The start of 2016 was painful with risk-on financial markets in steep fall from global growth risks led by China and most analysts working on March rate hike from the FED. The combination of China and the US headwind dynamics on markets triggered the fall, which was already looking weak, nervous and vulnerable for break down. DJIA index collapsed to 15350-15500, door-step of set 14850-15350 strategic value-buy base from set hot to hold resist zone of 17850-18350; US 10Y yield eased from over 2.20% to below 2% and Brent Crude looked fragile even at $28-30, set as short-squeeze and hedge-buy zone. In the meanwhile DXY remained indecisive at 98-100.
When the hell was breaking loose wiping out investors capital and serious value erosion in long term risk-on portfolio, ECB stepped in with the rescue act of possible liberal dose of QE in March. While the relief was seen to be momentary and too little to provide sustainable comfort, BOJ dropped the manna from heaven with shift from near zero to negative interest rate policy regime adding cheese to its liquidity over-hang ultra-lose liquidity policy stance. Given the very negative and risk-aversion markets sentiment, the guidance tone from FOMC remained dovish reducing the probability of March rate hike. All these combined, risk-on financial markets had soft landing at the end of January from the steep fall during the month. It was indeed great relief as DJIA recovered from below 15500 for close over 16350 and Brent Crude moved sharply up from 28-30 to 33-35. Possible delay of rate hike by FED kept US 10Y yield low at sub 2% despite unwind of risk-off momentum, while DXY regained bullish rhythm into higher end of 97.50-100.50 focus. During this phase between risk-off and risk-aversion, Gold had the best of rally from 1035-1050 to 1120-1135.
India lost the most in the first month lap of 2016. Nifty went down by 8-10% from 7965-8000 to 7250 before unexpected recovery for close at 7500-7650. Bank Nifty got hammered from 17000-17100 to 14750; recovery from here met rough weather at 15150-15650 before relief close at 15350-15500. The worst part of India 10Y bond is the widened spread in India-US 10Y yield from 5.35-5.60% to 5.60-5.85%, while 7.72% 2025 stay under pressure at 7.70/7.73-7.80/7.83% and new babe 7.59% 2026 weak at 7.60/7.62-7.70/7.72%. It is less said the better on the Rupee, down from 66-66.15 to 68.20-68.35 while most global currencies remained relatively steady against the US Dollar.
While global markets remained under pressure from depressed macroeconomic fundamentals with very little optimism for turnaround in 2016, the impact on India was severe from shift of investor sentiment from optimism to loss of hope. India was seen as the best destination not long ago, but the significant value erosion in FY16 across equities, Gilts and Rupee make it believe that India has lost its most favoured status. This is the major risk in play on India financial assets.
Equity market in risk-neutral mode from liquidity and interest rate support despite weak fundamentals and above fair value
DJIA mid 2015-2016 big-picture focus was set at 15000/15350-18000/18350 with neutral breakout bias with stop on break of 14850 or 18500. Since then, the play has tested either end more than once without breakout momentum shifting play from risk-on bullish consolidation zone of 16500-18000/18350 to risk-off bearish consolidation at 15350-16500/16850. What next? The immediate term outlook is for risk-neutral consolidation at 15850/16000-17000/17150. On the way forward, FED rate hike in March will be negative to shift the focus back to 14850-16500, while extended rate pause stance will provide the desired bullish momentum for lift of focus at 16500-18350.
India equity markets got saved by ECB and BOJ in the absence of limited positive (and optimistic) vibes from the Government and RBI. When NIFTY was under pressure at 7100-7350 with punch of new low below 7250, ECB provided relief for shift of play to 7350-7500, followed by BOJ trigger into 7500-7650. Bank Nifty found support around 14750 for shift of play at 15000/15150-15550/15700. Given the lack of optimism in-house, directional bias is set up by external forces. RBI has limited bandwidth to be liberal when staying suspect on inflation, fiscal consolidation against emergence of external pressure on the CAD and Rupee. Now that ECB and BOJ have delivered to arrest value erosion, attention is on the FED and next steps of PBoC. The positive take-away at this point is that January 2016 low of 7241 is seen safe in Q4/FY16 for shift of play from risk-off bearish consolidation zone of 7000-7500 to risk-neutral sideways mode at 7250-7750, and there after dovish stance of FED in March could get the focus to 7500-8000. All combined, retain big-picture focus at set 7000/7150-8000/8150 and zoom-in between set value-buy zone of 7300/7335 and caution on "long" book at 7635-7785.
Bank Nifty 2016 low of 14750 is not out of danger as yet post the RBI caution on hardening interest rates and higher bond yields if growth gets priority at the cost of fiscal prudence. Bank Nifty big-picture was set at 13850/14000-17000/17150, and the move from above 17000 to value-buy zone of 14850-15000 is done before recovery failure at 15550-15700. For now, set near term focus at intermediate zone at 15000-16000 and stay bias neutral on the next move either into 14000-15500 or 15500-17000.
It is too early to turn risk-on with too many complexities in play. The macroeconomic fundamentals are yet to make a sustainable turnaround to the comfort of external investors and to the confidence of domestic stakeholders. Money market is not expected to turn supportive to equity assets in the near future. Both combined, DIIs will have limited risk appetite while FIIs will look for exit post the mark-to-market scare on both equity and debt portfolios adjusted for Rupee de-rated valuation. Having said these, the prudent big picture strategy is to cherry-pick while Nifty at 7300-7350 and cautious on "long" at 7650-8000 with most trades likely to be at 7350-7650. Bank Nifty valuation will look not-so-bad at 14000-14850 and hot to hold at 15850-16700. All taken, equity markets got the benefit of liquidity for rally since mid 2009, and now extended liquidity support will push FII investors to search for exit to take monies off the table before it gets late.
Soft interest rates in developed markets is no support for India, retaining weak undertone in 2016
FED hawkish monetary policy stance got countered by ECB and BOJ with liberal dose of money and negative interest rate policy regime. This stance has done very little to attract investments, expand consumption and to spur growth. But, what it has done effectively is to push US 10Y yield down from 2.35-2.50% to 1.85-2.0% unwinding the 50 bps rate hike outlook impact. Given this play, positive take-away is that even if FED carry forward with one or more baby-step rate hike starting March, US 10Y yield may not harden beyond 2.35-2.50% to the relief of emerging markets. For now, US 10Y bond yield is seen at 1.85-2.0% (on expectation of March rate-pause) with risk of shift of play at 2.05-2.20% if FED choose to go ahead based on supportive domestic economic data.
India 10Y bond saw the best post delivery of 50 bps rate cut in September 2015, which is now behind. Since then, 7.72% 2025 went down from 7.45-7.50% to 7.80-7.85%. The new babe 7.59% 2026 went down from 7.55-7.58% to 7.70-7.73%. In the process, India-US 10Y yield-spread widened from 5.35-5.50% to 5.70-5.85%. What Next? While long term yield didn't get the benefit of 1.25% rate cut in 2015, the pressure is now on the shorter end of the curve, showing signs of hardening mode. All combined, retain focus on 7.72% 2025 at 7.70/7.73-7.82/7.85% and 7.59% 2026 at 7.57/7.60-7.70/7.73%. Beyond here, FED rate pause will ensure hold at this range in sideways mode while March rate hike will extend weakness into 7.90-7.93% (7.80-7.83%). RBI has already issued caution on this probability on risks from weak Rupee and high fiscal deficit.
USD stuck between neutral to bullish undertone, and stronger against Rupee
The bullish set up on the DXY is triggered by ECB and BOJ and the confirmation is awaited from the FED through hike or pause. All combined, DXY has firm strategic base at 97-98.50 and it's work-in-progress for break of 100.50. USD/JPY held firm at 115-116.50 with lift of base at 118.50-120 for 123.50-126. EUR/USD repeated failure at 1.0950-1.10 sets up bearish momentum for 1.0450-1.07 from current sideways mode at 1.0750-1.10. It would need FED shift into dovish mode (through deferral of rate hike) to get the focus at 1.0850-1.1350, seen as low probability event now.
USD/INR is stronger than expected in 2016, intra-January crash from 66-66.15 to 68.20-68.35 was at hectic speed, against the outlook for Q1/2016. MARKET PULSE strategy was to be in chase for 66.20 to 68.20 for switch side with stop at 68.35 for correction into 67.50-67.85. 12M $ lost steam as per script at 72.25-72.50. What Next? USD/INR base is now seen at 67.20-67.35 against immediate resist zone at 68.20-68.35 retaining bullish momentum into 68.85-69 in traction with 12M $ at 71.25/71.50-72.50/73. The hedge strategy is to stay risk-neutral on 1-3M imports at spot 67.20-67.50 and risk-neutral on 3-12M exports in 2 lots at spot 68.20-68.35 and 68.65-69. This stance holds good till better clarity on FED rate stance in March, which is now 50:50 between 25 bps hike and cautious rate pause.
EUR/INR resistance zone at 74.65-75.00 stayed solid from combination of heavy USD/INR at 68.20-68.35 and EUR/USD at 1.0950-1.10, no surprise though as both are seen as long-unwind and short-build zone. What Next? The immediate focus is set at 72.15/72.50-74.15/74.50 in traction with EUR/USD at 1.05-1.10 and USD/INR at 67.20/67.35-68.70/68.85 and stay neutral on breakout bias till clarity from the FED to set up momentum either way.
Commodities stuck between demand-supply dynamics and liquidity overhang
MARKET PULSE expected 30% spike in Brent Crude from 28-30 to 36-38 while retaining big-picture focus at 28/30-36/38. Got most of the move at terrific pace! What Next? It is consolidation phase at 33-38 with breakout bias into $45 on supply squeeze with downside protection at 30-33 from short-squeeze and hedge appetite. The big picture range is now reviewed at 30/33-42/45.
Got the move in Gold from 1035-1050 to 1120-1135 post the down-hill chase in 2015 from 1180-1195 to 1050-1065. What Next? It's now risk-neutral phase at 1070/1085-1135/1150 with end to end focus and stay neutral on breakout bias.
Have a great week ahead!
Moses Harding
harding.moses@gmail.com
