Nifty slid on Israel-Hamas war tensions and higher bond yield

But Dow as well as Nifty Future may recover on easing of Israel-Hamas geopolitical tensions as Hamas is now gradually releasing hostages

India’s benchmark stock index Nifty closed around 19278.30 Wednesday, tumbling almost 2% in the last 4-trading session on simmering geopolitical tensions over the Israel-Hamas/Gaza war trajectory, higher bond yield and mixed report card. Nifty made a low around 19257.95 Monday (23^rd October), almost at the July low of 19234.40 (lowest in last 4 months), and is also substantially down from the recent lifetime high of 20222.45 scaled on 15^th September on G20 and Modinomics optimism (despite subdued global cues amid hopes & hypes of Fed pause/pivot and Chinese slowdown). Apart from G20 optimism, the Indian market also got a boost in early September as the Modi admin/ruling BJP was trying for ‘One Nation, One Election’ (ONOE) and may also go for an early general election by Dec’23 instead of scheduled May-June’24 for various political, and economic/budget, and weather-related issues.

But Nifty stumbled from mid-September (18^th September) soon after the G20 meeting and institutional buying support ended and it became clear that the Modi admin called for the special session of Parliament not to go for legislation for ONOE and also an early election, but to appreciate India/Modi leadership over G20 and to pass various pending legislative bills including Women’s Reservation ahead of a general election scheduled in May-June’24.

Nifty was also dragged by index heavyweight HDFC bank and RIL. HDFC Bank stumbled on guidance warning after merger with HDFC. RIL slips after the imposition of a higher export tax on diesel/petrol in line with higher global crude oil prices (windfall tax). India’s Dalal Street was also dragged by the growing diplomatic rift between the Modi admin (India) with Canada (Trudeau Government) involving an assassination of an alleged Khalistan terrorist (Sikh-Canadian citizen) by RAW/Indian agencies in Canada.

In any way, Nifty recovered by almost +500 points from the 4^th October low around 19333.60 to 19849.75 Tuesday (17^th October) on hopes of Fed/RBI pause/pivot, upbeat earnings/report card for Q2FY24 and robust local macro data. But Nifty was also dragged by simmering geopolitical tensions amid the Israel-Hamas confrontation. Palestine’s Militant organization Hamas launched an unexpected barrage of missiles/rockets on Israel on 7^th October, killing almost 1400 people and taking more than 200 people (including foreigners, women & children) as hostages. Subsequently, Israel launched/prepared a major military operation to re-control/re-occupy the Gaza Strip.

The market is concerned as Israel launched a major ground offensive to reoccupy the Gaza Strip, which may cause wider military conflict in the Middle East involving almost ten countries/militant organizations on five fronts Iran, Syria, Jordan, Egypt, and Lebanon. But on Tuesday, Nifty got some boost on hopes that Israel may not eventually launch such a major military offensive to reoccupy the Gaza strip after U.S. President Biden warned Israel against such an extreme step, but Biden notably did not say it was time for a ceasefire.

Hamas may be termed as a Frankenstein militant organization originally supported by Israel/present government and the U.S. to confront another militant organization Hezbollah. 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 7^th 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. Thus there are various issues of domestic political compulsions apart from geopolitical and diplomatic issues.

Wall Street Futures stumbled on the Fed’s higher-for-longer policy and escalating geopolitical tensions involving Israel-Hamas/Gaza-Middle East. Although the market is still expecting a balancing act by the U.S.-Israel in Gaza for a short and long-term solution to avoid a wider regional conflict, the risk trade is being affected by various war-related headlines and escalating geopolitical tensions. Iran is so far waging a proxy war against Israel primarily through various militant/terrorist organizations like Hamas, Hezbollah and Houthi. Israel is also ‘fighting’ mainly through the intelligence agency Mossad and also army (ISD). But this time, there is a risk of confrontation/war between Israel and Iran and in that case, even the U.S./NATO and even Russia may be involved.

On Friday, Wall Street Futures were briefly boosted on hopes of some peace/ceasefire agreement between Israel-Hamas/Palestine after a report that Palestinian President Abbas to participate in the Cairo summit for peace Saturday. Further Hamas agreed to release a US hostage (Mother-Daughter) on ‘humanitarian’ ground. But Wall Street Futures also slipped again as Israel termed it as a Hamas strategy to delay the Gaza invasion by the IDF. The U.S. and EU/Europe are all advising Israel to go slow on the Gaza invasion plan, and Israel may also itself considering it as the last option after exhausting all other options to secure the release of around 200 hostages held by Hamas.

On late Friday, Hamas said: “We are working with mediators to close the civilian file if security conditions are appropriate”. Hamas release of two hostages is a first step, discussions are ongoing for more releases - Source Briefed on Negotiations. Hamas release of two hostages is a first step, discussions are ongoing for more releases - Source Briefed on Negotiations.

Hamas freed two American citizens who had been imprisoned in Gaza. Leaders from across the region are gathering in Cairo on Saturday for the Middle East crisis/peace summit. The Israeli military claimed to have struck Hamas targets in Gaza overnight. In response to fire from Lebanon, Israel struck Hezbollah assets and evacuated residents near the border. The Iran-backed militant group claimed to have launched guided missiles at several Israeli targets.

Israel-U.S. is increasing pressure on Hamas by positioning huge military assets at the Gaza border for any invasion through land. In the meantime Israel is systematically destroying all Hamas war/terrorism infra including underground tunnels, so that Hamas is forced to release around 200 hostages of its own without a major escalation in regional confrontation. Israel is trying to release those hostages from Hamas through surgical strikes, being supported by U.S./NATO indirectly (laser-guided tech to locate underground tunnels) or even directly (through unofficial mercenaries).

If this strategy works, then there will be no major regional war; otherwise, there may be some major regional conflicts involving Iran, Syria, Lebanon/Hezbollah, Egypt, and Yemen. Although the U.S. is trying its best to avoid such a scenario, it’s not guaranteed. If such a major regional war breaks out, then there will be a major risk-off trade and vice versa. But as per some reports, Israel aims to destroy Hamas and make a new ‘friendly’ security regime.

On Monday (23^rd October), Wall Street Futures, as well as Dalal Street Futures, were affected by a report that some Israel battle tanks have entered in Gaza Strip, while China has sent 6-war ships into the Mediterranean Sea, where the U.S. sent its most advanced carrier/destroyer (warships). Although Chinese ships may be only a part of the humanitarian/evacuation process, the market is tense that a wider conflict may happen between Israel/US/NATO and Hamas/China/Russia/Iran.

Israel-Hamas/Middle East geopolitical tensions already boosted oil from around $80.00 to 89.00 and may further rally to $95-100 or even $120-150 if there is further escalation involving the Gaza invasion and subsequent wider conflict. This will be hugely negative for a country like India, as it imports almost 85-90% of its oil requirement (even after considering a steep Russian discount). Also, various listed companies directly/indirectly have business links in the Middle East/Israel area.

Apart from Israel-Hamas/Gaza war geopolitical tensions, Nifty was also affected by Fed/RBI higher for longer policy, higher borrowing costs (higher bond yield), and mixed/subdued report cards. The US10Y bond yield is hovering above +5.0%, the highest since 2007. India’s 10Y GSEC bond yield also jumped to around +7.39%. The US bond yield is surging because of higher inflation, higher interest rates, the Fed’s higher-for-longer policy, higher issuance of debt to fund increasing public debt and lower demand as a result of QT.

Market wrap:

In the last 30 days, Nifty was boosted by Bajaj Finance, Bharti Airtel. Nestle India, Tata Motors, Coal India, Bajaj Auto, L&T, Bajaj Fin Services, Hero Motors and Ultra Cement, while dragged by Infy, RIL, TCS, SBIN, Axis Bank, ICICI Bank, HDFC Bank, Asian Paint, TECHM, ITC, Tata Steel, Wipro, Adani Enterprises and Adani Ports. Overall, the Indian Market was supported by automobiles and real estate amid the festival season buying boom, while dragged by banks & financials (higher bond yields), techs (subdued report card and external market), media, metals (slowing China), energy (volatile oil), pharma, infra and FMCG to some extent.

What’s Next?

In the short term, all focus is now on the Israel-Gaza war situation; if Israel can secure the release of hostages without any major ground military operation and fulfill its objective without triggering a major regional military conflict, then Nifty may not break 19200-150 levels and vice-versa. As per a report late Monday, Hamas is set to free 50 hostages of dual citizenship and 2 Israeli hostages. As a result, Wall Street Futures surged and gold slipped amid some easing of Israel-Hamas/Gaza geopolitical tensions. Israel/U.S. strategy of putting maximum pressure on Hamas may be now working as Hamas is now gradually releasing hostages to prevent a big ground military operation-positive for the risk trade.

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.”

But Dow Future eventually stumbled after a report that rocket/drone attacks are continuing on U.S. army bases in Syria and Iraq. Also, there was another report that Russian President Putin had a heart attack on Sunday and lost consciousness, but he has since regained consciousness

Bottom line:

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (19262) now has to sustain over 19200 for a rebound to 19355/14475-19600/19775 and rally further to 19875/20055-20200/20300 levels in the coming days; otherwise sustaining below 19150, Nifty Future may further fall to 19090/18870-18625/18490-18275/18075 in the coming days.

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