Wall Street surged on easing of Gaza war tensions; Oil slips

On Monday, Wall Street closed mixed on mixed news flow from the Israel-Hamas war front despite easing of some geopolitical tensions and hopes of blockbuster earnings from big four techs (Microsoft, Meta, Alphabet, and Amazon) this week. Oil and Gold stumbled on easing of Israel-Hamas geopolitical tensions. Late Monday, U.S. President Biden said in response to a reporter’s question on whether the White House supports the "hostages-for-ceasefire deal," that a potential armistice/ceasefire between Israel and Hamas can be considered once the hostages are freed. Biden said: “We can talk about a ceasefire when the hostages are released.”

Both Israel and Hamas are under pressure from all fronts including internally/domestically and externally/internationally to go for the ‘hostage-for-ceasefire’ deal to end the present war and avoid killings of innocent civilians. Global leaders including the U.S. and Europe are also stressing a separate statehood (country) solution for Palestine/Gaza as a permanent feasible solution, but Israel may not agree.

On Tuesday, French President Macron said during a meeting with Palestinian Authority President Abbas that lasting peace cannot be achieved if there is no recognition of the legitimate right of the Palestinian people to have a territory and a state. Macron stressed that nothing can justify the agony that civilians in Gaza are going through. However, he noted that Hamas' actions affect not only Israelis but the Palestinian people as well. Macron also supported present Israeli military action against Hamas as its legitimate right of self-defense but also urged some restraint to minimize the suffering of innocent civilians. On the other hand, Abbas slammed Israel for its ‘savage’ attacks and claimed that the Israeli authorities show no signs of seeking a peaceful solution to the conflict in Gaza.

Most of the influential G20 global leaders including the U.S., China, India, the U.K. and Germany have the same view similar to Macron. However, Israel may not be interested in such a permanent solution of Gaza Strip/Palestine due to domestic political compulsion. Like the U.S. cold/trade war narrative with Russia/China, Gaza/Palestine is also a big domestic political issue for Israel’s political leaders (like India-Kashmir-Pak-China-Taiwan issues).

On Tuesday, Jordan’s Foreign Affairs Minister Safadi warned that the war between Israel and Hamas threatens to spill over to other fronts in the region, emphasizing the urgent need to halt the hostilities. Safadi stressed the importance of ending the siege on the Palestinian enclave and highlighted that the ongoing conflict in Gaza is fostering a dangerous perception that the Arab world conflicts with the West. The foreign minister of Jordan called on nations backing Israel to recognize this danger and to show their support to Israel by advocating for peace.

Hamas may be termed as a Frankenstein militant & political organization originally supported by Israel/present government and the U.S. to confront another militant organization Hezbollah. Iran now primarily controlled/funded Hamas. The popularity of Present Israeli PM Netanyahu, who was already running a minority government, was at rock bottom due to various issues such as corruption and economic issues before the Hamas incident of rocket fires on 7th October. Netanyahu's admin and the national intelligence agency Mossad may allow Hamas to launch such horrendous acts as the subsequent military action by Israel and the wave of nationalism may help Netanyahu to gain political mileage. The key question is how the Israeli admin allows a big international music festival in the vicinity of the Gaza border which is always a military/terrorist sensitive area.

Thus there are various domestic political compulsions apart from geopolitical and diplomatic ones for this legacy issue of Palestine. Also, the U.S. and Europe have many Palestine migrants who are also a part of block votes and assets of any political party in a Parliamentary Democracy. Therefore, U.S. and European political leaders have to take a balanced approach to satisfy both Israel, which is a key ally in the Middle East, and Palestine (domestic political compulsion).

On Tuesday, the S&P Global flash data shows US Manufacturing PMI rose to 50.0 in October 2023 from 49.8 sequentially, above market forecasts of 49.5, and the highest reading in six months, signaling stabilization in operating conditions at manufacturing firms. Although the US manufacturing PMI is now approaching the expansion zone after hovering in the contraction zone for the last 5-months, the US manufacturing PMI also needs to stay around 55.0 (pre-COVID trend).

A further improvement in supplier performance and still soft demand conditions led firms to cut their input buying for the fifteenth month running in October. The rate of decline was the slowest since April, but firms continued to highlight the rundown of safety stocks, with preproduction inventories falling at a faster pace. Stocks of finished goods also fell further. The rate of contraction softened, however, as some firms noted that canceled orders were moved to inventories following a reduction in backlogs of work. Meanwhile, some reports of labor and material shortages at suppliers led to the least marked improvement in lead times since January.

 

On Tuesday, the S&P Global Flash data also showed that US Services PMI increased to 50.9 in October from 50.1 sequentially, the highest in three months and above market expectations of 49.8. Employment rose but new business fell for a third month running, albeit at a softer pace than seen in September. On the price front, service providers saw a notable slowdown in charge inflation amid competitive pressures and customer requests for concessions.

Finally, the S&P Global flash data shows US Composite PMI rose to 51.0 in October 2023, up from 50.2 sequentially, signaling acceleration in the pace of private sector output expansion. This marked the fastest expansion since July, supported by a quicker rate of expansion in both services and manufacturing activities. Demand conditions at manufacturers improved for the first time since April, while new business in the service sector fell for a third consecutive month, attributed to high-interest rates and challenging economic conditions. Meanwhile, job creation was only marginal, with firms citing uncertainty surrounding future demand conditions and their efforts to make cost savings, while backlogs of work fell for the sixth consecutive month. On the price front, operating expenses increased the least in three years, and average selling price inflation eased to the lowest level since June 2020. Finally, business confidence picked up to the joint-highest since May 2022.

The S&P Global comments: US private sector growth edges higher while inflationary pressures ease in October

“Hopes of a soft landing for the US economy will be encouraged by the improved situation seen in October. The S&P Global PMI survey has been among the most downbeat economic indicators in recent months, so the upturn in US output growth signaled at the start of the fourth quarter is good news. Future output expectations have also turned up despite rising geopolitical concerns and domestic political tensions, climbing to the joint highest for nearly one-and-a-half years.

Sentiment has improved in part due to hopes of interest rates having peaked, something which looks increasingly likely given the further cooling of inflationary pressures witnessed in October. Despite higher oil prices, firms’ input cost inflation fell sharply to the lowest since October 2020, and average selling prices for goods and services posted the smallest monthly rise since June 2020. The survey’s selling price gauge is now close to its pre-pandemic long-run average and consistent with headline inflation dropping close to the Fed’s 2% target in the coming months, something which looks likely to be achieved without output falling into contraction. That said, the tensions in the Middle East pose downside risks to growth and upside risks to inflation, adding fresh uncertainty to the outlook.”

In brief, the S&P Global PMI survey report for October sees cooling inflation without causing a hard landing and Fed pause/pivot. Thus Wall Street Futures got some boost along with Gold.

Market wrap:

On Tuesday, Wall Street Futures jumped on easing of Gaza war tensions, soft landing, and pause/pivot optimism coupled with hopes of blockbuster earnings from big four tech majors and Chinese stimulus. China decided to raise additional public debt by around $137B and target a 3.8% fiscal deficit instead of an earlier target of 3.0% to achieve a 2023 real GDP growth target of +5.0% at least.  Blue Chip DJ-30 surged over +200 points, while tech-heavy NQ-100 jumped around +0.9% and broader SPX-500 gained +0.7%. Wall Street was boosted by utilities, communication services, real estate, materials, consumer discretionary, consumer staples, industrials, techs, banks & financials, and healthcare to some extent, while dragged by energy as oil further slumped on easing of Gaza war tensions and Saudi prediction of subdued demand.

Late Tuesday, after the US cash market close, Wall Street Futures briefly slipped to some extent as Alphabet slips on a mixed report card (subdued cloud revenue), but Microsoft rose on an upbeat report card (earnings and guidance beat). Meta slips after being sued by California and a group of states over claims of harmful youth marketing.

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

Whatever the narrative, technically Dow Future (33300) now has to sustain above 33000-32900 levels for a rebound to 33400/33550-33700/33950 and rally further to 34050/34150-34325/34600 and 35000/35150-35350/35850; otherwise sustaining below 32850, may fall to 32750/32600-32500/400 and further to 32150/31700-31595/31000 and even 29300-28600 in the coming days. Technically, 33000-32900 levels should provide good buying support (depending upon Israel-Gaza news flow). If Israel launches a big ground invasion in Gaza, resulting in wider Middle East conflict, then Dow Jones may break 32900 levels and vice-versa.

Similarly, NQ-100 Future (14800) now has to sustain over 14600-550 levels for a rebound to 14750/900-15150/15350 and may further rally to 15475/15655-15775/16100 in the coming days; otherwise, sustaining below 14500, may further fall to 15450/14350-14250/14175 and 14000/13890-13650/13125 in the coming days.

Gold (XAU/USD: 1971) now has to sustain above 1990 for any further rally to 2005/2020-2035/2055 and 2075/2085 levels; otherwise, sustaining below 1985, may again fall to 1975/1965-1955/1940 and further to 1920/1910-1900/1895 and 1885/80 -1870/60-50/40 and 1825/1810-1798*/1770 level in the coming days.