Global markets outlook for 13-17 April 2015 : State of extended bullish consolidation phase

Global market dynamics steady, in the absence of fresh cues for extended consolidation phase

Market Pulse outlook for previous week was for bullish (risk-on) consolidation mode at inner-ring of near term ranges of 17000/17500-18000/18500 (DJIA Index), US 10Y Treasury yield at 1.80/1.85-2.0/2.05%, USD Index at 96/96.50-99/99.50, Brent Crude at 52.50/54-57.50/59 and Gold at 1135/1150-1220/1235. The "risk-on" investor sentiment kept the DJIA index in bullish tone with close above 18000, driving US 10Y yield up from 1.80-1.85% to 1.95-2.0%. USD index found solid support at 96.00-96.50 for swift recovery into 99-99.50 driving Euro down from 1.10-1.1050 into 1.05-1.06. Gold recovery from 1135-1145 support (and short squeeze zone) met 1220-1235 before sideways play at 1185-1210, while Brent Crude in end to end play at 54-59. Good so far, what next this week?

There are no major developments to review the bullish consolidation outlook against lack of clarity on FED stance on the timing and quantum of rate hike. While most stakeholders look for baby steps hike by not more than 50 bps through June to December 2015 followed by an extended pause through 2016, expectation on the timing of start of rate hike is mixed. Euro zone economic stability is underway with QE and NIRP support, while US economy recovery is seen to be round the corner. All taken, delay in shift to rate hike cycle (in baby steps) and extended monetary policy advantage to the US will retain investor appetite in favour of equity (against reduced allocation for bonds). The concern however will be on USD revert to bullish undertone ahead of time. For now, it is safe to assume that start of 25 bps rate hike deferred to Q4/2015 from Q3/2015.

The outlook this week is for risk-on bullish consolidation in DJIA index with shift of focus to 17750/17850-18200/18300. US 10Y Treasury yield is seen to be under pressure into higher end of 1.85-2.10%. USD index seen bullish for revisit to 100-100.50 with upward shift of support from 96-96.50 to 98-98.50. The risk of shift of reserves from Euro to USD and JPY has now come into play, adding strength to DXY. Gold is under pressure with shift of focus from higher to lower end of 1170/1185-1220/1235, but no major cues to trigger overshoot either way. Brent Crude retains its sideways momentum at 52.50/54-59/60.50 with breakout bias into 45-50 in the near term. All taken, it would be an extended consolidation phase, while looking for signals that would help FOMC to take firm stance on start of rate hike cycle, which is now seen to be between August to October 2015.

Domestic cues favour shift from bullish to neutral consolidation mode awaiting clarity on directional bias

India markets traded to the script. NIFTY extended gains over 8600-8635 to the doorstep of set "end of recovery" target (from 8265-8300) at 8785-8850. Bank NIFTY recovery beyond 18750 didn't have the steam for set target at 19350-19500 for back and forth play at 18350-18900. The damage is from RBI's status quo on 7th April, and the nervous (and mixed) tone on the guidance. In consequence, 10Y bond yield shifted focus from lower to higher end of 7.70-7.80%. USD/INR push back held at 62.00-62.15 (end April 2015 $ at 62.35, thus completing end to end of 62.35-63.15 focus range in quick time). The intra-week strategy was to unwind short dollar book at spot below 62.15, allowing $ recovery into 62.45-62.70. All taken, it is good start for FY16 in equity markets and Rupee exchange rate, providing double benefit for off shore investors, while rally in 10Y bond seen deferred for now against firm strategic support at/over 7.80%. What next?

Concerns on evolving conflict in growth-inflation dynamics and unwind of strategic investment book are major risks in play

While there are no major worries on medium to long term India optimism, short term outlook is not euphoric to chase elevated valuation from here. The domestic cues continue to stay supportive, but not meeting to expected outcome is worry; signs of set up of economic vibrancy may become visible in H2/FY16. This outlook may lead to delay in sovereign rating upgrade to H1/FY17, which is now distant away. The time-decay against limited upside in H1/FY16 will shift strategic investors appetite from equity to fixed income assets. It makes sense for strategic investors carrying investments since August 2013 to May 2014 to take monies off the table for 3-6 month temporary parking in Gilts and/or corporate bonds. An appreciation of 30 bps in 10Y Gilt in 6 month period is good for 13-14% annualised return, while equity assets stay in consolidation mode. Strategic investors will get reinstate opportunity at 7950-8250/8450 in NIFTY and  16350-17000/17700 in Bank NIFTY, while staying invested in 10Y Gilt at 7.78-7.83%. There is no need for FIIs to dilute India appetite, despite valuation pick-up in US, China and elsewhere. Stability in equity assets, work-in-progress for bullish Debt market and Rupee stability are positive signals ahead. The strategy for FIIs to lock in 10Y India-US spread at 5.90-6.0% works well, against India 10Y support at 7.80% and US 10Y resistance at 1.85%. All taken, in the absence of clarity on directional bias in the near term, it is prudent to stay in neutral mode, being "light" on risk-on equity assets for conservative play with higher allocation to Gilts and Corporate bonds. The short term investment theme is around staying heavy on fixed income assets and light on equity assets.

NIFTY relief rally from 8265-8300 is not expected to sustain beyond 8815-8850/8900 seen as "long-unwind" zone for equity assets or lighten the equity portfolio for shift to fixed income assets. Bank NIFTY is seen heavy at 19000-19150 ahead of major resistance at 19350-19500. At this stage, it is tough to set the extent of reversal. NIFTY has firm support at 8665-8700 and 8550-8585 with end of reversal zone at 8270-8470. Bank NIFTY has firm support at 18450-18600 and 18000-18100 with end of reversal zone at 17700-17850. For the week, will retain NIFTY focus at 8600/8685-8850/8935 and BNF at 18300/18450-19000/19150, in sideways mode. Having chased NIFTY from 9000-9120 to 8265-8300 to 8785-8850 and BNF from 20650-21000 to 17700-17750 to 18850-18900, it is prudent to take monies off the table on stretched bullish extension from here and stay aside (by shift to India 10Y at/above 7.80%) for deep correction. The comfort however is from upward shift of fair-value buy zone in NIFTY from 8200-8300 to 8400-8500 and Bank NIFTY from 17500-17750 to 18000-18250, seen as bull-protection zone.

10Y bond back at 7.80% post RBI policy, unwinding the impact of 4th March 2015 rate cut which saw recovery from 7.80 to 7.63% before push back to 7.75-7.80%. The comfort is from restricted volatility within set short term focus range of 7.60/7.63-7.77/7.80%. Now, need to be patient absorbing weakness at 7.80-7.83% enjoying the positive carry (against soft CBLO rate at sub 7.5%) and  awaiting shift of focus from 7.78-7.83% to 7.60-7.70% ahead of 7.35-7.60% (target by July - September 2015). The trigger for next rate cut will be on CPI stability at 5.0-5.5%, driving Repo rate to 7.0% ahead of start of FED rate hike squeezing the India-US 10Y spread to 5.0-5.5%. This spread is adequate to retain USD/INR exchange rate stability at 62-64, to the comfort of RBI.

USD/INR seen in comfort zone at 62.05/62.15-62.35/62.45 retaining the interest rate advantage with elevated FX premium at 7.90-7.50% across 3-12 months and at 5.85-6.0% in 10 year. The end to end play in end April 2015 $ set at 62.35-63.15 is done in quick time with spot Rupee recovery from 62.80 (low on 27/3) to 62.05 (high on 6/4). RBI support for the $ at 62.00-62.15 prevents extended $ weakness into lower end of set strategic support zone of 61.65-62.15 which is seen rock solid for pull back into 62.55-62.70 ahead of 62.95-63.20. The trigger may be from either lumpy $ demand or DXY rally beyond 100-100.50. The hedge strategy is to act at both ends of April 2015 at 62.10/62.35-62.85/63.10; 3M at 63.00/63.25-64.00/64.25; 6M at 64.25/64.50-65.25/65.50 and 12M at 66.50/66.75-67.50/67.75; strong appetite at both ends will retain spot stability at 62/62.15-62.85/63 till FED gets into rate hike mode, but time decay till then will cover Rupee weakness to 64 to protect the hedge play. We have already seen multiple times back and forth moves (within set strategic focus) without adjusting for time-decay, which is the serious concern for RBI keeping Rupee value at elevated levels against global currencies. For the week, let us watch sideways play at 62.00/62.15-62.55/62.70; with RBI protection at/above 62.00, break-out bias into 63.00 is the risk in play.

EUR/INR completes back and forth of 65.75/66-69/69.25 in quick time, since the previous FOMC meet. It is from combination of weak USD/INR at 62-63 against weak EUR/USD at 1.0450/1.05-1.10/1.1050. Euro did make multiple attempts at 1.10-1.1050, but didn't have the desired strength for last mile extension into 1.12-1.1250. With short/medium term focus at/below parity,  all stakeholders including Central Banks are keen to hedge Euro asset exposures and shift Euro assets to USD or JPY on recovery over 1.10. Now, EUR/USD will be under pressure into 1.0450-1.05 against steady Rupee at 62.20-62.45 to drive EUR/INR  into extended weakness below 65.75-66.00 for 65.00-65.25 which should trigger short squeeze entered at various levels from 69.00-69.25, 68.50-68.75 and 67.00-67.25 chasing EUR/USD push back from 1.10-1.1050 and USD/INR from 62.80-63.00 to 62.05-62.15. For the week, set focus at 65.00/65.25-66.50/66.75 in sideways mode, tracking EUR/USD at 1.0450/1.05-1.07/1.0750 and USD/INR at 62.20-62.70.

Moses Harding