Swift back-and-forth moves within set tolerance trading zones:
Global financial markets witnessed mood-swing from shock to awe in quick time from change in investor risk-perception for shift from risk-off to risk-on for reasons beyond macroeconomic fundamentals. The first trigger was from emergence of value-buy from strategic investors, followed by global liquidity driven momentum. While FED provided hawkish guidance on the way forward through exit of QE and improved confidence on US economic growth recovery and resultant dilution in worry on the unemployment (and job creation) trend, other major economies (Euro zone and Japan) ensured availability of adequate liquidity for risk-assets! The impact on the markets is not surprise, which was to the script. DJI traded back-and-forth of set focus range of 15850-17350 (17350 to 15855 to 17395) while US 10Y bond recovered most of its risk-off rally from 2.65 to 1.90% for push-back into higher end of 2.25-2.40%. Gold swiftly unwound its recovery from 1183.50 to 1255 for push-back into 1150-1180 with low at 1161. With US seen as the best among the West, DXY sharp unwind from 86.75 to 84.50 could only establish the bullish momentum for over 86.75 with high at 87.40. Brent Crude stayed steady in sideways (despite fireworks elsewhere) at set focus range of 82.50-87.50/90 with 82.60 to 87.94 before stability around 85. While the change in investor stance from risk-off to risk-on is comfort, bullish momentum not backed by strong macroeconomic fundamentals may not be cheer for long. The current liquidity driven recovery from under-valuation (cheap-to-acquire) territory may have already moved into over-valued zone, thus diluting fresh appetite while pulling in profit-booking long-unwind into 2014 year end.
Indian markets too gained from the global euophoria combined with positive domestic cues driven by long term improvement in macroeconomic fundamentals and roll-out of policy initiatives. NIFTY nervous undertone which triggered the 8180 to 7723 push didn't last for long to trigger an awe rally over 8180 for an extended bull-run into 8350. 10Y Bond too joined the party with minor recovery from higher to lower end of 8.15/8.20-8.35/8.40% focus zone. Despite lack of clarity from mixed cues, Rupee traded back-and-forth of set NT strategic focus at 60.70/60.95-61.95/62.20; end-to-end October saw Rupee trading at 61.95 to 60.90 to 61.93 to 61.15 with October close around 61.35. The kind of back-and-forth moves seen in September-October within set ranges in alignment with underlying value of the asset is cheer to many, while speed was scary with ecstasy and awe!
Shift from under valuation to high risk premium territory:
Global markets:
DJI daily/weekly/monthly close above 17350 is bullish with firm support above 17000 and focus at 17700-17750 (extension target not beyond 17900-18100). While it is ok to be with the bullish trend, it is important to stay fleet-footed with trail-stop to protect profit. Given the depth of the euophoria (expected to stay valid into November till start of holiday season), investors will have buy-dips appetite to chase the move to its logical end.
US 10Y bond yield likely to stay relatively steady at 2.25-2.40% post the wild swing between 2.65 to 1.90%. With QE behind, attention is on timing of shift into rate-hike mode seen to be either in the 2nd half of 2015 or 1st half of 2016. Till then, "carry premium" will limit weakness for stability at inner-ring of set focus range of 1.90/2.15-2.40/2.65%.
USD is in strong bull phase from combination of economic strength (relative to the peers) and interest rate advantage; rally from 84.50 to over 86.75 is confirmation to extended bull phase into/over 88.70/89.50 in the months ahead with firm support at 86.25-86.75. Euro now in mark-time mode post the punch below 1.2450 with correction expected to stay limited at 1.2550-1.2650 for ST target at 1.1850-1.2050. JPY sets focus beyond 113.75 on heavy dose of liquidity and interest carry play.
Gold has lost its safe-haven appetite given the kind of value-buy opportunities in financial assets. Despite reversal from set sell zone of 1250-1265 into 1160, undertone is weak for extended weakness below 1135-1150 while 1185-1200 stays safe to retain short term bearish momentum into 950-1000 where long term value buying appetite would emerge.
Brent continue to stay weak despite strong reversal from over $115 to 82.60, thus retaining bearish momentum into lower end of 77/80/82-88/90.
Domestic markets:
NIFTY continue to look good despite strong rally from 7723 to 8350; recent leg of rally over 8150-8300 triggered by external liquidity/appetite. While the near term outlook is positive into 8450-8500 on rate-cut pressure on RBI, it would be high risk chase over 8500, hence prefer push-back into 8150-8200 for rest of 2014 consolidation at 8150/8200-8450/8500.
Despite excessive system liquidity, soft overnight/short term money market rates and 25-50 bps rate cut (in the next 1-3 months), 10Y bond is seen heavy at 8.15-8.20%. All cues taken, prefer rest of FY15 stability at 8.15/8.20-8.35/8.40% (maintaining 5.85-6.0% spread with US 10Y bond yield).
Rupee steady around mid-point of 60.95-61.95 focus zone; given the combined impact of global & domestic cues, prefer gradual weakness into 61.95-62.20 by end Dec'14 and 62.85-63. 35 by end Mar'15. See major risk on Rupee from interest rate and dilution in FII appetite (as India assets tend to be seen as over-valued into Budget 2015).
Strategy for rest of 2014 and into Budget 2015:
It is obvious that shift from cheap-to-acquire to hot-to-hold valuation is driven by global liquidity and NaMo optimism. While the confidence of growth pick-up and significant improvement on macroeconomic fundamentals is high, there is lot to be done to get into execution mode for realisation of benefits at ground level. It is important to stay prudent (and fleet-footed) on move into high volatile (make-or-break) period of December to February. When the value is hot2hold, any event risk or disappointment can risk deeper correction, hence sensible to end 2014 in cheer with prudence overcoming the greed!
Moses Harding
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