Budget2016 review : directed at systemic sensitive stakeholders!

Approach of reveue-scratch than revenue-build from capacity is worry

Budget2016 has played to the gallery of systemic sensitive group of external stakeholders (global rating agencies and offshore investors) and internal stakeholders (urban, semi-urban & rural poor, middle class population and the RBI) with focus on infrastructure-build, capacity expansion in agricultural sector and improvement in social well being.

Global rating agencies and RBI will be too pleased with the Government sticking to FRBM agenda retaining FY17 fiscal deficit target of 3.5% and if this not enough to bring cheer, the vision target of 3% by FY18-FY19 is pulled into the mind if not into the radar. The budgetory allocation for agriculture & allied sectors, infrastructure and better facilities at under developed areas are music to the ears of majority of the vote-sensitive population. The positive take-away from this intent are (a) retain stable to positive India outlook and keep the upgrade hope alive in FY17 (b) enable RBI to deliver 25 bps rate cut on or before April policy review and provide bandwidth to shift policy stance from accomodative to growth supportive stance (c) capacity expansion in agriculture sector building aspiration for higher contribution to the GDP and resultant employment & wealth creation in the rural & semi-urban geographies, and (d) re-balance consumption between urban and rural with intent to bridge the gap between rich and the poor leading to improved social standards & security.

Some of the weak links are from (a) no tangible solutions to emerging crisis and credit risk-off sentiment in financial intermediation sector (b) limited efforts to pull private capital as top up for public investments (c) risk of consumption squeeze in the super rich to affordable middle income group, and (d) no clarity on how the fiscal deficit target will be met on steady GDP growth momentum at 7-7.75% target. Given that the contribution from direct taxes from the target segments will be low, the Budget2016 has opted to scratch more from the existing high tax payers. The FRBM compliance through taxing the rich and not from from revenue-build from capacity expansion and improved bottom-line efficiency stands out as black mark.

All taken, Budget2016 is a street-smart one providing priority to systemically sensitive issues rather than important agenda. BJP is known for delivering pleasant surprises taking out the hidden magic wand when things looks extremely tough. The worry is from the short term (and sighted) approach, which provides immediate relief but keep the long term visibility unclear. Given the extreme uncertain global environment, this crisis management (and keep-good, and not feel-good) Budget2016 deserve appreciation with 6.9/10 rating!

What is the impact on India markets?

It is big relief for Money & Bond market. There were signs of RBI throwing in the towel against heavy tides. 10Y (old) benchmark 7.72% 2026 hit 8.10% and new benchmark 7.59% 2026 in struggle at 7.80%. To rub salt into the wounds, short term rates moved higher from usual end of FY16 balance sheet build-up with higher demand for deposits. The FRBM agenda of 3-3.5% in FY17-FY19 is manna from the heaven to RBI, and big relief to Banks that were staring at huge provisions in the investment portfolio. MARKET PULSE strategy was to stay in duration-build mode when 7.72% 2025 at 8-8.10% completing the chase from 7.50-7.65% duration-cut zone. It is now repeat of history phase enacted during October 2015 - February 2016, when 10Y benchmark moved up from 7.45-7.50% to 8.05-8.10% post delivery of 50 bps rate cut on 29th September 2015. The major positive take-away from the Budget is lower net market borrowing at 4.3 lac Crores and 25 bps rate cut demand from RBI on or before April review. The downside risks are from demand-supply mismatch in FY17 and FED next round rate hike in June, if not in March. It is also to be seen how RBI will defend 6.5% Repo rate against 5.75-6% CPI by March 2016. However, with FY17 CPI target at 5% and Rupee recovery from 68.70-68.85 to 68-68.20 will provide RBI the necessary bandwidth (and defence) to deliver 25 bps rate cut. Given these dynamics in play, India 10Y benchmark bond 7.59% 2026 range focus is set at 7.50-7.65% reviewed down from previous 7.60-7.85%, which has already seen back-and-forth since issuance in 2016. It would be good opportunity for investors of 7.72% 2025  at 8-8.10% for exit from OMO bond purchase at 7.65-7.80%. For now, ahead of RBI rate cut it is good to hold entry at 7.75-7.80% and accumulate at 7.65-7.70% for exit at 7.45-7.50%.

MARKET PULSE set post-budget NIFTY  trading range probability of 7100-7350 (40%), 6850-7100 (40%), 6600-6850 (15%) and 7250-7500 (5%). It is pleasant surprise that all is done. From low of 6825 (momentary punch below 6850), NIFTY shifted focus at 7100-7350 not ruling out stretch into 7500-7600. Will this momentum stay as counter trend recovery or has shifted to bullish trend for 7600-8000? It is tough question to answer at this stage when external cues continue to stay resistive. MARKET PULSE 2-step value-buy (out of 3) at 7000-7035 and 6850-6885 held rock solid, and break of 7200-7215 takes focus into 7350-7600. It is good to hold precious enreies and accumulate at 7085-7120 for 7350-7600, where good to cash out and take money off the table. There is no clarity now beyond April-June, hence good to keep the focus short and be fleet-footed for now. It is tough for NIFTY to break the monthly lower high trend when 7972 (Jan) and 7600 (Feb) is distant away. The comfort however is from getting out of lower low cycle 6869 (Jan) and 6825 (Feb). Will 1st March low of 7035 stay safe? No clarity as yet, hence the stop here for strategic investors while being in chase for 7350-7360

Bank NIFTY held at 2-step value-buy zone of 13650-13800 and 13350-13500 and got a over 7% rally from the 29th Fenruary low of 13407 into 14350-14500. Here again, it 2016 high of 17067 (Jan) and 15565 (Feb) is distant away, while the lower lows trend is seen to be broken as Feb low of 13407 is also out of the radar. It is high probability that 1st March low of 14064 remains firm. The strategic play is to hold buy entered at 13500-13750 and accumulate at 14100-14150 for being in the chase beyond 14550-14700 enroute to 15000.

Over all, investors will stay risk-on in buy dips mode looking for exit ahead of rate cut event. The play is from feeling the pulse of RBI. There are no clarity from the macroeconomic fundamentals for shift into bull phase. Till then, see this as counter trend recovery, thanks only to Budget2016 powered by Arun Jaitley.

Good luck and happy trading!

Moses Harding
harding.moses@gmail.com
9674734145

Budget2016 : Need balanced approach between economic stability and fiscal credibility

Expectation is to restore confidence and revive animal spirits despite external headwinds

The India dynamics since mid 2014 and now is different. The advantages from clear political mandate to NDA, sharp decline in commodity prices and good external appetite chasing India opportunities (and valuation re-rating) are now behind. After 20 months of NDA rule, there has been gradual decline in sentiment from euphoria to optimism to hope, and now at breakdown point to despair and scepticism. The best of external supportive cues are now behind. There is little downside to commodity prices, and it could only turn worse from current prices. The flow of FII liquidity is now reversed looking for exit options with little appetite to hold and accumulate  despite de-rating in equity valuation and high fixed income yield from the high's of 2015. In short, the India optimism (and resultant wealth creation) didn't last for long, and now have turned from the best to the worst among both developed and emerging markets. In these tough on-ground dynamics, Budget2016 is not expected to score 10-on-10, and at best it would be pleasant surprise to get above-par score from stakeholders.

Macroeconomic fundamentals stable, but concerns remain on funding growth and fiscal prudence

While downside risks remain across the board, Current Account Deficit at 1.5-2.5% and CPI inflation at 5-6% is much better than what it was couple of years ago. The comfort here are from Brent Crude price stability at $30-45, sub zero WPI and relatively low core inflation. The concerns now are from balancing growth rate at 7.5-8.0% while containing fiscal deficit at 3.5% for FY17, stated as targets in Budget2015. The risk now is the downside review of these stated deliverables in Budget2016. Given the change in on-ground dynamics both from domestic and external cues, the practical (and realistic) approach will be to set FY17 GDP growth target at 7.5-7.7% and fiscal deficit at 3.7-3.9%. It will be loss of credibility for the Government, but it is prudent to accept the hard reality and work on achievable targets rather than setting wishful & tough targets.

The issues on hand are many across revenue, costs and investments. The revenue side of the balance sheet is mostly covered by taxation on top-line economic activities, tax on income & profits and dividend from public enterprises. There will be pressure on all these fronts in FY17. The cost components are heavy on interest payments, subsidies and administrative expenses. The budgetory deficit is largely from unproductive consumption rather than productive investments. The "borrow for consumption" mode remains and grows year after year for more than 6 decades now. There will be no relief on the cost side as well in FY17. Where we go from here?

The vicious circle that the system is stuck can't be broken when external appetite is low and domestic private investors sentiment is low. The equity to fund growth has to come from the public through budgetory allocation. The capability to provide leverage to equity through debt is low when most lenders are into credit risk-off mode, and into balance sheet clean-up exercise by aggressive provision for NPAs. It is worse when Bank's investment portfolio is now hit badly from spike in bond yields since Q4/2015. The Government now need to allocate funds from the Budget for growth, pull private (and offshore) investors participation and provide necessary bandwidth to RBI to script growth supportive monetary policy. All these are seen to be very tough to achieve without compromise on fiscal prudence.

Attention on fiscal deficit and capital gain tax

Most stakeholders have now zoomed in their attention on fiscal deficit (at 3.5-3.7%), GDP growth (at 7.5-7.7%) with worry on tightening the capital gains exemption from 1 to 3 years. The intent this time will be on being thrifty on unproductive monetary benefits (and consumption) for use for productive economic activities that would lead to demand for goods & services, generate employment and lead to wealth creation & higher consumption.

MARKET PULSE see Budget2016 as non-event given the limited financial bandwidth to be big-bang or deliver pleasant surprises. The FY17 BE for GDP growth is seen at higher end of 7-7.75% range set in ESR. The fiscal deficit will be targeted at 3.7%, mid-way between FY16 target of 3.9% and FY17 FRBM target of 3.5%. Other measures will be centred around pulling private and foreign investments while retaining cost and revenue structures unchanged. Needless to say, most of the focus will be on scaling up of economic activities through infrastructure-build, realisation of make-in-India manufacturing vision and uplift of agricultural & allied activities, and fulfilment of social obligations to urban, semi-urban and rural poor across health, education, housing, social infrastructure and financial inclusion.

What is the impact on financial markets?

While FY17 GDP growth at 7.75% and fiscal deficit at 3.7% will be acceptable to most stakeholders, anything beyond either way will lead to price volatility. However, change in capital gains tax structure (tenor and/or rate) will lead to knee-jerk downside reaction before stability. Given the need for money, the Government may be prepared the downside risk as short term pain. The valuation in equity assets have gone up significantly from FY14 to FY15, between August 2013 to March 2015 followed by value correction in FY16. It may not be a surprise if the Government either increase the exemption period from 1 year to 2-3 years or marginal upward revision in tax rate or both. Although, it would be viewed as step backwards post introduction of STT but the need for resources may make it compelling to bite the bullet.

The post-budget outlook on equity market is balanced on the outcome of Capital gains tax. NIFTY outlook is neutral between recovery into 7100-7350 or collapse into 6500-6850. The third option is for stability at 6850-7100 if it goes as non-event. Bank NIFTY despite having lost 35% from 2015 high (as against 25% in NIFTY), does not look relatively better given the combined impact from woes on PSU banks balance sheet and value correction in private sector banks. The outlook in Bank NIFTY is either for recovery into 14000-15000 or collapse into 12500-13500 with neutral option for consolidation at 13000-14000. It's near zero possibility of delivery of pleasant surprises that could trigger the NIFTY over 7350 or Bank NIFTY over 15000.

The most painful for the economy is the elevated money market rates at shorter end and high bond yields at longer end. While high long term yields is good for retail (and passive) investors, it's pain for the borrowers including the Government. It is unfortunate when RBI has exhausted most of its ammunition through 1.25% rate cut in 2015. The domestic investor appetite is now low with huge excess SLR in books, and less said the better on the plight of foreign investors with Rupee down from 58 to 69 by 19% since mid 2014. The Central Government gross borrowing is expected at 6.5-7.0 lac Crores, not including the supply of State Government bonds and UDAY bonds. The demand-supply dynamics will be heavy on the Bonds notwithstanding support from RBI through OMO bond purchases, while any rate cut will go ineffective. India 10Y bond yield 7.72% 2025 is already up from 7.45% to 8.10% post 50 bps rate cut on 29th September 2015, by 9% in less than 5 months. The new 10Y benchmark is up at 7.80% from issue coupon of 7.59% in less than 2 months. MARKET PULSE outlook is for stability in 7.72% 2025 at 7.95-8.10% and at 7.75-7.90% in 7.59% 2026 by squeeze of spread from 30 bps to 15-20 bps. Going forward, there will be demand for 7.72% 2025 from RBI and regular supply of 7.59% 2026. It will be painful for the Government (and equity market) if 7.72% 2025 shift post-budget play into 8-8.25% and 7.59% 2026 to 7.80-8.0%, while not sure of defence fire power from the RBI to hold play below 8.10% and 7.90% respectively.

USD/INR stay ring-fenced by Budget2016 jitters. The support for Rupee at 68.70-69.20 is firm from RBI, exporters and carry-trade borrowers in traction with 12M forward rate resistance at 73-73.50. The shorter end play for end March 2016 has stood firm at 69.20 with spot hold at 68.55-68.80. What Next? The short term big-picture range focus is at 68.20-69.20. The breakout bias adjusting for time-decay is for shift of post-budget play to 68.50-70, and would need miracles for Rupee recovery below 68.20 into 66-67.50. As always, the trigger is with FPI flows; will they exit or remain on hold or wish to accumulate? For new entrants, Rupee at 68.70-69.20 against de-rated value in equity and bond market (since March 2015) is attractive. For those who are light-weight, it is not bad to hold and accumulate for better average. The worry is from those who are over-weight on India; trigger of stop-loss exit will be heavy on Rupee and it would be beyond RBI to defend 69.20. The other major risk on Rupee is from Chinese Yuan devaluation and USD strength against major currencies. All taken, it's not good time for importers (and carry-trade borrowers) to stay risk-on (with unhedged imports and FC liabilities) while it gives comfort to exporters to stay risk-neutral at 68.70-69.20 (12M at 73-73.50) for shift to risk-off around 70 (12M at 74.25-74.50). During this phase, it is good for exporters to unwind risk-neutral mode to risk-on at spot 67.95-68.20. Importers are not in an enviable position (at spot 68.50-70) post sudden shift from 63 to 69 by 10% in less than a year and not sure of spot at 73 adjusting for time-decay. The post-budget range outlook is retained at 68.35/68.60-69.20/70, and good to retain end-to-end focus with stop at 68.20 and 70.05.

Best wishes and good luck ahead!

Moses Harding
harding.moses@gmail.com
9674734145

Valuation shift from "too hot to hold" to "not bad to ignore"....Read on

Financial markets in sharp unwind from signs of running out of stock on monetary steriods

Global markets got the benefit of monetary steroids since 2009 with major Central Banks pumping in huge system liquidity through QEs in various innovative forms while shifting the cost of liquidity from near zero to NIRP regime. In the absence of QE and NIRP impact on inflation, it provided larger bandwidth for Central Banks to stay in ultra-dovish stance for extended period of time. Most investors caught on to this opportunity and resultant euphoric appetite resulted in building huge valuation in risk-on financial assets over 2008-2013 base. It was not a one-way street and it had many bouts of value correction, before injection of next dose of steroid to pump the markets up again. This liquidity triggered valuation need to be supported by growth momentum for sustainability, which unfortunately didn't happen. The worry for Central Banks (and investor community) is the absence of impact from monetary steroids on macroeconomic fundamentals. The liquidity driven valuation will only stay as "bubbles" in the absence of catalyst support from growth, employment and consumption led investment. Why is the sudden turn of fortune in 2016? It is obvious that US and China economies have to be in high gears for stability in global financial markets. China losing the momentum was visible in early 2015 while US showed signs of recovery, and FED put end to QE and prepared the markets for H2/2015 start of rate hike cycle. Till then, it was bias neutral on financial markets with DJIA in sideways mode at 15350-18350, US 10Y yield at 1.85-2.35% and Gold crashing down from 1300 to 1050. The investor sentiment was boxed between risk-on and risk-neutral with few signals for shift of mode to risk-off and risk-aversion.

The turn of event in 2016 is the doubts  over US economic recovery, when other heavy-weight economies China, Japan and Euro zone have moved from bad to worse. The economic data from the US were not good enough for FED to stay on course for follow-on rate hikes in 2016. These turn of events (more QE from China  & the Euro zone, Japan into NIRP regime and FED into extended rate pause) undid the US optimism support to financial markets driving DJIA down from 17350-18350 bullish consolidation range to risk-off range at 15350/15500-16350/16500 and US 10Y yield sharply driven down from 2.20-2.35% to 1.50-1.65%. Combination of risk-off on equity, low Gilt yields and negative return on cash drove Gold value sharply up from $1035-1050 to 1200-1250. USD also lost its interest rate advantage for DXY push back from higher to lower end of 95-100. All combined, investor sentiment moved down hill from risk-on to risk-neutral and now mixed between risk-off and risk-aversion.

India status shift from preferred to stay aside from domestic cues not turning to expectation

While external cues shifted from tailwind support to headwinds resistance, domestic cues turned from euphoria to hope to verge of disappointment with fear of worst. Despite clear political mandate to Modi (and BJP), political irritants remain as serious hurdles to economic reforms and prosperity. There are lot of uncertainties ahead with no clarity on the way forward. India GDP growth in struggle around 7.5% and await GST roll-out for step up over 8%. The fiscal deficit wish-target at 3.5% by March 2017 is ambitious. CAD has lost its price advantage from Gold and the Brent, both showing signs of worst is behind. The existence of supply bottlenecks against higher demand is price-push on inflation, making it tough for RBI to ensure CPI soft landing at/sub 5% by end FY17 without being cautious on monetary policy stance. All combined, with Government in cross-roads and RBI short of ammunition post injection of overdose rate cut steroids in 2015, India status as most favoured financial markets is no more relevant as FIIs are already on the lookout of alternate destinations. MARKET PULSE strategy in FY16 was reflective of this shift of dynamics, both external and internal. During this phase, NIFTY trading focus got reviewed down from 7500/7650-9000/9150 with 2016 down-hill chase from 7965-8000 to 7000-7035. The outlook was bearish on Banking stocks for deep down-hill chase from 20650-21000 to 14000-14350. India Gilts didn't derive benefit from risk-off in equity with 10Y bond yield up from 7.45-7.50% to 7.88-7.93% from duration-cut play. During this phase, Rupee gave up 68.85 to 58.35 recovery between July 2013 - May 2014, and now back at 68.35-68.85. It is tough call on India financial markets when external appetite is on decline and domestic support is thin from pain and fear. All taken, while most investors missed the rally from Feb 2014 to March 2015 built on Modi euphoria and external beneficial impact on CAD and inflation from lower Brent Crude price, most incurred huge real loss and/or opportunity loss on the March 2015 - February 2016 crash.

India equity valuation is not bad to ignore

Nifty below 7000 and Bank Nifty below 14000 is not a good exit for those who have already absorbed the impact from 9000-9150 and 20650-21000 respectively. So, the choice is between hold or accumulate. While investors may be ok to accumulate over the entry made during August 2013 - February 2014, it is tough for those who entered between March - October 2015 to prefer accumulate over hold. However, It is easy decision for investors who are in cash (taking money off the table) and risk-off mode since March - October 2015.

India equity market behaviour is seen in traction with DJIA at 15000/15350-16500/16850. At this stage, probability of bullish shift to 16850-18350 is low with bias for test/break of 15350 into 13750-14000, seen as strategic value-buy base for 2016. Given this outlook, NIFTY near term focus is set at 6500/6650-7000/7150 with neutral bias between 5950-6100 and 7500-7650. Bank NIFTY having led the fall in FY16 will look to regain the excessive value-erosion. Having said this, it would take a while to get into risk-on mode. The focus for now is set at 12650/13000-14000/14350 with neutral bias between stretch into 11000-11350 and 15350-15700. The negative take-away is the lower shift of 2016 high in Nifty from 7965-8000 (January) to 7600-7635 (February) while in search of 2016 base for sustainable recovery. It would be relief for February hold at 6500-6850 for close at 7150-7500 ahead of Budget 2016. The ball is held by the Government to prevent equity assets unwinding completely the Modi advantage.

India Gilts retain bearish undertone against most cues against sustainable recovery

India 10Y bond retain its struggle at 7.80-7.93% despite ease in US 10Y yield from 2.20-2.35% to 1.50-1.65%. But for this move, 10Y bond might be trading at 7.85-8.0%. There are no positive triggers from domestic cues with near-zero bandwidth for rate cut when RBI continue to stay suspect on inflation and fiscal deficit against emerging downside risk on the Rupee. The demand-supply dynamics in the absence of external appetite will also lead to pressure. What Next?

Given that US 10Y bond retain stability at 1.50/1.65-1.80/1.95% based on expectation of FED rate pause in March, India 10Y bond 7.72% 2025 is seen in bearish consolidation mode at 7.80-7.95% (7.59% 2026 at 7.68-7.83%). MARKET PULSE continue to hold 7.75-7.80% as duration-cut zone and 7.90-8.0% as duration-build zone. The pity is that post 50 bps September 2015 rate cut, duration-cut zone is moved up from below 7.50% to 7.60-7.65% to 7.75-7.80% between October 2015 - January 2016.

Rupee has more pain (and less gain) despite attractive forward rate

Rupee shift of play from 65.85-66.20 to 68.50-68.85 is swift triggering importer's panic (on unhedged $ liabilities) and exporters fear (on mark-to-market on covered receivables) with depreciation of over 2 Rupees against time-decay of less than 50 paisa from start of 2016. The worst part is that despite DXY consolidation at 95-100, USD/INR retained upward bias and would have punched all time high but for RBI $ supply at 68-68.50. MARKET PULSE was positioned for 66-69 trading range for Q1/2016 not ruling out stretch into 70 in FY17; ahead of time is indeed scare for many. The strategy to hedge 1-3M imports/FCL at spot levels from 66.10-66.25 and 66.55-66.70 and 12M exports at 72.50-73 has worked good chasing the 12M USD/INR in 2016 from 70.25-70.50 to 72.50-73. What Next? The big-picture rest of FY16 is now tuned at 67.70/67.85-68.85/69 (12M at 71.75/72-73/74) and it would need miracles for Rupee recovery into 66-67.50 with high probability for stretch into 68.50-70.00. Don't know what is RBI upto when domestic liquidity squeeze and pressure on short term money market rates have not helped Rupee stability. MARKET PULSE continue to retain 12M USD/INR at 73+ as good to stay between risk-neutral and risk-off through hedge of 50-100% of earnings risk. USD/INR spot at 68.50-70 and 5-10Y India-US yield spread at 6-6.15% is good for shift of Rupee liabilities to USD for resident borrowers and off-shore debt investors.

EUR/INR chase from 70 to 77-78 is more than break-neck speed with shift of focus at 75.50/75.85-78/78.35. The end of chase from 70 is based on outlook of heavy EUR/USD at 1.1350-1.15 and Rupee support at 68.20/68.35-68.50. What Next? Now, with EUR/USD near term play seen at 1.0850/1.10-1.1350/1.15 and USD/INR at 68-69, watch EUR/INR resistance zone at 78-78.35 against support at 75.50-75.85, breakout eitherway is not expected to sustain.

Have a great week ahead and Good luck!

Moses Harding
harding.moses@gmail.com
9674734145

Global Markets this week: Sentiment switch between risk-on and off!

Attention more on Liquidity & rates and less on structural fundamentals 

Given the macroeconomic fundamentals where they are now in depression mode, markets sentiment is triggered more by Central Banks monetary triggers through liquidity injection and rate actions. ECB is in stand-by mode for injection of more QE stimulus, and seen to be prepared for deep NIRP regime for extended period. BOJ being in liquidity over-hang policy mode for long has now moved from near ZIRP to NIRP regime. China is all out to do anything to support growth & financial markets, and to protect the currency from off-shore lenders & investors. FED that stayed hawkish with start of rate hike cycle in December 2015 and being prepared for more through 2016 is now seen to be in review mode to delay the next rate hike that was seen due in March. These are all great news to financial markets. What it did was to prevent the worst to provide near/short term consolidation for now. The ultra-lose monetary policy driven bull phase is an extended one since 2009 and investors are not comfortable to ride the move from here, and instead would prefer to stay in cash and risk-off assets till improvements in macroeconomic fundamentals are sighted from pick-up in growth, consumption led investment and employment generation. Till then, recovery in risk-on equity assets will be used to churn portfolio from equity to Gilts/AAA fixed income, Gold and cash.The churning process has already begun driving 10Y US Treasury yield from 2.25-2.35% to 1.80-1.90% and Gold from $1035-1070 to $1150-1185.

India dynamics is stuck between "devil and the deep sea". The domestic liquidity is just adequate and interest rates are high. Despite high interest differential, offshore appetite is limited with FIIs in search of exit. It is less said the better on macroeconomic fundamentals with less optimism on growth, inflation and twin-deficits. While global bourses get tailwind support from major Central Banks, India equity and debt markets do not get the same from RBI. To rub salt into the wounds, Rupee is sharply down since start of 2016 from 66.15 to 68.20-68.35 against 58.35, high seen in mid 2014. The way forward from RBI is not seen supportive to markets, and better clarity on support through rate cut will emerge between March to June post 

presentation of Budget FY17 and end FY16 economic data. The bottom-line is that the expectation of GDP growth over 8% is delayed beyond FY17 and target of 3.5% fiscal deficit for FY17 is not on the wish list. The best of CAD and BoP is behind while inflation expectation is suspect with RBI upward revision of March 2017 CPI target from 4.8% to 5% with conditions attached. Given these evolving  domestic dynamics, it is highly wishful to expect RBI to take dovish easy money policy in 2016, which has been front loaded beyond required in 2015. The Government has the choice between holding GDP growth over 7.5% through public investments or work on 3.5% FY17 fiscal deficit target holding growth momentum around 7.5%. Combining both, RBI and the Government is seen to have divergent agenda, which is the root of the problem being stuck between the devil and the deep sea!

All combined, India risk-on financial markets is highly dependent on support and appetite from off-shore investors, while domestic appetite will be biased to capital protected high yield fixed income assets rather than high risk equity assets. The risk-off momentum is seen heavy from sustainability of US 10Y yield below 1.85% and Gold at/above 1150-1185 despite risk-on support from Brent stability at comfort zone of $28-38 and DXY at 95-100.

Equity markets stuck between value-buy appetite and good to exit urge

DJIA index hold at 15850/16000-16500/16650 is comfort to EM bourses, which is still the top end of lower-half of big picture range 15000/15350-18000/18350. The major comfort here is emergence of appetite for equity assets when US 10Y yield is not attractive and high-risk hold at sub 1.85%. At this stage it is good stay in focus at inner-ring of set short term focus at 15350/15850-16650/17150, intermediate zone of 2016 big-picture trading range of 14850-18150. The breakout trigger is held by the FED, clarity of which will emerge from pipe-line economic data and on run up to  March FOMC. For the week, it is good to stay in back-and-forth mode 15850-16650, overshoot either way is tough to hold for now.

India equity assets have taken the worst hit in 2016 as extension from start of FY16. The demand-supply dynamics is not in favour for set up of sustainable bull phase with DIIs versus FIIs, while others are in indecisive mode from lack of strength in macroeconomic fundamentals. While high's of 2015 and 2016 look distant away, downside risks for punch of new 2016 low is on the radar. For Q1/2016, MARKET PULSE set Nifty "cap" at 7965-8000 (Bank Nifty at 17000-17100) as long-unwind zone (for investors to cash out) and short-build for strategic traders for down-hill momentum into value-buy zone of 7315-7350 (14700-14850). This strategy got done ahead of time and now at intermediate zone of 7480-7515 (15150-15250). What Next? Given that there are no major changes in market dynamics - weak fundamentals against monetary stimulus from major Central Banks, there is no need to review the set trading range focus for Nifty at 7200/7350-7600 and Bank Nifty at 14350/14750-15550/15700. The "worst is behind" theory for the short term is based on external cues from pressure on FED into rate-pause mode for next couple of quarters. It may take long to establish sustainable bull phase for stakeholders comfort to position for "buy-on-dips" mode. Any recovery from injection of monetary steroids will only lead to relief exit. For the week watch immediate resist zone in Nifty at 7505-7520 ahead of make-or-break zone of 7600-7615. There is no clarity at this stage on hold of set value-buy zone 7315-7350 ahead of 7200-7235, break here opening up swift charge into 7000. The big-picture NIFTY focus for strategic play is seen good now at 7000/7150-7500/7650. 

Bank Nifty is pulled down sharply from risk-aversion on PSU banks and valuation-risk on private sector banks. It is tough to find one positive factor to stay bullish on Banks. It's less said the better on NPA woes; opportunity (and real) loss on investment book is huge; revenue squeeze from pressure on profitability, and increased competition leading to pressure on productivity. All combined (along with not-dovish RBI), investors sentiment is not to hold or accumulate at good valuation. The intent will obviously be to take money off the table till impact from above-said is factored in the balance sheet and resultant valuation adjustment. Bank Nifty has immediate resistance at 15200-15350 ahead of major hurdle at 15550-15700, and 2016 high at 17067 is clearly out of focus. The big-picture short term range focus till end of FY16 is retained at 13850/14350-15350/15850.

US Gilts is high risk to hold while worst is not far away for India Gilts

The divergent monetary stance between FED and RBI should have ideally squeezed the India-US yield-spread - from spike in US yields (building traction with shift to rate hike cycle) and steady India yield (from rate pause before further cuts). But it went the other way with India-US 10Y yield spread sharply up from below 5.35% to over 6.0% from ease in US 10Y from 2.35% to 1.85% and spike in India 10Y from 7.45% to 7.90%. MARKET PULSE chase from long unwind (and duration-cut) play from 7.45-7.50% to short-squeeze (and duration-build) zone of 7.88-7.93% is done. What Next? While India Gilts is relatively better than equity in the short term, there is no clarity for sustainable bullish undertone to stay invested for the attractive carry of over 1.10% against Repo rate. The strategy is to stay fleet-footed for back-and-forth play at 7.78/7.80-7.88/7.90% (7.72% 2025) and 7.65/7.67-7.75/7.77% (7.59% 2026). Given the hard fact that the new 10Y bond is into deep discount immediately at post-issuance, demand-supply dynamics is against set up of bull phase in 2016. Having said these, need to be prepared for short term unsustainable overshoot (and volatility) beyond 7.78-7.90% (and 7.65-7.77%) from external cues from FED actions and FII mood-swings. The only supportive cue is stretch in US 10Y yield below 1.85% adding support to 7.72% 2025 at/above 7.85% before restoration of India-US 10Y yield-spread stability at 5.85-6.0%. For the week, set zoom-in focus on 7.72% 2025 at 7.78/7.80-7.85/7.87% and on 7.59% 2026 at 7.65/7.67-7.73/7.75% retaining downside bias into 7.88-7.93% and 7.75-7.80%. 

Global currencies stuck between developments in US and China

Global currencies fortunes are driven by expectation on FED rate action and PBOC measures to ring-fence Yuan from exit of off-shore debt and equity and to retain currency advantage for Chinese exports. While China impact retain headwind resistance on the Rupee, DXY is volatile at 95/96.50-100 sending mixed impact on Rupee. While China drove Rupee down from 66-66.15 to 68.20-68.35 from start of 2016, DXY correction from 99.5-100 to 95-96.50 provided Rupee relief momentum from 68.20-68.35 to 67.50-67.65. What Next? USD/INR big-picture for 2016 was set at 65.85/66.20-68.50/68.85 with breakout bias for 70.00 retaining 12M $ at 71-73, and upper end at 72.50-73 was seen good for long term export cover & carry-trade $ liabilities adjusting for time-decay. MARKET PULSE see no reasons to review this strategy, come what may from the March FOMC. While there is good clarity on the USD/INR bull phase, the pace of momentum will be set by FED rate action. For now, see USD/INR in sideways mode at 67.20/67.55-68.15/68.50 with importers & RBI demand at lower end, and short & long term exporters supply at higher end in traction with end March 2016 close at 67.85-68.50. It is prudent to stay risk-neutral on short term imports at spot 67.20-67.55 and risk-off on short & long term exports at spot 68.15-68.50 in traction with 12M $ at 71.25/71.50-72.50/72.75, breakout either way is tough to sustain for now.

Rupee is sharply down against Euro; while the set up of bullish momentum from 69.85-70.20 for test/break of 74.65-75 enroute to 75.65-76.65/77 was in script, it got done at hectic pace ahead of time from combination of EUR/USD pick-up from 1.07-1.0750 to target 1.12-1.1350 and USD/INR spike from below 66.20 to over 67.70. What Next? The near term zoom-in focus is now reviewed up at 74.15/74.50-76.65/77 with intermediate long-unwind zone at 75.65-76. It is good for Euro zone exporters to cover 12M receivables at 82-83 (12M USD/INR at 72.50-73 and EUR/USD at 1.12-1.1350. RBI may also look at this zone for sell-side intervention. 

Great relief for commodity assets regaining lost valuation 

It's relief for most on shift of Brent Crude play from $27-30 to $33-36. The strategy of MARKET PULSE is to end the down-hill chase at $30-33 and switch side at $27-30 for 30% reward. It's not surprise to see Brent losing steam at $36-38 post relief from below $30 for consolidation at $33-36. Most cues now suggest short term consolidation at 28/30-36/38, and obvious strategy is to retain end to end focus with stop on break. 

MARKET PULSE set 2016 outlook for Gold at 1035/1070-1150/1185 with end of multi-year down-hill chase at 1035-1050. The pace of quick surge in value from below 1050 to 1150 is pleasant surprise. What Next? Gold has now completely recovered the lost valuation since start of 2015 (2014 close of 1183.55 against 2015 high of 1306.20). At this stage it is not clear whether it is good to chase value extension beyond 1185. For now, it's good to watch momentum at 1185-1210, seen as high-risk long zone and retain short term focus at 1110/1135-1185/1210.

Have a great week ahead and good luck!

Moses Harding

harding.moses@gmail.com

9674734145