Neutral (but firm) guidance from the FOMC
FOMC was not expected to sound dovish and there were no strong cues to turn hawkish either, at this stage. The expectation was to stay neutral, while not taking away the focus of start of rate hike cycle in September - December 2015 with maximum of 50 bps hike by end 2015. The guidance was more or less to this effect - while bulls take this stance as dovish and bears see it as hawkish ahead! Given this conflict in expectation between the bulls (and existing investors) and the bears (and investors who stay largely in cash awaiting value-buy entry), it is prudent to stay positive in the near term, with cautious optimism (or pessimism) into the short term. The message from FOMC is loud and clear that US economy is getting better, and that the trend in target economic data gives comfort for start of rate hike in Q3/2015 (followed by step-up in Q4/2015). All taken, the fear of bear-run is diluted but gives no cheer to get into sustainable bullish undertone. The strategy for traders is to be in buy-dips mode, while investors stay in sell-on-recovery mode for shift from risk-on assets to low risk (or risk-off) assets, and to be in cash to absorb value-buy opportunities that would come by in the short term.
Consolidation phase in global markets - supportive tailwinds in the near term before turning resistive in the short term
The way forward for financial markets is clear; build-up of bullish consolidation in the near term (from now to July/September) for push-back for formation of "base" in the short term (October - December) before into bullish undertone in the medium/long term (into 2016 and beyond).
DJIA near term focus is set at 17500/17650-18350/18500. The strategy is to stay in buy-dips mode for switch sides at 18350-18500 for short term (end of 2015) target at 17000-17150. It is good strategic entry at 17000-17150 for start of bull-run in 2016 for 18350-18500 and beyond (for over 7% return in 2016).
US 10Y yield near term (from now to September) play is seen restricted at 2.10-2.35% before shifting focus into 2.35-2.60% in the short term (September - November) enroute to 2.60-2.85% by end of 2015. Beyond here, risk of shift into 2.85-3.10% (and beyond) is not ruled out if FED extends rate hike beyond 50 bps into 2016.
DXY near term focus is firm at 93.00/93.25-97.75/98.00; while downside break is unlikely, risk of bullish extension into 98-100.50 is not ruled out from Euro zone woes around Greece and extended QE into 2016 when FED is already into rate hike and liquidity squeeze mode. EUR/USD will find it tough to extend bullish momentum beyond 1.1450-1.1550 in the near term against base at 1.0950-1.1050. The short term bias is for revisit to recent base zone at 1.0450-1.0550, which should hold.
India has more to worry than cheer for rest of 2015
Going ahead, India financial markets is at risk from spike in US yields and firm USD, with limited FPI appetite in H2/2015. In the absence of external supportive tailwinds, domestic cues will need to provide support to stay neutral, if not bullish! But given the lack of optimism on growth (and resultant downside risks on corporate earnings) and limited bandwidth with RBI to deliver rate cut ahead in 2015, it will be wishful to expect supportive tailwinds from domestic cues. All taken, sentiment and confidence on India financial markets is not good to stay bullish beyond near term.
NIFTY near term range is seen firm at 7950/8000-8250/8300 (with cap at/below 8465-8500) and Bank NIFTY at 17100/17250-17950/18100 (with cap at/below 18750-18850). The short term outlook is weak for sharp reversal from/below 8300-8500 (and 18100-18850) for end of 2015 target at/below 7400-7550 (and 16000-16400), seen as good strategic entry point for 2016.
10Y bond outlook for rest of 2015 is not good at all against combination of rate hike mode by FED and rate pause mode by RBI. The resultant squeeze in India-US yield spread against inflation comfort in the US at 0-2% and inflation pressure in India at 4-6% is major irritant ahead. Against spike in US yield into 2.60-2.85% by end 2015, the impact on India 10Y will be hard for push into higher end of 7.75-8.0%. The impact of high US yield on Rupee will be hard if the traction is not built in India Gilt yields. In the given inflation outlook, India US 10Y yield-spread below 5.5% is difficult to sustain and if it does, it will only lead to bearish momentum on Rupee to put added pressure on inflation. All taken, see near term consolidation in India 10Y bond yield at 7.72/7.75-7.87/7.90%, for shift of focus into 7.90-8.05% in the short term, by end of 2015. There is no clarity beyond here into 2016 at this stage.
USD/INR has firm strategic base at 63.45-63.70, seen as RBI support zone to build reserves ahead of bad days ahead. Setting aside the need to maintain Rupee exchange rate competitive to exports and attractive to FDI flows, most cues would turn against Rupee in the short term triggered by bullish momentum in DXY into 98-100.50 and spike in US 10Y yield into 2.60-2.85%. Both these cues will build bearish momentum on Rupee beyond 64.35-64.85 near term support zone for shift of focus to 65-66.50 by end of 2015. All taken, set near term USD/INR trading range at 63.45/63.70-64.60/64.85 (12M $ at 68-69).
EUR/INR near term focus is seen in traction with EUR/USD at 1.0950/1.1050-1.1450/1.1550 and USD/INR at 63.45/63.70-64.60/64.85. Both combined, set near term focus at 71/71.50-73/73.50 and need to take note of overshoot beyond 73.50 in the absence of Euro strength traction on the Rupee.
So, there is good comfort to stay positive on markets in the near term (till July - September), turn risk-off in September - December 2015 riding the bearish momentum and beyond there, be on the look out for value-buy opportunities for possible bulls-chase into 2016.
Moses Harding
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