Global cues dominated by accommodative monetary stance:
Global financial markets sentiment (and appetite) was mixed between risk-on and risk-neutral mode. While ECB/BOJ/BOC (and other economies in growth-inflation conflicts, growth depression against deflation fears) kept the tone positive with liquidity overdose at zero (and negative) Interest rate, expectation was mixed on FED monetary stance. There was pent-up fear of FED start of rate-hike cycle by June 2015, thus diluting the bullish momentum on risk-on assets for consolidation play, but at diluted bearish undertone. MARKET PULSE didn't see the need for FED to start the rate-hike cycle soon, given the growth-inflation dynamics being not in favour, and may not be effective for transmission. The expectation, therefore was to be in wait-and-watch mode, without giving any clear signal on the timing. The market outlook was based on the expectation of possible rate-hike in the second half of June 2015 to June 2016 period, with low probability of hike in 2015! All taken, the markets behaviour (and outlook) was tuned for bullish consolidation, with buy-dips strategy.
The trading strategy on DJIA index is to be in the chase from 17000-17150 for 18350-18500 (saw pick-up from 17037 to 18288 before consolidation above intermediate support zone of 17500-17650). US 10Y Treasury yield was expected to be volatile between 1.50/1.65-2.45/2.60%, tossed up between expectation swing of rate-hike fear against hope for extended pause (saw end-to-end of this range before consolidation at intermediate zone of 1.80-2.05%). It was bulls-eye hit on DXY, the bullish chase which began from 85 (since October 2014) was kept alive for 100, for end of chase (since then, got the rally from 84.47 to 100.39 before post FOMC consolidation play at 95-100). Brent Crude was expected to find support at $45-47 post the crash from $115, mainly on valuation risk from demand-supply (and price) equilibrium. The outlook, therefore was for gradual recovery from 45-47 not beyond 63-65 (saw bullish pick-up from 45.19 to 63.00 before consolidation at intermediate zone of 52-57). Gold recovery from set support (and short-squeeze) zone of 1120-1135 (seen in early November 2014) was expected to lose glitter at 1285-1310 for revert back to 1135-1150 before stability (saw the reversal from 1306.20 to 1142.86 before consolidation at 1150-1200). All taken, markets behaviour in Q1/2015 are more or less to the script. What next?
Global cues mixed between neutral to bullish undertone for Q2/2015:
Given the liquidity (and interest rate) support from major Central Banks extending into 2016 against FED pause on interest rate through 2015, risk-on assets stand to gain in the short term against currency stability. The tone, therefore will stay positive to be in buy-dips mode, without getting into one-way extended bullish phase. The market will throw up good opportunity for traders and may not be seen good for long term strategic investors. The need is to be dynamic (and fleet-footed), and avoid being in buy-only mode.
DJIA index is seen good to extend bullish momentum beyond 18288 for new high closer to 19000 with targets at 18600-18750 ahead of 18900-19000; risk-neutral support seen firm at 17650 (intermediate support at 17900-18000) to stay in chase for 19000.
US 10Y bond is expected to stay in sideways mode at 1.80-2.05% ahead of April FOMC, which may go non-event with no significant change of tone in the guidance. The volatility will be data driven against the trend in growth, inflation and unemployment rate. At this stage, there are no major cues in play to trigger break-out either-way. The strategy is to play end-to-end without chasing overshoot either-way, which is tough to sustain.
Post the end of chase in DXY from 85 to 100, the outlook is for consolidation at 94/95-99/100. Given the eventual shift into rate-hike mode in the US, well ahead of consolidation phase in other developed economies, DXY retain its medium/long term bullish undertone. The short term bias is for consolidation in Q2/2015, not ruling out weakness below 94 into 90-92, seen as good "take" for beyond short term play. The one-way up move in 2015 from 90.24 is seen to be over at 100.39 for Q2/2015. The post FOMC low of 96.50-96.65 is now at risk for extension into 94-95.50 while 98.50-99.50 stay heavy. It is good to absorb corrective rally into 98.50-100 (stop at 100.50) for target at 94-95.50.
EUR/USD is beaten down by over 13.5% in Q1/2015 (from 1.2097 to 1.0456 before post FOMC recovery to 1.1031). MARKET PULSE urged to close short-Euro book at/below 1.05 allowing post FOMC consolidation at 1.05/1.0750-1.10/1.1250. Since then, push-back from 1.1031 held around 1.06 for recovery into 1.0850-1.09. It is breather (and mark) time for Euro for extended recovery beyond 1.1031 into 1.1250-1.1300 and 1.1500-1.1550 before reversal into 1.0450-1.06. The signal for recovery will be under test at 1.0900-1.1050; failure here will get the focus back into 1.0450-1.06. All taken, visibility into EUR/USD parity is low and has moved out of focus in the short term.
USD/JPY has unwound intra-2015 rally from 119.68 to 122.02 before post FOMC push-back to 119.38. MARKET PULSE urged to close the bull chase from support/buy zone of 115-116.50 (low at 115.82) at 121.85-122.00 (high at 122.02). The short term tone is weak below 118.50-119.00 (minor support) for revisit to 115-116 which should hold to retain medium/long term bullish undertone beyond 124.00-124.25 into 135. Till then, 121-122 is seen heavy for 115-116.
Brent Crude retain strategic focus at 45/47-63/75 with neutral bias on break-out. In the near term, there is no clarity on the directional bias beyond 50/52-58/60 with most play at intermediate zone of 54-56. Need to be fleet-footed retaining big-picture focus at 45/47-63/65 with tight stop (on break-out) for low risk - high reward play.
Gold retain strong support at 1135-1150 and looks good for extended recovery beyond 1180-1185 with major resistance at 1220-1245 which should hold. For now, retain focus at 1145/1160-1225/1240 and play end-to-end. While short term outlook is for consolidation in neutral mode, medium term outlook is weak beyond set strategic support zone of 1110-1135.
Domestic cues mixed between euphoria and valuation worries
India got the best of everything since mid December 2014, with pent-up momentum into 2015. The external appetite was in plenty for India assets and domestic euphoria was at its peak. On the domestic front, there is nothing against with all cues in favour. Macroeconomic fundamentals are getting good with set up of firm base for shift to better and best by March 2019, ahead of next general elections. The other major bullish trigger was from shift in RBI monetary policy stance from suspect to accommodative, with 2 rounds of 25 bps rate-cut in quick time. The issue, however was the stretched valuation, post the intra-2015 break-neck rally; mistake of playing the test match like T20 for end of test match in less than 2 days!
NIFTY posted a swift 10% rally from 2014 close from 8282 to 9119 (intra-2015 by 13% from 8065 in less than 2 months). The reversal from 9119 to 8553 is at much faster pace to unwind most of intra -2015 gains. Ahead of Budget 2015, MARKET PULSE considered 8450-8600 as cheap-to-acquire zone and 9000-9150 as hot-to-hold zone for strategic play; since then, saw the bullish pick-up from 8470 to 9119 followed by sharp unwind to 8553, back to starting point.
BANK NIFTY is the worst hit, giving up 11.5% gain from 2014 close of 18736 to 28/1/15 high of 20907 and now at 18606, below the 2014 close. While the rate-cut brought in cheer, valuation mismatch against earnings pressure caused the damage, cutting the irrational exuberance in quick time.
While equity assets were volatile, 10Y bond posted gradual appreciation from 8.0% to 7.60-7.65% (strategic support and long-unwind zone) before stability at 7.70-7.80% MARKET PULSE ended the bullish chase from 8.40-8.65% at 7.60-7.65% for reinstate at 7.80% to be in chase for more.
USD/INR is seen as the best currency pair with limited volatility. Rupee has emerged as the strongest currency despite RBI support to the $ to arrest Rupee over valuation. RBI also comes to the rescue of Rupee, when in need to administer price-stability by its presence both sides. Rupee has remained strong with intra-2015 volatility limited at 63.62 to 61.29 to 63.00 to 62.36 to current 62.45 against 2014 close of 63.03. It has been good for hedge play (to hedge short term liabilities at spot below 61.50 and cover long term assets when spot above 62.50 enjoying the time decay) and carry benefit for FIIs and FC borrowers.
What next? Global cues in favour in the short term and domestic cues positive in the long term
NIFTY focus is retained between cheap-to-acquire zone of 8450-8600 and hot-to-hold zone of 9000-9150 (between 8470-9120). The strategy is to buy at 8470-8570 (seen low at 8553) with stop below 8450. There are several speed-breakers on the way at 8685-8700, 8785-8800, 8835-8850, 8985-9000 and 9120, tough nut to crack in Q2/2015. While do not see major risks in play to go below 8450, positive triggers may emerge for bullish break-out over 9120, but not beyond 9350-9500. I wouldn't be surprised to see 25-50 bps rate-cut from RBI and sovereign rating upgrade before FED preparedness for shift into rate-hike cycle.
BANK NIFTY strategic buy-zone is set at 18250-18750 (seen low at 18541); see no cues to trigger downside break below 18250-18500. There are firm resistance zones at 19350-19400, 19550-19600, 20000-20100 and intra-2015 high at 20907 to stay safe in 2015. All cues (current and evolving) taken, strategic focus retained at 18250/18600-20650/21000 for Q2/2015 and may be for rest of 2015.
Rupee retain its short/medium/long term bullish momentum adjusted for time decay at 0-3% against 1Y FX premium of 7.0-7.5%. The recovery from 62.95 has target at 61.95-62.20 ahead of 61.20-61.70. The hedge strategy is to buy 1-3M $ 62.00-62.50 (forward rate) and sell 12M $ at 67.35-67.85. This strategy has remained unchanged, and has given enough opportunities for strategic traders for back-and-forth play.
All taken, Q2/2015 (and start of FY16) will be period of consolidation. There will be lot of positive triggers from domestic cues, while external cues stay supportive in the short term.
Good luck, and wish you stay prudent and sensible avoiding irrational exuberance!
Moses Harding
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