parties work through the details of the agreement.

On Friday, PA President Abbas says ready to govern Gaza after ceasefire deal: Abbas said that the Palestinian Authority (PA) is ready to assume “full responsibility” in post-war Gaza, in his first statement since a ceasefire deal was announced between Israel and Hamas. While Hamas has exercised full control in Gaza since 2007, the PA, dominated by the Fatah movement, runs the West Bank which has been occupied by Israeli forces for decades; currently, Israel has no definitive stance on post-war governance in Gaza beyond rejecting any role for both Hamas and the PA.

·         The Palestinian government, under President Abbas’ directives, has completed all preparations to assume full responsibility in Gaza.

·         Those responsibilities include the return of the displaced to their homes in Gaza, providing basic services, and management and reconstruction of the war-torn territory.

On Saturday, Qatar’s Foreign Ministry spokesman announced the Gaza ceasefire will start on Sunday at 8:30 am local time in Gaza (06:30 GMT): “We advise our brethren to remain cautious, exercise the utmost care, and wait for instructions from official sources.”

As per TOI reports, Israeli PM Netanyahu allegedly told his cabinet ministers:

·         US President-elect Trump will give Israel full support to resume the war if the agreement is violated

·         Trump decided when he took office on Monday that we will again receive all the weaponry that was held up, which is important because if we don’t reach the second stage [of the deal] we will have additional tools to resume the fighting

·         Hamas opposition had prevented the deal from being finalized for months, but the situation changed because of the heroism of our soldiers and because of operations in the region, including the strong blow we dealt to the Iranian axis.

Netanyahu had previously pledged to continue the war until Hamas’s military and governing capabilities have been dismantled. He has reportedly indicated to his far-right coalition partners that he still plans to do so after the first phase.

As per TOI reports, Mossad chief David Barnea and Shin Bet head Ronen Bar, who both returned from Qatar following the signing of the deal, also addressed ministers, with the former saying they had a moral imperative to support the agreement:

·         We must pay this moral debt. This deal is ethically and morally the right thing to do. It is a humane deal. It includes mechanisms that will ensure our security.

·         Hamas will use the ceasefire to rebuild its governing and military capabilities and the deal will likely further weaken the PA.

In summary, while there is cautious optimism regarding a ceasefire in Gaza, the political implications for Netanyahu's government are uncertain. His ability to remain in power will depend on navigating both external pressures related to the conflict and internal political dynamics once hostilities cease. But growing political and policy uncertainty in Israel may be an issue as only 15% of the public now approves Israeli PM Netanyahu to stay as PM after the Gaza war ends. Anyway, Israel's PM Netanyahu will be under huge pressure from the Trump admin in the coming days to maintain the Gaza war ceasefire and go for a permanent two-state solution.

Market Impact:

Wall Street Futures surged Friday on moderate Trump 2.0 and a potential Gaza war ceasefire/hostage deal optimism. The broader S&P 500 rose 1%, and the tech-heavy Nasdaq 100 (NQ-100) advanced 1.6%, while blue-chip the Dow Jones (DJ-30) climbed 0.8%, or 334 points. On Friday, Wall Street was boosted by consumer discretionary, techs, communication services, consumer staples, financials, energy, materials, industrials, and utilities, while dragged by real estate, and healthcare.

On Friday, DJ-30 was boosted by NVidia, Amazon, Goldman Sachs, JPM, Caterpillar, Salesforce, 3M, Chevron, Boeing, Verizon, Microsoft, Amgen, IBM, Visa, Apple, Coca-Cola, and Walmart, while dragged by Merck, Travelers, J&J, Nike, United Health, and Honeywell. Moderate Trump 2.0 may be positive for China's heavy techs, industrial, consumer stocks, and even banks & financials due to his deregulation approach. But healthcare stocks are under stress as Trump’s potential Health Secretary was previously skeptical about the vaccine.

The three major US indices posted their first weekly gain of 2025, with the Dow and S&P 500 up 3.2% and 3.4%, respectively—marking their largest weekly gains since November. The Nasdaq-100 saw a 3.9% weekly gain, ahead of the Trump inauguration on Monday (20th Jan 25), which is also a US holiday for Martin Luther King Jr.'s anniversary.

At around $200 TTM EPS and 6000 levels of SPX-500, the current TTM PE is around 30, still in the bubble valuation zone and almost 30% overvalued from the mean/average fair PE range 22-25. Although SPX-500 PE is quite elevated at 30 due to tech/AI optimism, the reality may be far stretched and does not support an average annual EPS growth rate of around 8-10%. If average EPS growth is around 10%, the PE should be around 20-25, not 30. Although SPX-500 may again scale a new life time high around 6175-6225 next week on Trump 2.0 optimism, we may see a deep correction in the coming months if earnings growth continues to fail market expectations around 15-20% and remains below 10%. The stock market is the slave of EPS growth; i.e. earnings are the main factor, and everything other is simply noise.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42200) now has to sustain over 41800-41600 for any recovery and rally to 43000/43350-43800/45500 in the coming days; otherwise sustaining below 41600, DJ-30 may further fall to 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (20990) has to sustain over 20700-21000 for recovery and rally to 21500/21900-22250/222500 and further 22700-23000/23300 in the coming days; otherwise, sustaining below 20700, NQ-100 may further fall to 20500/20300-20100/19250 in the coming days.

Technically, SPX-500 (CMP: 5865), now has to sustain over 5950 for any further recovery/rally to 6025/6050-6150/6200 and 6350/6500 in the coming days; otherwise, sustaining below 5925-5900, SPX-500 may further fall to 5800-5775 and 5700/5600-5475 in the coming day.

Also, technically Gold (CMP: 2690) has to sustain over 2705 for a further rally to 2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2700-2685 may again fall to 2655/2620-2605/2600 and 2595/2575-2535/2435 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 $2500-2400 levels if Trump indeed can mediate both the Gaza and Ukraine war ceasefire by early 2025.