When Global Markets shift to risk-on mode, India in struggle from domestic woes
Global Markets have weathered the recent storm from Central Banks triggered price volatility. The PBoC triggered monetary policy actions (and resultant concerns on global growth recovery) triggered risk-off crash in Global markets, driving DJIA from 18350 to 15350, 10Y US yield down from 2.30-2.35% to 1.95-2.0% and DXY from 98-98.50 to 92.50-93 during June - September 2015. During this period, Gold also regained steam for rally from 1100 to 1185-1200. What followed thereafter was relief from combination of supportive monetary triggers from ECB and growth confidence from the US economy, driving the sentiments back into risk-on mode unwinding most of recent losses for status-quo position. DJIA is now back at 17850-18350, US 10Y at 2.20-2.35%, DXY at 98-98.35 and Gold at 1100-1115. Ideally, this shift from risk-off to risk-on mode along with RBI surprise 50 bps rate cut on 29th September should have added fuel to India markets recovery towards high levels of 2015. In contrast, NIFTY has unwound most of post 29th September rally from 7691 to 8336, Bank Nifty from 16648 to 18029, 10Y bond from 7.75 to 7.45% and Rupee from 66.41 to 64.69. When India is seen as the most attractive investment decision, markets losing traction with external risk-on bullish sentiment was seen as major risk in play when FED is preparing for December rate hike!
MARKET PULSE highlighted the "something invisible" factor that is hurting the investor sentiment (and confidence) when India was going through the Bihar election process. It was also pointed out that the system is shifting to lower gears on economic development agenda, and into higher gears on other non-productive matters around intolerance. The premium extended to the capabilities of BJP (and Modi) to fast track India economic development got into the process of unwind. The pent-up confidence (and euphoria) built from May 2014 - March/June 2015 is getting unwound, and now it may gain speed if immediate course-corrective actions are not initiated to restore the investor confidence.
BJP leadership can't take the decisive Bihar mandate (in favour of the opposition) as matter of fact. Most expectations were around split verdict, but the result has come as a shocker to the BJP and to external stakeholders. The "noises" around intolerance has to be shut and need to see top-gear cruise on India economic development. If the Bihar verdict is taken as "wake-up-call" by BJP, then the damage from here may be limited. If lessons are not learnt from Delhi and Bihar, then tough days are ahead for India Financial markets. All taken, the outlook for rest of 2015 is not positive for India Financial markets. While Global markets set up bullish momentum to post new 2015 high's, India will be under pressure to defend 2015 low's, thus setting up risk of India losing its most favoured investment destination. Will FPIs stay put in this change of dynamics of the India asset markets?
India equity markets retain bearish undertone: protection of 2015 low is essential
NIFTY close below 7985-8000 (at 7954) takes into account a kind of hung verdict giving BJP the single largest party status. But, the outcome of clean sweep to the United opposition is unpleasant shocker to market stakeholders. This sets up immediate risk on pre 50 bps rate cut low of 7691 and 7539. The unwind from post-policy high of 8336 to 7926 is not positive, making the rate cut support irrelevant. Taking all these developments (and related risks), MARKET PULSE already shifted NIFTY focus at 7650/7700-8150/8200 post the unwind of post-policy recovery from 8335-8350 to 7985-8000 with correction hold at 8115-8150. The damage on Bank NIFTY is more severe with push down from 18000-18100 to 16850-17100. What Next? When Global markets go into near term correction mode ahead of FED rate hike event (unwinding recent recovery), negative vibes from domestic cues is major concern to drive markets down in the immediate term with minor support for Nifty at 7650-7700 and major one at 7500-7550 against minor resistance at 7985-8035 with near term cap at 8115-8150. For the week, it is good to retain focus at 7670/7720-7970/8020 not ruling out stretch into 7500-7550, seen as major short-squeeze support with good appetite from strategic investors.
Bank Nifty under pressure from NPA woes and unwind of mark-to-market gains in Investment portfolio. The opportunity loss from 10Y bond yield unwind from 7.45% to 7.70% is huge. The only benefit is from significant benefit in cost of funds for the next 3-6 months, before turning flat. The immediate resistance zone is at 17100-17200 with major one at 17450-17600. The support at 16900 is set to give way for 16250-16400 not ruling out stretch into short-squeeze support (and strategic buy zone) at 15650-16000. For the week, retain focus at 16250/16400-17050/17200.
India 10Y bond at risk from spike in yield spread with US yield
10Y bond yield spike from 7.45-7.50% to 7.68-7.73% is bearish post the RBI dovish monetary policy stance. The risk from overdose 50 bps rate cut is the extended RBI rate-pause when FED prepares for rate hike. Despite this, India-US 10Y yield-spread got squeezed from 5.60 to 5.45% largely from FPI appetite. The recent political development builds risk of spike in spread into 5.50-5.60% against steady US 10Y at 2.20-2.35%. MARKET PULSE expectation was for 7.60/7.62-7.70/7.72% stability post the unwind from take-profit (and duration-cut) target at 7.50%. Now, may need to review the stance not ruling out stretch weakness beyond 7.72% with short term base at 7.65-7.68%. 10Y benchmark 7.72% 2025 trading at discount (against operating policy rate of 6.75%) may not be to RBI's liking, which is the only support at this stage. For now, it is good to review near term focus at 7.65/7.67-7.73/7.75% and stay end to end. For those who cut duration at 7.45-7.50%, it is manna from the heaven for reinstatement at 7.70-7.75%.
Rupee at risk for retest of pre RBI policy and 2015 low : can it hold here?
Indian Rupee is at risk from combination of domestic and external cues. External headwinds are from bullish undertone of DXY at 97.50-100 with momentum build-up for pass through of 98-98.35 resist zone and shift of FPI appetite to other favoured destinations that would get benefit from risk-on tailwind support. MARKET PULSE reviewed the short term focus from 65.50-67 to 64.50-66.50 post 29th September RBI policy (12M USD/INR at 69-70). The outlook was a gradual unwind of 66.40 to 64.70 post policy recovery with target at 65.70-65.85, and for stretch into 66.15-66.40 on DXY momentum beyond 98.35. Now, things have turned from bad to worse taking the focus range at 65.70/65.85-66.35/66.85. It would need aggressive RBI to avoid free fall momentum into 67.20 ahead of 68.85. It is bullish momentum on the 12M USD/INR for revisit to 71.00-71.25 resist zone for quick completion of back-and-forth play at Strategic hedging (and trading) range of 68.75/69-71/71.25.
EUR/INR will be worst hit in the near/short term from combination of EUR/USD near term stability at 1.08-1.0950 and Rupee downside risk into/beyond 66.15-66.40. The set short-squeeze zone of 70.90-71.15 will go distant away with focus beyond 71.90 into 72.15-72.50, which would hold if DXY build steam for over 98-98.35 driving EUR/USD into lower end of set short term focus range of 1.0450/1.05-1.0950/1.10. All combined, retain focus at 71/71.35-72.50/72.85 with bias for end to end play.
Wish you all a very Happy Diwali.
Moses Harding
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