Global Markets this week: Sentiment switch between risk-on and off!

Attention more on Liquidity & rates and less on structural fundamentals 

Given the macroeconomic fundamentals where they are now in depression mode, markets sentiment is triggered more by Central Banks monetary triggers through liquidity injection and rate actions. ECB is in stand-by mode for injection of more QE stimulus, and seen to be prepared for deep NIRP regime for extended period. BOJ being in liquidity over-hang policy mode for long has now moved from near ZIRP to NIRP regime. China is all out to do anything to support growth & financial markets, and to protect the currency from off-shore lenders & investors. FED that stayed hawkish with start of rate hike cycle in December 2015 and being prepared for more through 2016 is now seen to be in review mode to delay the next rate hike that was seen due in March. These are all great news to financial markets. What it did was to prevent the worst to provide near/short term consolidation for now. The ultra-lose monetary policy driven bull phase is an extended one since 2009 and investors are not comfortable to ride the move from here, and instead would prefer to stay in cash and risk-off assets till improvements in macroeconomic fundamentals are sighted from pick-up in growth, consumption led investment and employment generation. Till then, recovery in risk-on equity assets will be used to churn portfolio from equity to Gilts/AAA fixed income, Gold and cash.The churning process has already begun driving 10Y US Treasury yield from 2.25-2.35% to 1.80-1.90% and Gold from $1035-1070 to $1150-1185.

India dynamics is stuck between "devil and the deep sea". The domestic liquidity is just adequate and interest rates are high. Despite high interest differential, offshore appetite is limited with FIIs in search of exit. It is less said the better on macroeconomic fundamentals with less optimism on growth, inflation and twin-deficits. While global bourses get tailwind support from major Central Banks, India equity and debt markets do not get the same from RBI. To rub salt into the wounds, Rupee is sharply down since start of 2016 from 66.15 to 68.20-68.35 against 58.35, high seen in mid 2014. The way forward from RBI is not seen supportive to markets, and better clarity on support through rate cut will emerge between March to June post 

presentation of Budget FY17 and end FY16 economic data. The bottom-line is that the expectation of GDP growth over 8% is delayed beyond FY17 and target of 3.5% fiscal deficit for FY17 is not on the wish list. The best of CAD and BoP is behind while inflation expectation is suspect with RBI upward revision of March 2017 CPI target from 4.8% to 5% with conditions attached. Given these evolving  domestic dynamics, it is highly wishful to expect RBI to take dovish easy money policy in 2016, which has been front loaded beyond required in 2015. The Government has the choice between holding GDP growth over 7.5% through public investments or work on 3.5% FY17 fiscal deficit target holding growth momentum around 7.5%. Combining both, RBI and the Government is seen to have divergent agenda, which is the root of the problem being stuck between the devil and the deep sea!

All combined, India risk-on financial markets is highly dependent on support and appetite from off-shore investors, while domestic appetite will be biased to capital protected high yield fixed income assets rather than high risk equity assets. The risk-off momentum is seen heavy from sustainability of US 10Y yield below 1.85% and Gold at/above 1150-1185 despite risk-on support from Brent stability at comfort zone of $28-38 and DXY at 95-100.

Equity markets stuck between value-buy appetite and good to exit urge

DJIA index hold at 15850/16000-16500/16650 is comfort to EM bourses, which is still the top end of lower-half of big picture range 15000/15350-18000/18350. The major comfort here is emergence of appetite for equity assets when US 10Y yield is not attractive and high-risk hold at sub 1.85%. At this stage it is good stay in focus at inner-ring of set short term focus at 15350/15850-16650/17150, intermediate zone of 2016 big-picture trading range of 14850-18150. The breakout trigger is held by the FED, clarity of which will emerge from pipe-line economic data and on run up to  March FOMC. For the week, it is good to stay in back-and-forth mode 15850-16650, overshoot either way is tough to hold for now.

India equity assets have taken the worst hit in 2016 as extension from start of FY16. The demand-supply dynamics is not in favour for set up of sustainable bull phase with DIIs versus FIIs, while others are in indecisive mode from lack of strength in macroeconomic fundamentals. While high's of 2015 and 2016 look distant away, downside risks for punch of new 2016 low is on the radar. For Q1/2016, MARKET PULSE set Nifty "cap" at 7965-8000 (Bank Nifty at 17000-17100) as long-unwind zone (for investors to cash out) and short-build for strategic traders for down-hill momentum into value-buy zone of 7315-7350 (14700-14850). This strategy got done ahead of time and now at intermediate zone of 7480-7515 (15150-15250). What Next? Given that there are no major changes in market dynamics - weak fundamentals against monetary stimulus from major Central Banks, there is no need to review the set trading range focus for Nifty at 7200/7350-7600 and Bank Nifty at 14350/14750-15550/15700. The "worst is behind" theory for the short term is based on external cues from pressure on FED into rate-pause mode for next couple of quarters. It may take long to establish sustainable bull phase for stakeholders comfort to position for "buy-on-dips" mode. Any recovery from injection of monetary steroids will only lead to relief exit. For the week watch immediate resist zone in Nifty at 7505-7520 ahead of make-or-break zone of 7600-7615. There is no clarity at this stage on hold of set value-buy zone 7315-7350 ahead of 7200-7235, break here opening up swift charge into 7000. The big-picture NIFTY focus for strategic play is seen good now at 7000/7150-7500/7650. 

Bank Nifty is pulled down sharply from risk-aversion on PSU banks and valuation-risk on private sector banks. It is tough to find one positive factor to stay bullish on Banks. It's less said the better on NPA woes; opportunity (and real) loss on investment book is huge; revenue squeeze from pressure on profitability, and increased competition leading to pressure on productivity. All combined (along with not-dovish RBI), investors sentiment is not to hold or accumulate at good valuation. The intent will obviously be to take money off the table till impact from above-said is factored in the balance sheet and resultant valuation adjustment. Bank Nifty has immediate resistance at 15200-15350 ahead of major hurdle at 15550-15700, and 2016 high at 17067 is clearly out of focus. The big-picture short term range focus till end of FY16 is retained at 13850/14350-15350/15850.

US Gilts is high risk to hold while worst is not far away for India Gilts

The divergent monetary stance between FED and RBI should have ideally squeezed the India-US yield-spread - from spike in US yields (building traction with shift to rate hike cycle) and steady India yield (from rate pause before further cuts). But it went the other way with India-US 10Y yield spread sharply up from below 5.35% to over 6.0% from ease in US 10Y from 2.35% to 1.85% and spike in India 10Y from 7.45% to 7.90%. MARKET PULSE chase from long unwind (and duration-cut) play from 7.45-7.50% to short-squeeze (and duration-build) zone of 7.88-7.93% is done. What Next? While India Gilts is relatively better than equity in the short term, there is no clarity for sustainable bullish undertone to stay invested for the attractive carry of over 1.10% against Repo rate. The strategy is to stay fleet-footed for back-and-forth play at 7.78/7.80-7.88/7.90% (7.72% 2025) and 7.65/7.67-7.75/7.77% (7.59% 2026). Given the hard fact that the new 10Y bond is into deep discount immediately at post-issuance, demand-supply dynamics is against set up of bull phase in 2016. Having said these, need to be prepared for short term unsustainable overshoot (and volatility) beyond 7.78-7.90% (and 7.65-7.77%) from external cues from FED actions and FII mood-swings. The only supportive cue is stretch in US 10Y yield below 1.85% adding support to 7.72% 2025 at/above 7.85% before restoration of India-US 10Y yield-spread stability at 5.85-6.0%. For the week, set zoom-in focus on 7.72% 2025 at 7.78/7.80-7.85/7.87% and on 7.59% 2026 at 7.65/7.67-7.73/7.75% retaining downside bias into 7.88-7.93% and 7.75-7.80%. 

Global currencies stuck between developments in US and China

Global currencies fortunes are driven by expectation on FED rate action and PBOC measures to ring-fence Yuan from exit of off-shore debt and equity and to retain currency advantage for Chinese exports. While China impact retain headwind resistance on the Rupee, DXY is volatile at 95/96.50-100 sending mixed impact on Rupee. While China drove Rupee down from 66-66.15 to 68.20-68.35 from start of 2016, DXY correction from 99.5-100 to 95-96.50 provided Rupee relief momentum from 68.20-68.35 to 67.50-67.65. What Next? USD/INR big-picture for 2016 was set at 65.85/66.20-68.50/68.85 with breakout bias for 70.00 retaining 12M $ at 71-73, and upper end at 72.50-73 was seen good for long term export cover & carry-trade $ liabilities adjusting for time-decay. MARKET PULSE see no reasons to review this strategy, come what may from the March FOMC. While there is good clarity on the USD/INR bull phase, the pace of momentum will be set by FED rate action. For now, see USD/INR in sideways mode at 67.20/67.55-68.15/68.50 with importers & RBI demand at lower end, and short & long term exporters supply at higher end in traction with end March 2016 close at 67.85-68.50. It is prudent to stay risk-neutral on short term imports at spot 67.20-67.55 and risk-off on short & long term exports at spot 68.15-68.50 in traction with 12M $ at 71.25/71.50-72.50/72.75, breakout either way is tough to sustain for now.

Rupee is sharply down against Euro; while the set up of bullish momentum from 69.85-70.20 for test/break of 74.65-75 enroute to 75.65-76.65/77 was in script, it got done at hectic pace ahead of time from combination of EUR/USD pick-up from 1.07-1.0750 to target 1.12-1.1350 and USD/INR spike from below 66.20 to over 67.70. What Next? The near term zoom-in focus is now reviewed up at 74.15/74.50-76.65/77 with intermediate long-unwind zone at 75.65-76. It is good for Euro zone exporters to cover 12M receivables at 82-83 (12M USD/INR at 72.50-73 and EUR/USD at 1.12-1.1350. RBI may also look at this zone for sell-side intervention. 

Great relief for commodity assets regaining lost valuation 

It's relief for most on shift of Brent Crude play from $27-30 to $33-36. The strategy of MARKET PULSE is to end the down-hill chase at $30-33 and switch side at $27-30 for 30% reward. It's not surprise to see Brent losing steam at $36-38 post relief from below $30 for consolidation at $33-36. Most cues now suggest short term consolidation at 28/30-36/38, and obvious strategy is to retain end to end focus with stop on break. 

MARKET PULSE set 2016 outlook for Gold at 1035/1070-1150/1185 with end of multi-year down-hill chase at 1035-1050. The pace of quick surge in value from below 1050 to 1150 is pleasant surprise. What Next? Gold has now completely recovered the lost valuation since start of 2015 (2014 close of 1183.55 against 2015 high of 1306.20). At this stage it is not clear whether it is good to chase value extension beyond 1185. For now, it's good to watch momentum at 1185-1210, seen as high-risk long zone and retain short term focus at 1110/1135-1185/1210.

Have a great week ahead and good luck!

Moses Harding

harding.moses@gmail.com

9674734145