China plays havoc in global markets
The outlook for 2016 was based on FED hawkish monetary policy stance and "fear of unknown" dynamics from China and the Euro zone. The start of 2016 is dominated by geo-political issues in the Middle East and China extending the "currency war" into 2016. The collapse of Brent Crude below $35 and China growth concerns made investors run for cover shifting appetite from risk-off assets to cash, Gilts and Gold. PBoC also caught the FED on the wrong-foot pushing US 10Y yield to lower end of 2.10-2.35% and diluting DXY bullish rhythm unwinding recent recovery from lower to higher end of 97-100. DJIA gave up more than 50% of recent recovery from 14850/15350 to 17850/18350 with failure to hold base at 16850/17100. Gold has come back into investors focus with solid recovery from set short-squeeze zone of 1035-1050 to 1100-1135. While all these were not unexpected, India was seen to be relatively "safe" against domestic positive vibes. But it was not to be driving the equity assets down by 5% - Nifty from 7965-8000 to 7515-7550 and Bank Nifty from 17000-17150 to 16850-17000. Chinese Yuan impact on the Rupee was marginal with push-back from 66-66.20 holding at 67-67.20 before consolidation at mid-point 66.50-66.70. 10Y bond stood resilient around mid-point of set sideways range of 7.68/7.70-7.78/7.80. While most moves were as per script on the trend (and directional bias), the break-neck pace was surprise. What Next?
Good to stay risk-neutral and light for now
The extreme pain inflicted in the 1st trading week of 2016 will put investors and strategic traders on the back foot and let the fleet-footed traders play on the undercurrent momentum, thus adding to volatility eitherway. The impact on global markets is on DJIA shifting play from upper to lower half of 15350-18350 at 15350-16850 (stop at 17150 retaining the bearish chase) and stability in 10Y bond at lower half of 1.95/2.10-2.30/2.45% with most trades at 2.05-2.20%. DXY also shift play into lower half of 96.50/97-100/100.50.
The impact on India markets will be more downside risk on the equity market, neutral consolidation in the Gilt Market and bearish consolidation in the Rupee market. For the week, set NIFTY focus at 7480/7515-7665/7700 retaining sell-on-recovery mode while below 7750-7765. Bank NIFTY too retain its bearish undertone with focus now at 15750/15900-16350/16500 and relief recovery only above 16650. The near term big-picture focus on NIFTY is set at 7150/7250-7650/7750 and Bank Nifty at 15000/15250-16350/16600 retaining hope to find relief support ahead of strategic cheap-value buy zone of 7000-7150 and 14650-15000, where it is good to open up the investment book for 2016.
Retain 10Y 7.72% 2025 bond focus at 7.68/7.70-7.78/7.80% (at elevated spread of over 5.60%) while the new 10Y 7.59% 2026 bond adjust to 5.35-5.60% yield spread against US 10Y sideways mode at 2.05-2.20%, thus setting up sideways play at 7.55-7.65% in the new 10Y benchmark.
Rupee is now back to stability post the sharp weakness from 66-66.20 to 67-67.20 in traction with end January 2016 USD/INR focus at 66.35/66.50-67.20/67.35 and 12M $ at 70.25/70.50-71.25/71.50. There are no cues to review this outlook for now. The hedge strategy is to buy 1M $ at forward rate of 66.35-66.50 and sell 3M $ at 68.35-68.50 retaining Q4/FY16 USD/INR outlook at 66-68.50 within set 65.65-68.85 big-picture focus.
EUR/INR focus now at upper-half of 69.65/70.15-73.15/73.65 range at 71.65-73.65 from combination of firm EUR/USD at 1.08-1.1050 and steady USD/INR at 66.20/66.35-66.85/67.00. It's good to retain back-and-forth focus being neutral on breakout bias.
Good luck and have a safe week ahead!
Moses Harding
harding.moses@gmail.com
9674734145
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