Can Draghi (and ECB) emerge as saviour when QE is seen to contain the worst, and not effective for prevention or cure!
The latest statement of Draghi on QE came at the best time when the global risk-on markets were in free fall since the start of 2016. There has been huge erosion in investors wealth. Everyone was seen moving away from equities to Gilts, cash and Gold. Brent Crude was looking heavy even below $30 highlighting the hard fact that worst is not yet behind. DJIA 2-year rally from 15340 (February 2014 low) to 18351 (May 2015 high) went behind pulling in February 2013 low of 13784 into the radar. DJIA bearish momentum since start of 2016 is extreme for steep and swift fall from 17850 (door-step of short-build zone of 17850-18000/18350) for hold at value-buy base of 15350-15500. But for the Draghi rescue statement, it would have been more blood on the street.
India equity is stuck between the devil (lack of external appetite for India equity) and the deep sea (China currency impact on Emerging markets). Nifty is down from 2015 high of 9119 for punch of new 2015-2016 at 7241 and it's worse for Bank Nifty down from 20907 to 14754. The only comfort is that MARKET PULSE saw 2015 high as too hot to hold and recent low's as strategic value-buy for opening the 2016 book. It did overshoot beyond 7300-7350 (14850-15000) before recovery, thanks to Draghi QE statement.
What Next? Is it relief rally or consolidation before another deep dive or shape up to bull phase?
Obviously this last mile QE is not going to set up a sustainable bull phase when ultra-dovish monetary policy support since 2008-2009 has not resulted in beneficial impact on macroeconomic fundamentals. So, the option is between consolidation between recent high and low or recovery to recent high preparing momentum for punch of new 2016 low. How far the relief could stretch? Now that Draghi is expected to execute the QE in March, it may be a month of "buy-on-dips" and sell ahead of or post event in March. The positive take-away however is the shift from "sell-on-recovery" to "buy-on-dips" mode and trigger short-squeeze.
DJIA near term focus was set at lower-half of 15350-17850/18350 at 15350-16600/16850 with close above 16000 on recovery from 15350-15500. The immediate term bias is into 16600-16850 from combination of short-squeeze and risk-on buy for quick bucks. What is not sure at this point is the strength of momentum beyond 16850? Let us freeze our attention on 15850-16850 and stay neutral on breakout extension which is seen limited at 15350/15500-17200/17350.
Nifty near term focus was set at 7300/7350-7950/8000 with breakout bias into 7000-7150 before sharp recovery. It was a sharp fall from 7972 to 7241 in 2016. Thanks to Draghi, Nifty closed the week above 7380-7415, seen as intermediate support turned resistance which pulls 7500-7650 resistance which is the doorstep of upper-half of set 2016 big-picture range of 7000/7150-8000/8150. For now, good to stay tuned at 7200/7350-7650 in buy-on-dips mode and in caution at 7615-7650 (stop at 7665); break here will get the focus back to 2016 high at 7972 before down.
Bank NIFTY near term end2end focus was set at 14850/15000-17000/17150, down-hill from 17067 got stretched marginally to 14750 before Draghi triggered recovery over 15350-15500, seen as intermediate resistance zone. MARKET PULSE set immediate focus at 14750/15000-16000/16250 with bias into higher end. The worry now is most cues turning against banking stocks barring a few select ones. While all have NPA woes at different degree, some have the desired cash power through other income (despite losing the valuation gains on its investment portfolio) and high provision coverage.
Gilts retain its shine from higher allocation given the dynamics shift between risk-aversion and risk-neutral
US 10Y yield is volatile at 1.95/2.0-2.30/2.35% with mixed expectation on the timing of next round of FED rate hike. While there is unanimity on the quantum (25 bps), the street is divided on the timing (next FOMC or pause with caution). This stance keeps it volatile within set focus range, thus setting up traders delight. Now, with ECB coming into play with more QE and deeper NIRP stance, US 10Y yield focus is set at 1.95-2.20%, not ruling out downside break if "What Next" syndrome strikes ECB shifting the sentiment back to risk-off and risk-aversion mode. Even a 25 bps hike by FED may not turn out to effective shifting the play not beyond 2.20-2.35%.
The external dynamics have turned supportive for India Gilts despite possible status-quo on policy rates through 2016. US 10Y yield stability at 1.95-2.20/2.35% with India-US yield spread of 5.50-5.80% sets up sideways mode in 7.72% 2025 at 7.70-7.85% (7.59% 2026 at 7.55/7.60-7.70/7.75%). DII attraction will be from "interest-carry" of 90-110 bps and FII pull from short term stability of Rupee at 66.85-68.35. It is good to stay focused end2end and await Budget FY17 for better clarity. There may not be significant expectation or take-away from next couple of RBI monetary policy review meetings.
Have a great week ahead.
Moses Harding
harding.moses@gmail.com
9674734145
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