Global Liquidity driven rally is in extended mode:
Developed economies continue to stay under pressure with downside risks from growth depression, increased un(and under)employment, and resultant deterioration in macroeconomic fundamentals. Given the priority on growth, consumer spend and employment generation with the need to squeeze the widening gap in supply-demand capacity, Central Banks have let loose their monetary policy with excess liquidity at low interest rates. Inflation is not seen as deterant to stay in ultra-dovish, growth supportive monetary stance for long till sight of growth sparks in the system. While ECB and others (include Asia heavyweights Japan and China) have reaffirmed extended liquidity support; there are clear signals of FED delaying rate-hike shift into 2016. All taken, monies can't be kept idle in Banks (to avoid payment of parking fee) and Central Banks are more willing to provide refinance (and high leverage) at low (near zero) interest cost! So, monies have to chase credit and investments or spent in consumption. In the absence of credit demand, there is no second option other than chasing high-risk equity assets and low-risk Gilts!
The liquidity driven rally in DJIA index since 15th October (low of 15855) is in extended mode beyond 17350 with strong weekly close at 17810 post print of all-time high at 17894. The first signal for set up of bullish undertone was sighted post complete unwind of FED rate-scare collapse from 17350 to 15850 in less than a month since 19th September. MARKET PULSE set intra-week consolidation at 17600-18100 with overshoot either-way not expected to sustain. What next? The bounce from 17603 into 17894 has strong momentum and it is no surprise to see investors pulling out their take-profit offers despite hot-to-hold valuation in the absence of alternate investment avenues. The near term outlook is obviously positive for more gains, but can not ignore risk from unwind of investments (to cut leverage) ahead of 2014 year end for taking money off the table before Christmas holidays. The target ahead is 18100/18275/18500 with firm support at 17600/17500. The strategy is to be with the bullish momentum with trail-stop below 17600.
US 10Y bond finds solid support at 2.35-2.40% on good demand from risk-neutral and risk-off investors. For those who wish to protect capital with assured inflation adjusted return, time-decay (and carry) is in favour when FED is expected to stay in extended pause on rates, when it is aware that rate-hike impact may not yield desired outcome when others around them are pumping liquidity at near zero interest rate. This outlook drove the 10Y US bond yield from 2.65% to 1.90% and now steady at 2.25-2.35%. The near term outlook is for bullish consolidation at 2.10-2.35/2.40% The strategy is to stay invested at 2.35-2.40% but risk-reward may not be in favour on extended gain into 1.90-2.10%. It is not bad to spread the risk between equity and Gilts into year end.
Sovereign rating upgrade and rate cut in 2015 add cheer to India Equity & Bond markets:
All cues in favour; NaMo wave is gaining Tsunami strength for global optimism on India with monies chasing India assets in size and time! No worries on India macroeconomic fundamentals; it could only improve in 2015 to set up long term pace. The execution (and implementation) risk of NaMo India ambition stands diluted. All taken, it is matter of time for India sovereign upgrade and RBI shift into growth supportive monetary stance.
MARKET PULSE set long-term base at 7700-7750 with upward revision at 8150-8200 with near-term target at 8485-8500 ahead of 8585-8600, where long-unwind could emerge ahead of year end 2014. It was all as per script for correction from 8150-8200 to end at 7700-7750 to build steam for 8500. We have seen 8160 to 7723 to 8489 in mirror reflection of DJIA index, but at higher pace! What next? The set pre-policy target at 8585-8600 is at striking distance; strategy was to end the chase from 7700-7750 at 8550-8600. Should we review or be in the chase for more beyond 8600? Not sure at this stage and it is prudent to feel the pulse of price-actions (and momentum) for directional bias from/below 8600. Given the combined strength of domestic euophoria, external support, sovereign rating upgrade and rate-cut ahead, correction from/below 8600 will be shallow, not beyond 8300-8400 and firm pulse at 8600 can extend focus into 8800. In worst case scenario, NIFTY is not seen to go below 8150-8200, seen as long term base into 2019-2024. For now, let us retain focus at 8350/8400-8550/8600 with bias into higher end; there after, prefer to stay neutral on correction into 8350-8400 or extended rally into 8800. The bulls party-time is at break-neck speed with no signs of fatigue!
India 10Y Bond 8.40% 2024 is rock-solid at 8.15% despite completion of end-to-end rally from 8.65 to 8.15%; profit-booking (along with RBI bond sales and vocal caution on rate-cut hope) driven correction had an abrupt end at 8.23-8.25% for back at 8.15%. Stake-holders pressure on RBI is huge while most economies are in dovish monetary policy stance. But, they do not have issues from elevated inflation, high twin-deficits, supply-side bottlenecks and abnormal exchange rate pressure from high dependent hot-money inflows to fund currency deficit. RBI has valid reasons to stay in extended pause, but rate cut is inevitable as worst of worries are behind, and things could only improve from now on. The doubt is on the timing - now or Q4/FY15 or Q1/FY16?!
The short term outlook on India 10Y bond is positive, with good investment appetite at 8.18-8.20% and 8.23-8.25% for chase into 8% for consolidation at 8.0-8.20/8.25%. This range is in alignment with US 10Y bond stability at 2.15-2.35/2.40%; India-US bond spread around 5.85% (higher end of medium term outlook at 5.50/5.65-5.85/6.0% taking into account squeeze in inflation differential and FED preparedness for rate-hike in 2016) is not seen as major risk on Rupee (which drove the Rupee down from 53 to 68.85 in July 2013). All taken, near-term strategy (pre & post-policy) is to reinstate investment book at 8.16-8.18% and 8.23-8.25% for chase into 8%. Having completed the major chase from 8.65 to 8.15%, next round of 15-20 bps chase is icing on the cake!
Moses Harding
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