Global cues : FOMC policy guidance will set the short term undertone
It has been mixed cues in the Global economy. The overdose liquidity support at near zero (and negative) interest rate policy did arrest severe downside pressure on growth recovery to provide sort of relief to the stakeholders. US economy is leading from the front on the global growth recovery process, and signals for FED shift from dovish to hawkish monetary policy stance are loud and clear. The expectation are more or less unanimous on start of rate hike in December 2015 FOMC meeting. While the markets have factored in 25-50 bps rate hike between December 2015 to March 2016 and extended pause thereafter, any guidance to the contrary will be volatile on markets, either way! The comfort however is from other major markets (Euro zone, Japan and China) staying in ultra-dovish monetary policy stance through 2016. The combination of comfort on growth recovery in 2016 (and beyond) and minimal risk of liquidity squeeze on risk-on assets during this time will keep the global markets between risk-on and risk-neutral mode with low probability of risk-off sell off.
MARKET PULSE set the risk-neutral trading range for DJIA at 17500/17650-18000/18150, while preparing steam for punch of new 2015 high over 18351. The intra-2015 back-and-forth swing at set focus range of 14850/15350-17850/18350 has been perfect with 18351 to 15370 to 17977 big-picture moves since May 2015. It is prudent to stay tuned to 17350/17500-18000/18150 ahead of FOMC guidance (and FED rate action) and stay fleet-footed for breakout either way. A hawkish guidance will extend reversal to 16850-17000 before stability, while a neutral guidance will set up bullish momentum into 18200-18350.
US 10Y Treasury yield has been volatile within set big-picture focus at 1.85/2.0-2.50/2.65% keeping 2015 low of 1.65% distant away. Post the swings between 2.50% to 1.90% since June 2015, now it is in risk-neutral intermediate zone at 2.20-2.35%. The post FOMC trading range is bias neutral between 2.05-2.20% and 2.35-2.50%. It is prudent to set pre & post FOMC range focus at 2.20-2.50% and overshoot either way into 2.05-2.20% or 2.50-2.65% will be tough to sustain.
DXY has been volatile in back-and-forth mode at set big-picture focus range of 92/93.50-98.50/100 with solid recovery from 92.62 to 99.50 since August pulling 100-100.35 to striking distance. The probability of punching new 2015 high beyond 100.39 is high with risk of FED intervention to arrest excessive USD strength. For now, good to retain focus at 98/98.35-100/100.35 with bias into higher end.
EUR/USD has almost completed its back-and-forth play at set big-picture range of 1.05/1.0650-1.15/1.1650 unable to sustain overshoot with moves from 1.0456 to 1.1711 to 1.0673 since March 2015. It is good to stay tuned at 1.0450/1.05-1.0850/1.09 ahead of FOMC and await breakout cues.
Gold has completed back-and-forth play at set focus range of 1070/1085-1185/1200 with 1077 to 1190 to 1083 since July 2015 and now under pressure at lower end. The run upto FOMC bias is weak at 1070/1080-1100/1110. It is prudent to squeeze shorts at 1070-1085 or hold with trail stop at 1110 awaiting test/break of lower end which could pull 950-1000 into the radar.
Brent Crude has been steady at 45/46.50-50/51.50 post the intra-2015 crash from 68.50-70 to 40-42.50 seen as strategic base. For now, retain big-picture play not beyond 40/42.50-50/52.50, not ruling out bullish extension into 55.50-56.
Domestic cues : "cat on the wall" sentiment
India sentiment is seen to be down (and out) in the short term. The external tailwind support is diluted with foreign investor appetite shift to developed and other emerging markets. It is less said the better on the domestic cues. There is no political consensus on economic development agenda, and BJP is seen in struggle to deliver on key economic agenda. The political advantage support since May 2014 is diluted post the Delhi and Bihar verdict against the Government. It is a big setback given the big thumbs down for NaMo. The markets have already responded to these events unwinding the gains from liberal 50 bps rate cut delivered by RBI on 29th September with risk posting new 2015 low across asset classes. In the given dynamics, downside risks can run deep while recovery will be shallow, thus keeping the investor sentiment weak and appetite low.
NIFTY is in struggle at lower-half of set strategic focus at 7500/7650-8350/8500 with failure at post-policy high of 8336 for swift fall to short-squeeze support zone at 7750-7785. The worry is from consistent lower high's since 9119 (March) to 8116 (November) with threat to take out recent low's of September at 7539/7691. MARKET PULSE already shifted pre FOMC focus at 7650/7700-8150/8200 for back-and-forth play. What Next? The open up of FDI flood-gates (post Bihar election setback) is seen as reactive, and at best it could only speed break the bearish momentum. The risk is from lack of appetite from FPIs and the extent of PSU Institutional Investor support to risk-on assets. All combined, the downside risk (on run upto FOMC) and acceleration thereafter is not ruled out. It is prudent to stay cautious in sell-on-recovery mode awaiting credible positive triggers from domestic sector. For now, retain focus at 7500/7650-8000/8150 with minor resist zone at 7885-7935. The near term strategy is tuned for shift into sideways mode at 7500/7550-7800/7850.
Bank NIFTY has been relatively stable at 16500/16600-17000/17100 post the swift fall from post-policy high of 18029/17466 taking out the policy day low of 16648 with punch at 16587. Here again, the headwinds are much stronger than the tailwind support. It is good to retain focus at 16500/16600-17000/17100 with breakout bias into 15750-16250 against short term cap at 17250-17500.
India 10Y bond yield met target 7.50% (post-policy low of 7.47% at 101.64) with multiple times failure at set strategic buy zone of 7.90-7.93% (pre-policy high of 7.93% at 98.70). The expected reversal from long-unwind and duration-cut zone of 7.45-7.50% hit 7.73-7.75% target before close at 7.68%. It was a pleasant wind-surfing ride despite extreme volatility. MARKET PULSE set focus at 7.60/7.62-7.70/7.72% with stretch to 7.75% which is done now. The focus range is now reviewed at 7.65/7.67-7.73/7.75% ahead of FOMC, while US 10Y yield stay in sideways mode at 2.25-2.35%. Given the higher probability for shift into 2.35-2.50% post FOMC, do not rule out India 10Y bond weakness beyond 7.75%.
USD/INR post-policy push-back from 66.35-66.50 held dot at 64.70-64.85 for swift pull-back to starting point with 66.41 to 64.69 to 66.49 moves in back-and-forth mode. Rupee extreme weakness is from combination of domestic woes and DXY rally into set target 99.50-99.85. FPIs and importers bids were huge to be fed by $ supply in the cash and forward segment. RBI rescue at 66.35-66.50 has helped to halt extension into 66.85-67.20 which would have pulled 68.50-68.85 into focus. In the process 12M USD/INR completed its back-and-forth at set focus of 68.75/69-70.75/71.25. MARKET PULSE had set consolidation and mark-time phase at 66/66.20-66.50/66.70, RBI willing. The risk is from sharp break-down open for Rupee, a kind of repeat action of 9/11 from 65.75 to 66.40 shifting RBI protection zone from 65.70-65.85 to 66.35-66.50. The hedging strategy is now tuned to USD/INR range of 65.85/66.20-66.85/67.20 (12M $ at 70/70.25-71/71.25).
EUR/INR is nicely down with lower high's at 75.65/74.50/72.50 with support at set short-squeeze zone of 70.65-70.90. For now, retain 71.65-71.90 as resistance with downside pressure into 70.50-70.65 which should hold for sideways play at 70.65/70.90-71.65/71.90 with overshoot not beyond 72.15-72.40 or 70.15-70.40.
Moses Harding
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