Global markets are in erratic mood-swings breaking the investor confidence on financial assets. Dow Jones Index continue to struggle to retain (and hold on to) strategic support zone of 16000-16350 post the swift fall from 17350, and resultant shift of appetite to safe-haven Gilt/sovereign assets pushed US 10Y bond yield from 2.65% to 1.90%. Global economic demand compression drives Brent Crude from $115 into $80-82 strategic support zone. The interest rate play which turned in favour of the dollar drove DXY from 79.75 to 86.75 is now not seen very relevant as FED loses its band-width to get into rate hike mode soon. Gold gets back its shine (as alternate to Gilts) for decent recovery from 1180 to 1250. All taken, investors appetite is highly risk-off with appetite for Gilts and Gold when cash earns nothing. This risk-off sentiment is firm with no great prospects of recovery signals, while "powers that be" have no clues to execute bullish turnaround post the extended QE liquidity support and near Zero Interest Rate Regime have not yielded desired results.
There is support now from "short-squeeze" and long term value buying while retaining appetite for more on extended weakness beyond recent lows; small portion of portfolio is seen to be allocated to non-Gilt financial assets as capital protection strategy adjusting to recent gains made on Gilts and Gold. The recovery from recent lows is seen as "correction" phase retaining near term bearish undertone. The visibility ahead is very poor to take short/medium term view on financial markets/assets and no clue whatsoever on long term investment strategy.
What next? The attention is obviously on the recent lows and the extent of correction. The undertone (and appetite) is mixed with "buy-dips" (by strategic investors) "sell-on-recovery" (by short term traders); needless to say, volumes from traders are seen to be much higher than the investors, which is a serious cause for concern, thus retaining the risk of DJI extended weakness below 16000, US 10Y bond rally below 1.90%, Brent Crude below $82, Gold above 1260 and DXY above 86.75; all combined will be signals for emergence of global economic depression. It is tough for EMs to ring-fence the economy (and financial markets) from the Tsunami headwinds from developed markets, who contribute to the demand for goods (and services) from EMs, while economies with good domestic consumption/demand and ability to open new business opportunities will stand out relatively better. India is in this position with good confidence to expand domestic demand (thereby capacity expansion) and create opportunities to put foreign monies to work.
How to trade markets in this tough environment?
DJI unwinds most of intra-2014 gains from 15340 to 17350 with recent low at 15855. The undertone is weak while below 16200-16350 and need to keep the downside risk below 15770-15855 open for extended drag into 15340, relief only on early recovery above 16400-16600. For now, let us keep focus at 15770/15855-16200/16350 and stay neutral on break-out direction, bias however is into 15340 before set up of relief rally.
US 10Y bond rally from 2.60-2.65% into 2.30-2.35% and gained speed on break of 2.30% into 1.90%, followed by sharp correction into 2.15%. It is tough to suggest positional trade at current high valuation and lack of clarity on the way forward. All cues taken, it is fair to assume possible trading range of 1.90-2.15%; bias however is for limited upside (below 1.90%) and whip-saw downside (above 2.15%) on strong economic data print which could bring the rate-hike fear back into focus.
Gold completely unwinds intra-2014 rally from 1184.50 to 1391.76 with recent low at 1183.46; while the fall is in alignment with FED hawkish monetary stance, the recovery from below 1185 into 1249.30 has diluted impact from emergence of weak economic outlook and resultant investor risk-off stance. The short term trading range is seen at 1150/1185-1265/1300; while the near term bias is for safe-haven benefit for extended recovery into 1265-1300, which will be seen heavy for push-back into 1150-1185. The strategy is to sell in 2 lots at 1250-1265 and 1285-1300 (with stop at 1305) for 1150-1185, which is low risk - high reward strategic trade.
Brent Crude gave up intra-2014 geo-political concerns led rally into 115.71 for sharp reversal into set strategic support zone of 80-82 with recent low at 82.60; recovery from here is sharp into 87.34. It will be worry if Brent falls below 82.30-82.60 on growth deceleration and consequent demand compression outlook/environment. Given the demand-supply dynamics, upside is seen to be firm at 90-95 to look for near-term consolidation at 80.00/82.50-87.50/90.00. The strategy is to play end to end with stop on range break-out.
DXY staged smart intra-2014 rally from 78.90 to 86.74 on combination of interest rate play and safe-haven demand; US economy is now seen as the best among the worst in the DM community! Correction from 86.74 is sharp into 84.47 mainly on short-squeeze and fear of concerted G7 Central Banks intervention to crush the extended dollar rally. Immediate support is seen at 84.45-84.90 (worst case at 83.75) to retain bullish undertone for reclaim of 86.75 and to pull 88.70 (2010 high) and 89.62 (2009 high) into focus. The strategy is to buy in 2 lots at 84.50 and 83.75 with tight stop on downside break.
EUR/USD saw strong intra-2014 push back from 1.3992 to 1.2499 triggered by combination of Euro zone woes (leading to extended QE and sub-zero interest rate regime) and US rate-hike worry ahead of expectation. The emergence of US economic woes pulled marginal recovery from 1.2499 to 1.2885. At this stage, it is seen as correction (and consolidation) phase retaining the short term bearish undertone. The first sign of back into the bearish trend will be below 1.2685-1.2700 for back into strategic support zone of 1.2450-1.2500 which protects re-visit to July 2012 low of 1.2040. Near term relief will be only from recovery over 1.30-1.3070. For now, let us set our focus at 1.2450/1.2500-1.3000/1.3050; tone consolidation till fresh cues come in.
USD/JPY posted strong intra-2014 rally from 100.74 to 110.08 which is "manna from the heaven" for Japanese exporters who have been hit by extended JPY strength for long. The rally is as per strategic script set at 100/101-109/110. The reversal was deep (at 105.18) but held at lower end of revised strategic focus at 105.00/105.50-110.00/110.50. The way forward is mixed; recovery above 107.50-107.65 will get the focus back to 110, while below 105.00-105.50 will be shallow at 104.30 before strong bounce back! For now, let us focus our attention at 104.30/105.15-107.65 and retain bullish undertone for revisit into 110.
What is the impact on India markets?
Global (and external) headwinds stay muted on significant improvement in macroeconomic fundamentals and Modi euophoria. India is the only destination seen to open up opportunities (with improved business friendly environment) to put external liquidity to work.
It has been a fantastic bull-run for NIFTY from intra-2014 low of 5933 into 8180; as per script, correction phase from above 8150 has hit 7700 with low at 7723. The positive take-away is the lift of long term strategic base from 5933 to 7422-7540 seen as the worst case scenario for now. The positive triggers are many across political, economic and monetary factors despite strong external headwinds. NIFTY has firm short term support at 7650-7700 to get back into recovery phase into 7830/7900/7950 while 8180 is expected to stay safe through rest of 2014. For now, let us stay focused at 7650/7700-7900/7950 and neutral on break-out into either 7550 or 8030/8180. The strategy is to be fleet-footed by trading end-to-end while strategic investors could buy extended weakness into 7550-7700 for 8000-8150.
10Y bond 8.40% 2024 has seen back-and-forth of 8.35-8.65% since issue. There is conflict of interest between RBI and FM on monetary policy. While RBI's preference is to stay neutral (to hawkish) to ring-fence domestic impact on inflation and external impact on Rupee, there is seen to be pressure from most stake holders for shift into dovish stance taking cues from sharp downtrend in core & retail inflation and weak IIP print from capacity squeeze. All conflicting cues (and dynamics) taken, see stability at 8.30/8.35-8.40/8.45% (with overshoot limited to set strategic focus at 8.15-8.65%). There is no clear trend at this stage for possible price-stability around mid-point at 8.40% and await more cues for set up of directional bias into 8.15% or 8.65%. It is important to stay tuned to 10Y India-US bond spread at 5.85/6.0-6.20/6.35% while deciding entry strategy for directional clarity. For now, let us watch tight range play at 8.35-8.40% with attention on global cues (shift back to risk-on mode) and domestic cues (inflation trend) for break-out guidance.
Rupee has been bit volatile in 2014; recovery from intra-2014 low of 63.32 held at 58.33 for push back into 61.95 twice in October, recovery from here held at 60.90 (again twice in October); back-and-forth at 60.90-61.95 is as per script limiting volatility in end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50. RBI is seen ok with lift of intra-2014 USD/INR base from 58.33 to 59.52 to 60.20 (and now at 60.90); the said shift is fair taking the REER impact from strong dollar and differential in inflation/interest rate. There are no fresh cues to review the set strategic focus at 60.70/60.95-61.95; going forward into end FY15, Rupee weakness into 62.25-63.00 is in order. Hence, RBI's advise to stay hedged on exchange rate exposure as no big monies to be made on unhedged imports till March 2015, while it is good for exporters to play the high premium (and time-decay) for better realisation. This approach will establish long term price-stability for win-win across stakeholders!
Moses Harding
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