Shift from bull to bear phase since 1st week of March 2015
India glorious bull-run since August 2013 - May 2014 had a sudden and abrupt end in early March 2015. Since then, financial markets across asset classes got into the bear phase, posting lower high's and lower low's on monthly basis. However, comfort is from not seeing a one-way free fall, but with bouts of strong recovery followed by gradual reversal.
The bear phase is evident from NIFTY posting lower high's from 9119 (4th March 2015), 8844 (15th April), 8489 (22nd May) & 8467 (1st June), and lower low's from 8269 (27th March 2015), 8144 (30th April), 7997 (7th May) & 7940 (12th June). It's worse in Bank Nifty from drop-down high's from 20907/20541 (January -March 2015) to 19038-18832 (April - June), and slip-down low's from 17719 to 17174 during March to June 2015. The old 10Y bond 8.40% 2024 yield is sharply up from 7.50-7.65% to 8.0-8.15%, and the new 10Y bond 7.72% 2025 yield is up from 7.62% to 7.92% post issuance. Despite lift of USD/INR base from 61.29 to 63.45 (between January to June 2015), Rupee has stood firm against bullish momentum on the USD, adjusting only for the time-decay.
Relief not in focus against external headwinds and from domestic irritants
Global cues will stay resistive for rest of 2015. The major setback for India will be from Euro zone woes (from Greece), and FED shift to tight monetary policy. Grexit risk is seen to be deferred, and it would need lot of financial support (and sacrifice) from ECB (largely funded by Germany and France) to keep Greece in the Euro zone. Indian markets are set to face stiff resistance from weak US equity market (DJIA index building downside risk from/below 18350-18500 to 16850-17000), firm US Treasury yields (10Y into higher end of set focus at 2.20/2.35-2.60/2.75%) and strong USD (DXY into higher end of 93/94.50-99/100.50). Minor relief, however will be from soft Brent Crude at lower end of 58/60-68/70 and weak Gold into lower end of 1135/1150-1185/1200.
On the domestic front, euphoria is behind and disappointment scare is emerging. Capital (equity and debt) availability to fuel growth is seen to be tight. Expectation of big-bang reforms is behind for aggressive capacity expansion, and the worry is from maintaining business-as-usual mode retaining hope for marginal pick-up. While the downside risk on growth remains valid, better-than-expected monsoon revives hope of 25 bps rate cut in 2nd half of FY16; but could only act as speed-breaker to the bear phase. All taken, investors are in wait-and-watch and PSU Banks have limited capacity to support growth with not enough balance sheet capital against NPA woes and earning pressure.
India equity market under pressure retaining the lower high and lower low price dynamics
Can NIFTY post a June high over May high of 8489? It's below 50% probability. Will NIFTY post a new July low below June low of 7940? It is 50% probability. NIFTY struggle at higher end of set strategic focus at 7950/8000-8450/8500 is not cheer to the bulls, while bears are seen to be in firm control at strategic no-buy zone of 8350-8500, not allowing entry into upper-half at 8425-8500. The intra-week push back from 8423 to 8329-8339 is in validation to set up of bearish momentum at/below 8425-8500. While hope of Greece resolution provide support at 8300-8335, it may not provide cheer for bullish extension into/beyond 8467-8489. For now, would continue to watch 8425-8500 resistance to hold for test/break of 8310-8335 enroute to 8050-8200 ahead of 7935-7985. It is not yet the good time for strategic investors to put cash to equity assets, given the high probability of posting new low below 7940 between July-September 2015. For now, retain set July Nifty Futures focus at 7950/8000-8450/8500 (stop at 8510 for 7965).
Bank Nifty is worse than the most sectors, driven down by PSU banks and default - support from Private sector banks. The pre 2nd June policy high of 18832 is solid with major resistance at 18500-18600. The intra-week push back from 18539 held well at 18150-18200 minor support zone. For now, continue to watch firm resistance zone at 18500-18700, which should hold for test/break of major support at 18000-18050 for 17850. The risk of posting a new low below 17174 in July-September is very much in the radar. It is good to retain set July Futures focus at 17150/17400-18550/18800 (stop at 18850 for 17200).
10Y bond under pressure despite build-up of RBI rate cut hope
Since the launch of new 10Y bond 7.72% 2025, it has been in back-and-forth play between 7.62-7.67% (seen as duration-cut zone) and 7.88-7.93% (value-build zone). Now, the strategic base is lifted up at 7.72-7.77% extending bearish momentum beyond 7.93% into 7.98-8.03% (old 10Y bond 8.40% 2024 into 8.15-8.20%). The external cues are firmly against from spike in US 10Y yield into higher end of 2.35-2.60% with risk of settle at 2.60-2.85% in H2/2015. Despite efforts to hike FII limit through Rupee exchange rate adjustment, FII appetite for India Gilts is low, and seen in pull-out mode from combination of yield spike and Rupee depreciation. The comfort from 25 bps rate cut is distant away (in October 2015 - March 2016), by then the damage would have been done and could only help in post rate cut stability at 7.80-7.95%.
The strategy now is to cut portfolio duration at 7.72-7.77/7.80% to create space to absorb weakness into 7.90-7.93% and 7.98-8.03%. For now, let us set focus at 7.77/7.80-7.90/7.93%, with Banks at the lower end (to cut duration) and RBI at the higher end to cool down bearish momentum to retain appetite for pipe-line bond auctions.
Rupee firm from interest rate advantage, but downside risks not out of the radar
USD/INR shift of base from 61.25-61.50 to 63.20-63.45 from January to June 2015 is not bad, adjusting only for time-decay interest rate/inflation differential, while not building traction with USD gains against global currencies. In the process, RBI has added adequate reserves building muscles to weather the storm ahead. While the exchange rate play has not helped carry - trade foreign currency borrowers, it has not harmed importers and exporters. The need on the way forward is to keep Rupee exchange rate competitive to exports and attractive to long term FDI inflows.
Going forward into long term, interest rate advantage may dilute on significant spike in US rates and marginal decline in India rates, driving the FX yield curve down across tenors. Taking this along with USD strength and decline in FII flows, USD/INR direction is clearly to the upside of 63-65/68 focus. If the Rupee decline is gradual adjusting only for time-decay, then the adjustment process is smooth. And if it happens sudden, as always, then there is need to protect short term foreign currency liabilities. The strategy has been to hedge 1-2 month liabilities on dips and cover 9-12M assets on spike. There is no need to review the strategy now.
Continue to retain USD/INR short term focus at 63.25/63.50-64.25/64.50 (12M $ at 67.85/68-68.85/69). It is risk-neutral play for importers to hedge end July 2015 at 63.85-64.00, and for exporters to cover end July at 64.50-64.65. Despite risk of 12M $ moving beyond 68.85-69.00 (into 70), covering long term/12M exports around 69.00 may not be bad given the time-decay adjustment. Given the RBI presence either side of 63.45-63.55 and 64.20-64.30, it is safe to retain focus here for hedge strategy. The risk of shift of focus to 64.20/64.35-64.85/65 is in the radar between July - September 2015.
EUR/INR failed at strategic resistant-cum-sell zone of 72.75-73.25 for reversal into target 70.50-71.00. It is from combination of EUR/USD failure from 1.14-1.15 to 1.1050-1.1150 against Rupee stability at 63.45/63.60-64.20/64.35. Now, the focus is towards extension into firm support zone of 69.00-69.25, while the recovery if any will be shallow at 71.50-72.00. For now, let us watch EUR/INR at 69.25/69.50-71.25/71.50 and be in preparedness for downside extension into 68.50 ahead of 66.50-67.25.
Have a great week ahead!
Moses Harding
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