Valuation adjustment in progress in Equity assets with comfort from rate cut hope:
The weekly focus was set at 8750/8785-8965/9000 with expectation of back-and-forth play in value adjustment mode from hot-to-hold zone of 8965-9000 and cheap-to-acquire zone of 8750-8785. The play, therefore was expected to be between value encashment at higher end and for value investment at lower end awaiting rate-cut from RBI, positive vibes (and optimism) from Budget 2015 and sovereign rating upgrade from Global rating agencies. The intra-week rally from 8825 punched 8996 before sharp reversal into 8775 before close of week at 8808. The intra-week focus for Bank NIFTY was set at 19850/20000-20500/20650 in consolidation mode. The moves were swift (and erratic) for extended rally from 20098 to 20907 before sharp (and deep) push-back into 19732 before close at 19843.
What next? January 2015 rally in NIFTY at 11.5% (and Bank NIFTY at 14.8%) is stretched (and excessive) against the expected 15-20% value appreciation by end 2015 with NIFTY target at 9500-10000. The dynamics (and outlook) ahead is mixed; domestic cues stay supportive to retain bullish undertone, while external cues are suspect and nervous. The comfort, however is from strong FII appetite for India assets, who will be seen to stay in buying corrective dips mode against long term bull trend. All taken, there is no reason to panic on NIFTY correction from 9000, while support at 8750-8785 stays firm, ahead of major "make-or-break" support zone of 8600-8650. For the week, good to retain focus on NIFTY at 8600/8650-8950/9000 (and Bank NIFTY at 19200/19550-20450/20650); directional bias will be set by RBI on 3rd February (into lower end on rate-pause or into higher end on delivery of 25 bps rate-cut). It is prudent to stay in back-and-forth mode (ahead of Budget 2015) and overshoot either-way will be seen as excessive, hence unsustainable for long!
Gilts in bullish undertone deriving comfort from start of accomodative monetary policy stance:
With fire works in equity and Rupee exchange rate markets, 10Y Gilt 8.40% 2024 traded steady around 7.70% (at 7.68-7.72) with good appetite either-way; unwind of excess SLR book at below 7.70% and fresh build-up above 7.70% for rate-cut action, shift of Repo rate from 7.75% to 7.50%. The only discomfort is from India 10Y yield not in alignment with US 10Y Treasury yield ease from 1.85% to below 1.65%, thus widening the India-US 10Y bond spread from 5.85 to over 6.0%. What next? Retain strategy to stay invested at 7.70-7.75% for 7.45-7.50% on expectation of 25 bps rate-cut and in the event of rate-pause, extended consolidation at 7.70-7.75%. For the week, two options in play; stability at 7.65-7.75% or shift into 7.45-7.55% on delivery of 25 bps rate hike, thus setting up intra-week focus range of 7.45-7.75%, hence the strategy to stay invested at 7.70-7.75%, come what may! India-US 10Y bond spread at over 6% puts RBI at ease to deliver 25 bps rate-cut; in the event of rate-pause (with dovish guidance), bullish momentum will be retained for 7.50-7.65% (against US 10Y Treasury yield at 1.50-1.75%) adjusting for India-US bond spread at 5.85-6.0%. All taken, it is high-risk to trade from "short" side.
Rupee in structural adjustment mode:
Rupee bullish momentum from 63.90/62.20 ran out of steam at 61.20-61.45 (set short-squeeze support for 12M $ at 65.50-65.65 for unwind of earlier sale at 68.00-68.50 + time-decay); reversal from 61.29 was sharp into 62.03 before close of week at 61.86. Over all, the play was restricted at 61.20-62.20 for back-and-forth shift from upper-half to lower-half. What next? While the long term Rupee bullish undertone is intact, the near term risk is from structural adjustment, weak global cues and extent of RBI appetite for the US Dollar. At this stage, downside risk on Rupee from rate cut action is not seen as cause for worry given the FII appetite and elevated India-US interest rate spread (across 1-10Y tenor) as ring-fence to FII pull-out from India bond assets. All taken, it is safe to stay with consolidation outlook at 61.20/61.35-62.20/62.35 till optimism from Budget 2015 and sovereign rating upgrade are pulled into the radar for restoration of bullish undertone into 60.45-60.95. The strategy is to play end-to-end of 61.20/61.35/61.55-62.05/62.20/62.35 tracking 12M $ at 65.50-66.50. The worry from bearish impact on Rupee from weakness of global currencies (against the USD) is diluted given the domestic optimism (and strengthened euphoria) on macroeconomic fundamentals and India emergence as safe-haven destination for value investment.
EUR/INR swift fall from 72.00-72.50 found support at 68.00-68.50 as per script; thereafter, the 2-step correction in recovery mode from 68.00-68.25 and 69.00-69.25 failed ahead of set end-of-correction zone at 70.50-71.00. While the long term bearish undertone is firm, near-term consolidation at 69-70.50 is preferred before shifting gear to take out 68.00-68.25. The risk for this outlook is beyond 70.50-71.00 for deeper recovery into 72.00-72.50 before sharply down. Over all, strategic chase from 80.00 is still valid with long-term target below 65.00 with parity outlook between USD and Euro.
Have a great week ahead!
Moses Harding
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