Frenzy followed by panic: euphoric rally unwound at greater pace
Post the markets rally from August 2013 - May 2014, the last mile extension since mid December 2014 (into 1st week of March 2015) was at greater pace retaining the domestic hope and optimism, supported by RBI's shift to accommodative monetary policy stance and cues not in favour of FED shift into rate hike cycle! Most expected one-way upmove through 2015 and beyond, despite significant valuation re-rating of India assets not adequately backed by earning potential. MARKET PULSE urged to stay cautious ahead (Sensex over Mount 30K and NIFTY above 9K) from pent-up resistance to scale up valuation against higher base, when headwinds seen to emerge in realising the stated ambitions on set targets of macroeconomic parameters. The worst is seen to be behind, but the light for end of tunnel is clearly not at sight. Given the domestic headwinds in play, which will lead to disappointment (if not despair) and diluted tailwind support from external cues, H1/FY16 was seen to be period of bearish consolidation till emergence of better clarity for set up of directional bias ahead. Not to surprise, financial markets have been in frenzy (and panic) mode on a roller-coaster ride for significant valuation spike since mid December 2014 to first week of March 2015 followed by unwind of intra-2015 gain. Back to square one!
NIFTY reversal from set "hot-to-hold" zone of 9000-9150 held at "fair value zone" of 8200-8350 for punch below 2014 close of 8282 (at 8273). The worry is that Modi-euphoria (valuation re-rating by 37% from 6638 to 9119) since May 2014 is at risk of extended unwind!
BNF reversal from set "hot-to-hold" zone of 20650-21000 held at "fair-value zone" of 17500-17750. The reversal from 20947 (high on 7th January) and 20541 (4th March) held at 17798 (low of 22nd April), but was deep to take out 2014 close of 18736 and into striking distance of mid December 2014 low of 17502. Modi-euphoria rally from 12773 (by over 63%) is now cut down by 20%, and weak for more!
Rupee has also given up the intra-2015 rally from 63.62 to 61.29 with a new low punch at 63.64 before close at 63.56, below the 2014 close of 63.03. It is not major worry as the adjustment of 50-60 paisa is not significant to time-decay of 150-160 paisa since then. What is concern is the year-on-year fall by 9% from May 2014 high of 58.33 to April 2015 low of 63.64. There is no panic if seen against 2015 YTD rally in DXY by over 7% and Y-o-Y from May 2014 by over 19%.
EUR/INR is the worst loser with 2015 YTD loss of over 9% from 76.25 to 65.70. MARKET PULSE initiated coverage at sell zone 71.00-71.25 for unwind at 65.50-65.75, followed by squeeze in focus range at 66.75/67.00-69.00/69.25. It was also seen good for RBI to cut Euro reserves at/above spot 69.25 to mitigate risks against valuation loss and better yield (over 7.5% against sub 0.5%). This will also resist bullish undertone of USD/INR at 63.65-64.00.
10Y bond 8.40% 2024 has been relatively stable with back-and-forth move at 7.60-7.85% (105.25 to 103.60) as against mid December 2014 peak yield of 8.30-8.35% (102.42). RBI shift to supportive monetary policy stance through 2-step adjustment of Repo rate from 8.0 to 7.5% has helped to retain price stability. What is intriguing is the absence of 50 bps rate cut transmission for post-rate cut reversal of gains from 7.60-7.63% to 7.77-7.82%, as against 2014 close at 7.85%?
What next? Concerns emerge from slippage in macroeconomic fundamentals and nervous Rupee exchange rate
There are risk factors in play in shifting FY16 GDP growth momentum into 8.0-8.5%. Brent Crude recovery from $45 to over $65 and USD/INR bullish momentum at higher end of 61.65/62.00-63.65/64.00 against concerns on monsoon (and resultant supply squeeze) may retain CPI print at higher end of 4-6% comfort zone. Both combined, conflicts in growth-inflation dynamics will put RBI on back-foot on its accommodative monetary policy stance. The best is behind on the CAD in the short term from 50% spike in Brent Crude (from $45 to above $65 for near term consolidation at $62-72) and higher import of Gold. Export is also not seen in support to bridge the widening gap in the trade account. BoP may come under pressure on FIIs loss of appetite on India assets and slow down in ECB flows against risk from unhedged carry-trade exposures. There is better comfort on fiscal deficit for FY15 actual at 3.9-4.1% of GDP and higher confidence on beating the FY16 estimate of 3.9%. All combined, bullish euphoria is undone, thus diluting the investor (and stakeholder's) sentiment and the confidence on the short term through H1/FY16. The worry thereafter is the FED shift into rate hike cycle in H2/FY16 with minimum 50 bps rate hike. Taking all these cues in play into account, MARKET PULSE strategy was to unwind risk-on exposures in equity (for shift to risk-off Gilts and cash) and close USD/INR liability exposure.
Equity downside risks limited from long term investor appetite absorbing fair and cheap to acquire valuation
Is NIFTY at risk of giving up set support at 8265-8300? The concern is from shallow recovery from here, first at 8500 and next at 8350 for weak weekly close at 8305. The worry is also from losing sight of all-time high at 9120 to be replaced by 8850 now, against risk of test of 2015 low of 8065 ahead of mid December 2014 low of 7960. For now, let us set focus at 7950/8050-8450/8550 with attention on 8250, make-or-break point. The strategy is to buy in 2 lots at 8250-8265 and 8200-8215 with tight stop below 8200 or in sell-on-recovery mode at 8350-8500. Be prepared for either bearish consolidation at 7950/8000-8500/8550 or for bullish consolidation at 8200/8250-8750/8800 (within short term big picture focus at 7950-8850). Given the mixed cues and conflicting dynamics, stay neutral on hold or break of 8250!
BNF will be in bearish undertone against pressure on inflation, Rupee and Money market rates. Despite these negative sentiments in play, RBI support to Rupee and interest rates and heavy Brent at $70-72 (for recovery into $60-62) provide confidence to buy when the going becomes tough and nervous. All taken, do not see BNF risk below 17500 while 18500 is heavy in the short term. The strategy is to stay end to end at 17500/17650-18350/18500 with stop on break.
Attention on RBI to cut importer's fear and exporter's greed against FII mood-swing
USD/INR found firm support at 61.65-62.15 for shift of focus at door-step of 63.65-64.00. Can Rupee hold its ground at 63.65-64.00 is the uncertainty in play now? It would need lead-support from RBI to cut the lead-lag syndrome, importers rush-in and exporters hold-back. Exporters will be in greed for more, while importers (and carry-trade players) will be in fear to close exposures. Despite mixed (and nervous cues ahead), 12M $ is tough to sustain beyond 68.00 (where have seen multi-time failure for push back to 65-66.50) while it is good to cover near/short term $ liabilities at forward rate 62.85-63.35. Needless to say, risk to this expectation is on break of 64.00, shifting focus to 63.35/63.50-64.85/65.00, seen as low probability and RBI willing. For now, let us set focus at 62.50/62.85-63.65/64.00; hedge strategy to be around buying end May 2015 $ at 63.00-63.35 (spot at 62.60-62.95) and sell 12M $ at 68.10-68.35 (spot at 63.65-63.90). Having covered end April and May 2015 imports at 62.35-62.50, importers not to panic at 63.65-63.90 and to leave the street to RBI, exporters and carry-trade players (against the Euro).
EUR/INR trading focus was squeezed from 65.50/65.75-71.00/71.25 to 66.75/67.00-69.00/69.25 and now it's time to review it again. The make-or-break consolidation zone is seen at 68.50-69.25 with overshoot either way limited at 67.50-70.00. Euro exporters have lost margin from sharp reversal from 2014 close at 76.25 and intra-2015 high above 82.00. It is prudent for exporters to cover at 69.25-70.00 given the risk of EUR/USD parity in Q3/2015. There is huge interest at 1.09-1.1050 to offload Euro assets by investors and Central Banks. For now, let us watch sideways mode at 68/68.50-69.50/70; retaining breakout bias into 66.75-67.00.
India 10Y in extended bearish consolidation mode
India 10Y benchmark 8.40% 2024 is under pressure on possible delay in next round of monetary easing against risks from Brent Crude and Rupee. Rupee extended weakness beyond 63.10-63.35 (with new 2015 low at 63.64) and Brent Crude price-stretch beyond $65 has put 10Y bond under pressure for shift of focus from 7.75-7.77% to 7.78-7.80%, into higher end of set strategic focus at 7.60-7.85%. In the meantime, India-US 10Y Yield spread is in back-and-forth between 5.95% (7.80/1.85) and 5.75% (7.75/2.0) and now steady at 5.85-5.90%. For now, need to track 10Y at 7.75/7.77-7.80/7.82% (within near term big picture at 7.70-7.85%); higher India-US spread at 5.95-6.0% (7.80-7.85 versus 1.80-1.85) will limit downside risks not beyond 7.82-7.85%, but recovery beyond 7.72-7.75% is deferred for now till normalcy (and price stability) is restored in Rupee exchange rate.
Good luck and be cautious against sudden (and volatile) mood swings against low appetite either way!
Moses Harding
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