Mixed cues between global growth (and geo-political) concerns and resultant comfort from passive FED on rate hike
Global macroeconomic fundamentals continue to stay fragile and weak. The short term outlook on Euro zone, Japan and China builds despair than hope. The only comfort is from higher probability of recovery in the medium term given the abundant liquidity support at zero (or negative) interest rates. The current combination of low growth - low inflation adds to price pressure on risk-on assets as investor appetite shift to risk-neutral and risk-off assets, thus retaining bullish undertone on sovereign bonds and Gold. The added worry is now from political tensions in the Middle East, driving the Brent Crude prices up from higher risk premium. All these cues have diluted the risk of early rate hike from the FED, shifting the expectation to latter part of June to October 2015 by not more than 50 bps by end 2015.
Combining all these, the outlook for previous week was for consolidation phase in sideways trading mode within set ranges. DJIA index focus was set at 17750-18200 (saw intra-week recovery to 18169 for push back to 17748 before close at 17826). US 10Y bond traded in back-and-forth mode at 1.85-1.95%. Brent Crude was sharply up from above 54.50 to set target at 63.50-65.00 to hit 64.95 before close at 63.45. Gold in back-and-forth mode at set 1185-1210 focus with 1207 to 1184 to 1209 before close at 1204.15. DXY was volatile with failure at 100 for sharp push-back to lower end of set 96.50-100 focus (99.99 to 97.0 before close at 97.45). In the absence of clarity in near/short term directional bias, the strategy was to stay fleet footed in back and forth mode within the set ranges which has worked well. What next this week?
DJIA index has strong near term base at 17575-17625 and firm resistance at 18200-18300. The lift of base in 2015 from 17000-17050 is seen safe at 17500-17550 for building bullish momentum over all-time high at 18288 (seen on 2/3/2015). The near term positive cues are from availability of abundant liquidity at near zero rates and dilution in risk of FED start of rate hike cycle in June 2015. Till then, it is good to stay in buy-dips mode at 17550-17625 (with stop below 17500) for 18200-18300, which should hold. For the week, set focus at 17550/17625-18150/18225; overshoot, if any limited at 17500-18300.
US 10Y Treasury yield is now attractive at 1.90-1.95%, while set firm resistance at 1.80-1.85% (which has provided push back to 1.95-2.0% so far) is now at risk. The delay in shift to rate hike cycle, and in baby steps mode before extended pause into 2016 are positive cues in play to retain the elevated spread advantage in the yield curve. The strategy is to buy in 2 lots at 1.91-1.93% and 1.98-2.0% for 1.80-1.82 and 1.73-1.75%. For the week, set focus at 1.80-1.95% and overshoot not beyond 1.75-2.0%.
DXY traded to the script with failure at 100 and supported at 96.50, overshoot either side was momentary; moves so far has been in back and forth mode, from 100.39 to 96.26 to 99.99 to 97.00. There are no major cues to review this outlook for near term consolidation at 96.50-100 against short term support at 95-96.50 which should hold for eventual test/break of 100.39, with no clues to set upside target. For the week, set focus at 96/96.50-99.50/100 in sideways mode.
EUR/USD in back-and-forth mode since previous FOMC at 1.0450/1.05-1.10/1.1050 with 1.0456 to 1.1051 to 1.0519 to 1.0848 for close around 1.08. With short term outlook for parity and below, there is good amount of Euro supplies at 1.0850-1.1050 from Central Banks and exporters into Euro zone. None would like to hold assets in Euro currency despite sharp fall since August 2014, when there is no sight of strategic base (or firm floor support) as yet. Having said this, Central Bank's intervention fear support at 1.05 handle has delayed the inevitable move to parity by now, while sellers in huge at/below upper handle 1.10. For now, see resistance (above 1.0850) at 1.0935-1.0950 ahead of 1.10-1.1050 and support at 1.0685-1.0720 ahead of 1.0590-1.0615. For the week, set focus at 1.0590/1.0685-1.0935/1.1050, and under pressure for 1.0450/1.05-1.0525.
GBP/USD bit more volatile than Euro within the post FOMC range of 1.4550-1.5150 with moves from 1.5147 to 1.4563 to 1.5053 before close around 1.4950. Here again, against risk of more weakness in the short/medium term, GBP is heavy at 1.5050-1.5150 in anticipation of eventual break below 1.4500-1.4550. Till then, prefer back and forth at 1.4550/1.4650-1.5050/1.5150, overshoot either way not to stay for long.
USD/JPY has nicely traded back and forth of set strategic focus at 118/118.50-120.50/121 (118.30 to 120.84 to 118.54). Post failure at pre FOMC high at 122.02, focus range was squeezed at 118-121 and now may need to stretch it at 116-121, watching firm support at 116.50-116.85. Since the set up of strategic focus range in mid December 2014 at 115/116.50-123.50/125, have seen rally from 115.56 to 122.02 and there are no major cues for 115-116.50 to give way now, while heavy at 120.50-122. For the week, set focus at 116/116.50-119.50/120 in sideways mode.
Post the crash in Brent Crude from over 115, saw firm short/medium base at 45 for 45-65 consolidation; got to see recovery from 45.19 hit 64.95 before close at 63.50. The strategic base is now lifted at 52.50-57.50 and break of 65.00 will stretch the focus at 72 and 80, seen as all-win fair value zone and relief for oil importers only below 60.50-62.00 to get focus back at 56/57.50-63.50/65. For the week, prefer tight play at 60/61.50-63.50/65, overshoot either way tough to sustain.
Gold in consolidation mode at 1170/1185-1220/1235 post intra-2015 reversal from 1306 to 1143. There are no major cues to suggest overshoot either way in the near term against short term risk for weakness below 1135-1150.
India equity market in consolidation mode against mixed cues, adjusting for valuation
It has been orderly trades in NIFTY capturing investor sentiment and valuation. The rally from mid-December 2014 low of 7950 to intra-2015 high of 9119 was euphoric (and stretched on valuation) for push back to 8260 (into 8200-8300, seen as fair value zone). The recovery from 8269 was seen stretched at 8815-8850 for correction to 8550-8585. As per script, recovery from 8269 failed at 8844 for reversal into 8596 before close at 8606. Bank NIFTY volatility was high both ways, recovery from set fair value buy zone of 17500-17750 failed at 19000-19150 (high at 19038) before push back below 18350-18340. While the moves within set "fair value" and "hot to hold" zones provides comfort, the breakneck momentum either way is scare for stakeholders. What next?
Global cues continue to stay steady and impact neutral on India equity assets. Risk from FED is diluted now, and impact of 50 bps rate hike by FED before end 2015 is not seen as threat against RBI preparedness for 50 bps rate cut. The immediate worry is from domestic cues as euphoria premium is seen unwound, while retaining the positive sentiment from medium/long term hope on NaMo building stronger India. The concerns on twin deficits and inflation are behind despite firm Brent Crude and lower exports. The major uncertainty is on achievement of FY16 GDP growth target at 8.0-8.5%. All taken, short term outlook is neutral with no clarity on directional bias either way. It is possible that H1/2015 NIFTY "cap" is down from 9000-9150 to 8850-9000 (BNF from 20650-21000 to 19000-19350), while support at 8265-8300 and 17650-17750 is solid. Given the possibility of extension of consolidation phase beyond H1/2015 into H2/FY16, strategic investors may need to stay dynamic supporting bull protection at 7950/8200-8300 (and 16850/17500-17750) and taking money off the table at 8850-9000/9150 (19000-19350/19700).
The outlook for the week is mixed, but not beyond set near term focus in NIFTY at 8265/8300-8815/8850 and BNF at 17650/17750-19000/19100. Post the end to end recovery, unwind is now around midpoint intermediate zone of 8550-8565 (and 18350-18400). Two options now: either into bearish consolidation at 8265/8300-8550/8585 (BNF at 17650/17750-18350/18450 or into recovery mode at 8550/8585-8815/8850 (BNF at 18350/18450-19000/19100), with most trades expected to be at 8400-8750 (BNF at 18000-18750). Do not rule out CRR cut trigger into 8850 (and 19350), hence prudent to be in buy-dips mode at 8265-8400 (and 17650-18000).
India Gilts retain bullish momentum from RBI monetary support to growth and appetite shift from Equity to Debt/Fixed Income assets
India 10Y benchmark bond (8.40% 2024) has held at solid support at 7.80-7.82% (103.80-103.90) for long now; rally from here hit 7.61-7.63% (105.25) on 4th April (post rate cut). Since then, it has been back and forth at 7.68/7.70-7.80/7.82 (103.75-104.50). What next?
There are no cues to suggest break down of 7.80-7.82% support, near term bias is in favour of recovery into 7.68-7.70% and 7.61-7.63%. India growth - inflation dynamics continue to favour shift to surplus system liquidity mode at lower interest rates. The trending in US 10Y yield into lower end of 1.70-1.95% is also of support for lower India Gilt yields, seen good to cut FY16 borrowing cost of the Government. All taken, most cues favour RBI delivery of CRR (and/or rate) cut soon. It is possible that RBI deliver 50 bps CRR cut ahead of June policy review. Till then, retain focus at 7.75/7.77-7.80/7.82 with bias into lower end awaiting RBI action for shift of focus into 7.68-7.70% enroute to 7.61-7.63%.
Strategic investment appetite is seen at 7.80-7.82% (against NIFTY squeeze at 8815-8850) and NIFTY at 8265-8300 (against 10Y bond sale at 7.60-7.65%). It is appetite neutral for FIIs against India-US spread stability at 5.85-5.95% in traction with 7.70-7.80% and 1.75-1.90%.
Rupee price momentum firm, but outlook nervous in the short term
USD/INR price momentum is stuck at 62.00/62.15-62.85/63.00 in traction with end April'15 range at 62.35-63.10 (same range focus for end March 2015). USD/INR not adjusting for interest differential time value and $ strength against major currencies retains Rupee dominant position (and strength) against global currencies despite RBI absorbing excess $ supplies. What next?
Rupee is not at risk from higher imports and lower exports, given the abundant $ supplies in capital account, and elevated FX premium support to exporters. There is nothing to worry from the CAD (having shifted the trend from above 4% to below 1%) or squeeze in real interest rate differential between India and US. The only risk is from the "forced" adjustment of Rupee to keep the over valuation under limit below 110%. All taken, stake holders need to cover the possibility of USD/INR base shift from 62.00-62.15 to 62.55-62.70 for shift of near term focus at 62.50/62.65-63.35/63.50. Retain hedge strategy in 3M at 63.50-64.50 and 12M at 66.85-67.85, overshoot either way is not expected to sustain. For the week, set USD/INR focus at 62.25/62.35-62.70/62.80, marginal upward shift from previous week focus at 62.00/62.15-62.55/62.70.
EUR/INR strategic resistance-cum-sell zone has moved down from 71.00-71.25 (high on 17/2/15) to 69.00-69.25 (high on 26/3/15) against firm near term support at 65.50-65.75, held twice on 12/3 and 14/4. There is significant squeeze in volatility range from 65.50-71.25 to 65.50-69.25, and now at 65.50-68.00 building risk for break-down below 65.50 into 63.00-63.50. For the week, retain focus at 65.50/65.75-67.75/68.00 with bias into lower end.
Have a great week ahead!
Moses Harding
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