India’s benchmark stock index closed around 19140.90 Monday, surged almost +1.50% in the last two trading sessions on easing of Israel-Hamas/Gaza war tensions coupled with an upbeat report card from Wall Street techs majors (Intel (NASDAQ:), Microsoft (NASDAQ:), IBM (NYSE:), and Amazon (NASDAQ:)) as-well-as Dalal Street led by RIL, Maruti (NS:), Axis Banks and HCL Tech (NS:).

Earlier the Indian market was also dragged by Israel-Hamas/Gaza/Middle East geopolitical tensions, and subdued report cards from TCS (NS:), INFY, HDFC Bank (NS:), Bajaj Finance (NS:), ITC, and ICICI Bank (NS:) to some extent. Although in most of these report cards, EPS was slightly below market expectations, guidance was subdued.

Also, there was a market rumor citing ‘Jaipur Satta Bazar” (unofficial betting source at Jaipur circle) that the BJP/Modi admin will lose all the forthcoming five state elections badly and INC (Congress) is set to win big. The five states involved are MP (BJP), RJ (INC), CG (Chhattisgarh-INC), TL (Telangana-BRS/BJP ally) and MZ (Mizoram-BJP/Ally); out of these five states, BJP is now focusing mainly on retaining MP, and snatching RJ and CG from INC as BJP is not a force to reckon with in TL and even in MZ (after recent riots).

As per the latest official opinion polls, in MP, due to some incumbency wave, the ruling BJP is now running neck & neck with INC, while the opposition BJP is set to win big in RJ this time, thanks to the ruling party INC’s infighting and also some incumbency wave and corruption allegation against several top INC leadership including CM’s son! But in CG, despite tight fighting, ruling INC may win thin, thanks to credible local INC leadership.

In TL, the fight will be between BRS and INC and this time, INC may win thin due to the incumbency wave and allegations of various scams against ruling BRS. MZ, a small state may be going for a hung assembly, but INC may eventually form the government this time. Thus, apart from RJ, the BJP may not be able to form a government in any of the other four states and MP will be close. The focus of the market will be on big states like MP and RJ and no one is counting BJP for TL.

In this way, even a disappointing state election result will not affect the June’24 general election (LS) this time also for Modi magic and BJP is set to win big by around +300 seats as the INDIA opposition front is still quite divided in many states, not able to project a PM name to compete with Modi and have divergent politics/policies. Overall, BJP/Modi is set to win big in the 2024 general election on anti-corruption, development, nationalistic, and Hindutva platform in addition to Modi’s implacable leadership. Many voters are now voting for Modi/BJP at the Federal election, despite voting for regional party or INC at the state election levels.

Before Friday (27th Oct), Nifty tumbled almost -3.50% in October on simmering geopolitical tensions over the Israel-Hamas/Gaza war trajectory, higher bond yield and mixed report card. Nifty was also substantially down from the recent lifetime high of 20222.45 scaled on 15th 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 (18th 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 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 was also buoyed by 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 7th 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, resulting in risk aversion; global stocks including Wall Street and Dalal Street slumped, while and US bonds jumped as haven assets; oil surged on the concern of Middle East supply issues amid the possibility of an all-out regional conflict/war.

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 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 mismanagement before the Hamas incident of rocket fires on 7th October. Netanyahu’s admin and the national intelligence agency Mossad may have indirectly allowed 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. It’s also very strange, how the Israeli authority allowed an international music festival on 7th October in a small town very close to the Gaza border, which is always a sensitive place. Thus there are various issues of domestic political compulsions apart from geopolitical and diplomatic issues.

In any way, both Wall Street and Dalal 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 the 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 get involved directly/indirectly.

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, 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.

Israel-Hamas/Middle East geopolitical tensions already boosted oil from around $80.00 to 89.00. They 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.

But now risk trade sentiment was also boosted by hopes of a Gaza ceasefire, at least on humanitarian grounds as Israel is now under pressure from almost all major global powers including the U.S./Europe. Hamas may be also considering leaving Gaza for Lebanon, Turkey, or elsewhere. Subsequently, on Friday both Wall Street and Dalal Street Futures got some boost. Also, Japan’s and China’s tax cut stimulus boosted global/Wall/Dalal Street index futures. But higher USD/US bond yields also dampened the risk sentiment both globally and domestically.

On Friday’s U.S. session, Wall Street Futures got some further boost briefly on hopes of an imminent Gaza Ceasefire after a report that back door negotiations are progressing rapidly to achieve a ceasefire agreement and an exchange deal (hostages-prisoners) between Hamas and Israel, mediated by Qatar. But soon Wall Street Futures slipped as there was another report that Israel refused to respond to a long truce requested by Hamas. soon stumbled almost -500 points, while Gold soared $30 from around 1980 to 2010 on the concern of escalating Middle East geopolitical tensions after a report that Israel launched a ground incursion in Gaza, while the US urged restraint.
Equities tumbled, while Gold and oil surged after Israel expanded its Gaza ground surgical operation to eliminate/flush out Hamas terrorists and rescue any hostages still alive; but Israel is avoiding an all-out Gaza land military operation for various reasons.

Overall, Israel could still delay/postpone/cancel an all-out ground military invasion in Gaza and continue with the present strategy of intensified targeted surgical strike/operation involving aircraft/aerial bombing designed to destroy the underground network of numerous Hamas tunnels and special forces on the ground to eliminate targeted Hamas leaderships/mercenaries and rescue as many alive hostages as possible. The U.S./NATO is also providing direct/indirect ground support in finding underground tunnels and any possible hostages there with laser-guided technology and possibly by providing private mercenaries (contractors/freelancers) or even official U.S. marines.

This strategy will avoid a wider regional conflict and also limit the Israel Military’s casualties and help the general global support for Israel’s right to self-defense and eliminate Hamas. But Israel needs to finish the present ‘expanded’ ground military operation and restore mobile/internet in the Gaza strip ASAP to limit civilian and diplomatic damage. On average records show a 10-30-day duration of the Israel-Hamas war before arriving at any ceasefire. The recent war is now approaching almost 25 days by the end of this month and should finished by 5th November or even earlier considering intense ground levels surgical military operations targeting the horror network of Hamas tunnels (underground).

On Sunday/Monday, Israeli PM Netanyahu said the war in Gaza will be “long and difficult”, adding he will do everything to bring hostages home safe: “We’ll use every possibility to bring them back to their families”. But Netanyahu has also rejected any calls for a ceasefire or cessation of hostilities with Hamas. Netanyahu also said the idea of a swap deal of hostages for Palestinian prisoners had been discussed within the war cabinet but there was no decision on the move.

Hamas spokesman earlier said: “If the enemy wants to close this file of detainees in one go, we are ready for it. If it wants to do it step-by-step, we are ready for that, too.” Hamas’s leader said the group is ready for an “immediate” prisoner swap with Israel: “We are ready to conduct an immediate prisoner exchange deal that includes the release of all Palestinian prisoners from Israeli jails in exchange for all prisoners held by the Palestinian resistance”.

Qatar has been conducting back-door diplomacy for more than three weeks, speaking to both Hamas officials and Israel to promote peace and secure the release of hostages. Its mediation last week led to the release of two U.S. hostages (a mother and daughter), and two elderly Israeli women.

As per reports, negotiations between Israel and Hamas aimed at de-escalating the war are continuing but at a “much slower pace” than before Friday’s escalation as increased air and artillery attacks, severing of communications, and Israeli ground incursion affected the truce/ceasefire discussions. But both Israel and Hamas are under great pressure from all sides to have an immediate ceasefire deal after securing all the hostages.

Although Iran is threatening to send troops through the Hezbollah-controlled northern Lebanon border for domestic political compulsion, in reality, Iran will continue to support proxies (Hamas, Hezbollah, and Houthi rebels) and engage in light attack rather than direct military confrontation with Israel/U.S. as in that scenario, Iran will stand to lose both diplomatically, militarily and economically. Hezbollah, on the other side, is sympathetic to Hamas, in reality; it’s also not in a position to join Hamas in attacking Israel directly/indirectly. Hams is increasingly finding itself isolated and Israel is intensifying its surgical operations to eliminate targeted leaderships and rescue as many hostages as possible without going for an all-out ground military operation in Gaza to balance everything.

Conclusions:

The Gaza war may be over within the next few days considering expanded ground operations by Israel to eliminate Hamas terror and secure all most alive hostages through pressure tactics. Israel has to finish the job ASAP to avoid further global hue & cry against increasing civilian suffering. It now seems that Israel is aiming to bomb Al-Quads Hospital in Gaza City to destroy the suspected Hamas HQ underneath the ground of the hospital. Israel has already instructed the hospital authority to shift all the patients there and warned of an imminent air bombardment to destroy the suspected Hamas HQ (tunnels) under the ground there.

For the time being, Israel may secure the hospital and any Hamas terror infra/HQ there and then stop the present aggression/expanded military operation and offer Hamas a ceasefire for a free hostage deal. So far Iran has shown limited reaction and there is little chance of a big miscalculation and an immediate regional conflict. The U.S. is also coordinating with Israel and other Middle East nations to control the situation.

Market wrap:

In the last three months, Nifty was dragged by HDFC Bank, RIL, ICICI Bank, and ITC. Kotak Bank, SBIN, Asian Paint, HUL, JSW Steel (NS:), Britannia (NS:), Apollo Hospital, HDFC Life, UPL (NS:), Divis Lab and Adani Enterprise, while supported by L&T, Coal India (NS:), HCL Tech, INFY, NTPC (NS:), Axis Bank (NS:), Maruti, Bharti Airtel (NS:), ONGC (NS:), Nestle (NS:), Bajaj Auto (NS:) and Titan (NS:).

In the last month, INFY, TCS, and ICICI Bank also dragged. Overall, Indian market was dragged by banks & financials (higher bond yields negative for bond HTM portfolio MTM and the NPA concern of increasing unsecured retail loan assets), metals (Chinese slow down), pharma, media, techs/IT (slowing discretionary tech spending from Europe and also U.S.), infra, energy (higher oil negative for refining margin for OMCs), automobiles and FMCG to some extent, while boosted by realty (RBI pivot and lower cost of raw materials).

Bottom line:

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (19234) 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.

Nifty reported an EPS of around 858 for FY23 against 809 for FY22; now the projected FY24 EPS is around 927 (assuming +8% CAGR) and at an average PE of 20, the fair valuation of Nifty may be around 18540, very close to present technical support levels of Nifty (18500~18800-600).