Equity Markets: Weekly update for 25-29 May 2015

Global cues continue to stay supportive

Most cues turned in favour to support bullish consolidation in global equity markets. The shift of expectation in start of FED rate hike cycle from June to October-December 2015, front-load of ECB QE and China in ultra - accommodative monetary policy mode are the major cues which came into play to support MARKET PULSE outlook for sustained intra-May recovery in DJIA index from 17733 to 18351. The expectation is for set up of bullish consolidation at 18000-18500 with attention on US economic data that would throw clarity on FED rate actions. At this point, it is not clear on the timing of rate hike between October to December 2015, while there is an unanimous expectation of hike not beyond 50 bps through 2016, when ECB (and others) may start unwinding QE and ZIRP/NIRP support to financial institutions.

DJIA posted an all-time hike this week at 18351 (on 19th May) before minor pull back to 18217 with close at 18232, retaining bullish momentum into 18500. The positive takeaway is the bullish stability (against minimum volatility) for steady intra-2015 rally from 17037 (low on 2nd February) up by over 7.5%. For the week, good to retain focus at 18000-18500 in bullish consolidation mode.

Mixed domestic cues and nervous investor sentiment sets up increased price volatility

India Growth pressure building downside risks to FY16 GDP growth target of 8.0-8.5% and lack of comfort from RBI on sustainability of FY16 CPI at lower end of 4-6% comfort zone have emerged as spoil sport for India equity markets. The intra-2015 recovery in Brent Crude from $45 to $70 by over 50% has unwound most of positive impact on inflation and CAD against Rupee depreciation from 61.29 to 64.28 since end January 2015. Most stake holders are in the process of reviewing FY16 GDP growth at 7.0-7.5%, and RBI caution on downside risks on CPI into 5.5-6.0%; consequent emergence of growth - inflation conflicts provide little bandwidth for RBI to cut Repo rate beyond 7.5% or cut CRR to drive operating policy rate from Repo to Reverse Repo rate, from 7.5 to 6.5%. Given this macroeconomic play in FY16, FII appetite for India equity assets will stay diluted from now on for shift of stance to sell-on-recovery for unwind of existing exposure. It would need strong domestic appetite from DIIs and Pension & Provident Funds participation to arrest downside risks.

The nervous undertone has already brought in excessive price volatility, NIFTY between 7950/8000-9000/9150 and BNF at 17200/17450-20500/20650 since March 2015. While the intra-May recovery in NIFTY from 8000 to 8500 (BNF from 17250 to 18750) is relief, but sustainability here is in doubt in the absence of supportive tailwinds and build up of resistive headwinds. All combined, MARKET PULSE strategy was to end the NIFTY chase from set buy zone of 7950-8000 (BNF from 17200-17350) at 8450-8500 (and 18700-18850) and switch sides with short build for re-visit to 7950-8100 (and 17250-17700).

Bearish consolidation ahead of post policy sell off

The rate cut expectation on 2nd June is providing consolidation in NIFTY at 8350-8500 and BNF at 18350-18850. The squeeze in May/June Futures premium indicate the weak pulse of investor sentiment ahead. The strategy is to sell June NIFTY futures in 3 lots at 8500/8550/8600 and June BNF at 18700/18775/18850 for test/break of 8350 (and 18350) for 1st reversal target at 8100/17700 ahead of 8000/17250. At this stage, let us stay neutral on NIFTY downside break beyond mid December 2014 low of 7961 (risk below 7950), while Bank NIFTY is seen more vulnerable to downside risks on test/break of intra-2015 low of 17246 for explosive move into October 2014 low of 15130. In the absence of credit pick up from growth pressures, current issues around NPA  and elevated Gilt yields are serious risks in play on Bank's profitability to support future earnings against elevated valuation.

For the week, ahead of 2nd June policy review, retain NIFTY focus at 8250-8550 and BNF at 17850-18850. Retain strategy to sell June NIFTY at 8500/8550/8600 (with stop at 8625) and June BNF at 18700/18775/18850 (with stop at 18925) for 8100/17250. Also retain, BNF under performance to NIFTY. All combined, post-policy trading focus is retained at lower-half of set 2015 play at 7950/8100-9000/9150 (at 7950/8000-8500/8550. BNF at lower half of set 2015 focus at 17250/17400-20500/20650 (at 17250/17350-18850/18950). It is not the time for strategic investors to stay invested for beyond 2015, when downside risks dominate in H1/FY16. Till signs of emergence of supportive cues in H2/FY16, cash is the king as leveraged play will stay tuned to sell-on-recovery mode at/beyond set resistance at 8500-8550 and 18700-18850. The market sentiment beyond this week is in the mode of sell on 25 bps rate cut and sell more on rate pause. The relief beyond set resistance zone is only on combination of 25 bps rate cut and 50 bps CRR cut, which is near-zero probability. Tighten your belts for high price volatility ahead!

Good luck & have a safe week ahead!

Moses Harding