Global Cues:
Global economic gloom (and absence of revival instincts) begin to blow strong headwinds on financial markets! DJI unwinds most of recent 1000 point rally from 16350 to 17350 (for push-back into 16550) with no signs of sustainable recovery, most investors in "sell on corrective rally" mode; US Gilts stay firm on risk-off sentiment despite end of QE and risk of FED shift into rate hike mode in 2015, US 10Y bond yield drop from 2.65% to 2.30% highlights weak investor confidence; Commodity assets are down sharply on lack of confidence on growth pick-up and consequent demand compression, pushing Brent Crude down from over $115 into $ 85-90 and Gold down from $1345 to $1185 along with other Base Metal & Energy assets.
There are no turnaround signals; if QE and extended ZIRP have not helped the cause since 2009, what else can? How long Central Banks could stay with ultra-dovish monetary policy at the cost of creation of asset bubble? Where is the consumer demand going to come from for capacity utilisation (and expansion) to put investor's money to work? There are no workable solutions to these major issues in play! To add fuel to the fire, geo-political concerns (and lack of amicable resolutions) keep investor's mood nervous, with the intent to preserve capital. Cash is in plenty for growth capital and risk appetite is good to ride the appreciation in financial assets, but opportunities are few; hence the strong valuation of Gilts and cash-rich corporate assets. All taken, the gloomy global economic conditions turn out to be an extended one and would need "manna from the heaven" to spur growth and revive investor sentiment & consumer confidence! Till then, Cash (and Gilts) is the king, but do not rule out emergence of long term value buying from extended weakness from here! While near/short term outlook is weak, stay neutral on medium/long term value creation.
Domestic Cues:
Narendra Modi brought luck and cheer into Indian economy and financial markets. The oft-said ugly terms of policy paralysis, regulatory irritants and administrative bottlenecks are no more relevant with majority political mandate and decisive leadership over the Government & NDA; the consensus approach with the State Governments and roll-out of red carpet to cash-rich nations to pump growth capital into India is positive long term approach. There has been significant change in transparency and governance. The Modi mantra to build skills, speed & scale aligning with effective & good governance are cues to cheer. The long term agenda on across the pyramid financial inclusion, building social & economic infrastructure, vigour in make-in-India manufacturing story and better leverage of agriculture potential are melody to ears!
The luck factor has brought significant upside momentum to India macroeconomic fundamentals; sharp fall in commodity prices has brought in improvement on current account deficit and fiscal deficit, while diluting cost-push inflation triggers. The robust foreign currency inflows has removed the fear of sudden, excessive downside risk on Rupee. While concerns remain on growth, shift of focus from below 5% to 6.0-7.5% has attracted global investor attention. All taken, combination of positive domestic cues and headwinds from external sector will extend price-stability with minimal downside risks, but not good enough to add momentum to near/short term bullish recovery. Over all, while medium/long term bullish prospects stay intact, do not rule out near/short term weakness, seen as value-buy for strategic investors.
Outlook on financial markets:
Global markets:
Dow Jones Index is at risk of testing the strong short term support zone of 16300-16350 post the sharp reversal from recent high of 17350; weakness below the said support will be very bearish for global stocks. Let us have attention at 16300 for directional bias for either extended downside risk below 16000 or recovery over 17000 into 17350. Prudent to retain immediate term focus at 16300-17000 by playing end-to-end or break thereof either-way!
US 10Y bond yield traded back-and-forth of set focus at 2.30/2.35-2.60/2.65%; sharply up to 2.65% from 2.30% on FED hawkish monetary stance, but fell again to 2.30% on ultra-dovish monetary stance of ECB, geo-political concerns and general risk-off investor sentiment in the absence of growth-spark triggers in the system. All these factors lead to believe that FED shift into rate-hike cycle will be delayed one (into second-half of 2015 or early 2016), not withstanding end of US QE in October 2014. The immediate term risk is for further slippage in the yield below 2.30% while 2.50-2.65% stay firm; having said this, the chase below 2.30% has to be very cautious as couple of positive economic data could trigger sharp reversal into 2.65%.
Brent Crude reversal from over $115 (June high at 115.71) into set reversal target of 85-90 (low at 88.11) is comfort for energy importing economies and major relief for those battling with high CAD and elevated inflation. Combination of demand compression and shift to alternate low-cost avenues, the journey of reversal of rally from 36.20 to 128.50 (seen from December 2008 to March 2012) will be an extended one! Near term focus, not withstanding geo-political concerns is set at 80/82-93/95 retaining near/short term bearish undertone; risk of bullish reversal only beyond 98-100, seen as very low probability.
DXY bullish momentum from below 80 (July low of 79.74) met 86.25 target (high at 86.74) before consolidation at set focus zone of 84.75/85.00-86.25/86.75. The undertone is bullish beyond 86.75 into 88.70-89.60 (high seen in March 2009 - June 2010). Retain immediate term focus at 84.75-86.75 not ruling out upside break! In the given global economic scenario (and related developments & outlook), it is safe to bet monies on the dollar.
EUR/USD reversal from below 1.40 (May high at 1.3992) is sharp into 1.2500 on Euro zone concerns and related shift of assets from Euro zone to US and other growth markets in EM space or otherwise. The dynamics are obviously not in favour of triggering sustainable recovery with short term resistance at 1.2785-1.2800 and 1.2990-1.3015; near term attraction is for weakness into 1.2450-1.2500 and below here, pulls the July 2012 low of 1.2040 into the radar.
USD/JPY bullish momentum from May 2014 low of 100.80 into recent high of 110.08 is as per script for 2014 strategic play set at 100/101-109/110; correction from 110 found support at 107.50 as per expectation. What next? Japanese exporter's interest is huge at 110 ahead of end 2014, but $ strength across global currencies will retain the weak undertone on the ¥ not withstanding exporter dollar supplies. For now, near/short term support is firm at 106.50-107.50 (worst case not below 105.50) with target at 113.75. The strategic focus is revised from 100-110 to 105-115.
Gold completes back-and-forth of set strategic focus at 1185-1335, up from 1180 to 1345 and now down to 1183.50 before consolidation at 1185-1235. Gold outlook is mixed; chasing weakness below 1180-1185 is high risk, but do not see momentum for extended correction beyond 1240-1265. Till more cues emerge to set up better clarity on directional bias, it is prudent to stay with sideways trading mode at 1180/1185-1235/1240, not ruling out unsustainable extension into 1265.
Domestic markets:
NIFTY under pressure post multiple failures at 8150-8200, seen as best case for rest of 2014/FY15; reversal from here finds support at 7800-7850 on domestic optimism, but seen vulnerable from weak global cues. The year 2014 is great for NIFTY investors, up from 5933 to 8180 (from February to mid September) with gradual "lift" in long term base to/over 6600-7100 as worst case scenario. For now, NIFTY is under pressure below 7860 into 7785/7680 before emergence of value-buy support to retain near/short term focus at 7700-8000. This stance fits good into set big picture strategic focus at 7700/7850-8150/8300; having said this, do not rule out the need to review the strategic focus into 7550/7700-8000/8150 if DJI is pushed down below 16300-16350 support zone. For now, it is prudent to stay light (and fleet-footed) as investors dilute the "buy dips" appetite while traders shift to "sell recovery" mode.
10Y 8.40% 2024 Bond is the only asset looking good and stable while tone elsewhere is weak. Most cues (if not all) are positive in favour of shift into 8.15-8.40% range. The support is from removal of concerns on twin-deficits, dilution in inflation-risk, low US yield and the need to turn growth supportive sooner than later. But, RBI has other agenda to administer tight liquidity regime holding short term rates at elevated levels, thus arresting gains beyond 8.40%. RBI see prudence in delaying the shift to dovish monetary policy stance till absolute comfort on inflation and Rupee, while not seeing sense to cut rates now and to reverse the decision soon, to avoid repeat of 2013 mistakes!? RBI wish to wait and feel the pulse of FED stance on rate-hike momentum. All taken, it makes sense for RBI to stay in sell mode at 8.40% and in buy mode at 8.65% to administer price stability at upper-half of set strategic focus zone of 8.15-8.65%. For now, conflict in domestic & external cues to guide price-stability at 8.40-8.50% with risk of push-back into strategic buy zone of 8.55-8.65%.
USD/INR completes end-to-end of inner-ring of set strategic range of 59/60-62/63 with 60.20 to 61.95 rally in quick time in alignment with DXY gains from 79.75 to 86.75. Rupee recovery from 61.95 held at 60.90 in alignment with end Mar'15 $ focus range of 63.00/63.15-63.85/64.00. What next? There is need to review the strategic focus at 60/61-62/63 for better price stability at reduced volatility. All cues taken, there is no reason for Rupee to get into one-way excessive weakness while the relief will be from DXY giving up gains for steep reversal below 84.00-84.75. The hedging strategy is aligned to end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50 for spot stability at 61-62. For now, retain focus at 60.75/60.90-61.80/61.95; break-out either-way not expected to sustain.
Moses Harding
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