Global cues : Mixed dynamics and lack of trend clarity and directional bias!
Global markets continue to derive support (and investor appetite) from system liquidity over-hang, low fixed income yield and few investment options. The liquidity (and low interest rate) driven rally is seen to be stretched with risk-reward not seen to be in favour for fresh investments at current elevated valuation. Ideally, if liquidity driven support is followed by push from improvement (and positive outlook) in macroeconomic fundamentals, then there may not be worry on the way forward. But, most major economies across developed and emerging markets are in depressed mode. There are no clear growth signals from UK/Euro zone, Japan, China to name a few, while US and India look relatively better! All taken, investor appetite is not beyond near term when the visibility ahead is poor; hence markets stay jittery and volatile driven by mood-swings from risk-on to risk-off with most preferring to stay risk neutral (and light) and be in readiness (and fleet-footed) to jump one way or other. At this stage, it is kind of 2 steps up and 1 step down, and time is not seen to be far away for shift into 1 step up and 2 steps down. The near term ahead (into Christmas and New year season) will be volatile as investors unwind to stay light and risk-off into 2014 year end; one-way impact will be significant in illiquid market conditions. It is prudent to be cautious and good to take money off the table (winding up the 2014 bull-ride before set up of reversal mode), and take fresh look for 2015.
Domestic Cues : Bullish into long term and caution on the short term!
Global investors see India as great place to be in despite not considered as great place for doing business! The comfort of change into pro-business destination by the Modi regime is good, hence not seen as major risk factor. There has been significant turnaround in macroeconomic fundamentals, thanks to combination of efforts, luck and capabilities. There are lot of policy initiatives in pipe-line to get the growth revival with aspirations for GDP growth over 7.5%, CPI inflation stability at 4-6% and improved twin deficits at sub 2% by 2017-2019. The combined focus on building economic & social infrastructure and Make-in-India programme will make tremendous long term beneficial impact on the Indian economy, with growth momentum ahead of China. There is high possibility of sovereign rating upgrade and emergence of favourable monetary conditions in 2015. The pent-up domestic euophoria (and optimism) emerge as solid ring-fence to external headwinds and stay as catalyst to external tailwinds. While medium to long term bullish cues stay valid, do not rule out near/short term correction for value-adjustment profit booking, seen as consolidation phase while being in bull trend. The built-up confidence on Modi has only grown since May 2014; desire & urge to make a difference and the support that Modi has gained from within India and the G20 stand comfort to India's emergence as a major economic force by 2019-2024. This decade is for India; sleeping elephant is awake now and ready to move!
Equity market: Consolidation phase!
DJIA index not only recouped the reversal from 17350 to 15855, but also extended the lead into 17700 in cautious undertone with marginal shift in weekly close from 17573 to 17634. What next? The consolidation phase is there to stay into the near term with base at 17350-17500 for 18100-18150; it is good to be with this bullish chase from 15850 with trail stop below 17500.
NIFTY traded to the script with failure at 8415 for shallow correction at 8305-8320 followed by recovery for weekly close at 8389; despite fear of profit-booking unwind, upward shift of weekly close from 8337 is great comfort to the bulls. What next? The long term base is seen up from 7700-7750 to 8150-8200 with near term bullish momentum beyond 8415 into 8500 not ruling out unsustainable extension into 8575-8600 with value-buy support at 8290-8315. The hot2hold heat felt at 8385-8415 is now seen to be shifted to warm, post the shallow correction to build retention appetite for 8575-8600; good to be with the chase with trail stop below 8320-8345. There are no major cues to cause deeper correction despite high valuation post 52 week rally of over 40% at 19 times P/E. See intra-week play not beyond 8250/8300-8550/8600 with bullish undertone.
10Y Bond market : India-US spread seen steady at 5.85-6.0%
India 10Y bond lost steam at 8.15% for push-back into 8.20-8.25% while US 10Y yield stayed in sideways mode at 2.30-2.40%, thus pushing the bond spread from 5.80 to 5.90%. What next? Continue to see stability in US 10Y at 2.25-2.40% (post the volatile swing from 2.65 to 1.90 to 2.40%). While short/medium term bias is for shift into 2.40-2.90/3.15% range, lack of clarity in the near term may not have the desired momentum for sustainable break-out of 2.25-2.40%. The expectation on India 10Y is different with bearish outlook in the near term for stability at 8.15/8.20-8.35/8.40%. RBI is expected to get better clarity on inflation in Q4/FY15 and projection on macroeconomic fundamentals in Budget 2015, and more importantly FED stance on rate hike. There are no cues to suggest extended rally below 8.15% while value-buy strategic bids would emerge at 8.35-8.40%. Our strategy to end the bull-chase from 8.65-8.35% at 8.15-8.20% has worked well and now stay prepared to reinstate book at 8.35-8.40%. During the week, would not be surprised to see shift of trading range from 8.20-8.25% to 8.25-8.30% and prepare for post-policy stability at 8.25-8.40%.
Currency market : $ bullish momentum intact despite sharp lift of base!
As per script, DXY traded back-and-forth of set focus zone at 87.25-88.25 with 88.19 to 87.22 to 88.26 before steady weekly close at 87.54 (against previous 87.57). Despite sharp rally from 84.50 since 15th October, $ bullish undertone is intact for 88.70/89.60 with near-term base at 86.85-87.35.
EUR/USD as per script moved into sideways consolidation mode at 1.2365/1.2415-1.2485/1.2535 post previously week low at 1.2357; weekly close at 1.2521 against previous 1.2452 is relief but bearish undertone intact while the previous sell zone of 1.2565-1.2615 stays firm. For the week, retain focus at 1.2365/1.2415-1.2565/1.2615 retaining near-term target at 1.2050-1.2250.
USD/JPY on fire with the expected rally from 105.00 hit high of 116.82 not far away from target at 118-120; speed of this move since 15th October is break-neck! This is dream-come-true for Japanese exporters and it would be prudent to allow near-term consolidation at 113.50/115-118.50/120 before next round of rally in 2015 into/beyond 124.16 (June 2007 high before trigger of JPY one-way multi-year strength). Play end-to-end of 115-120; break-out either-way not to sustain.
Rupee : value-adjustment to time-decay!
USD/INR lift of base from 60.20 to 61.20 has held well for near-term consolidation at 61.20-61.70/61.95 with weekly close adjusting for time-decay from 61.62 to 61.72. What next? Most cues stay in favour of Rupee; dollar rally against global currencies left no impact on the Rupee; but for RBI hunger for the greenback, Rupee would be at different level sub 60 which is not seen good to provide price-stability! Makes sense and prudent. There is no reason to review the set near-term focus at 61.45-61.95/62.20. Also retain end Dec'14 $ focus at 61.95-62.20/62.35 and Mar'15 $ at 63.10-63.35/63.50; break-out either-way not expected to sustain. It is prudent to stay risk-off on move to either end, while trading end-to-end. For the week, prefer back-and-forth trading at 61.45-61.95 with good flows at either end to prevent break-out with most trades restricted at 61.55-61.70 (end Dec'14 $ at 62.10-62.35).
Commodities : In recovery mode before back into bearish trend!
Has Brent Crude complete its weakness from $115 at 75-77 or more to go? The lower end of the focus zone was moved from 85-87 to 80-82 to 75-77 and saw low at 76.76 before short-squeeze triggered recovery into 79.75 for weekly close at 79.41. What next? The reversal from mid June high at 115.71 to 76.76 (34% in less than 5 months) is sharp for whatever reasons from demand-supply dynamics or growth compression or political play to cut the price advantage to producers who had glorious period since December 2008 rally from 36.20! Brent retain target at 68-70 before stability; uncertain is the reversal point either from 80 or 83 or 85 or 88, thus retaining medium term focus range at 68/70-88/90, seen as good for all! Prefer intra-week consolidation at 76/77-82/83.
In the last weekly update, near-term focus on Gold was set at 1110/1135-1235/1260. The strategy post unwind of strategic short-book at 1135 was to reinstate in 2 lots at 1185-1200 and 1245-1260. Gold recovery from 1131.85 extended to 1193.34 (with most intra-week trades at 1145-1165) before close of week at 1187.85. What now? The focus zone is now up from 1135-1185 to 1160-1210 mid-point of big picture range of 1110-1260. For the week, let us watch sideways consolidation play at 1145/1160-1210/1225.
Moses Harding
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