Gloom and doom back to haunt global investors and markets
Global financial markets weathered the storm from the FED and ECB quite well, but China delivered tremors on the Emerging markets and bearish momentum on risk-on global markets, first from the collapse of its equity market followed by currency devaluation. China growth declaration is worry for developed markets, but the recent currency devaluation measures (to boost China exports) is sudden blow to Emerging Markets who are in hurry to adjust their exchange rate value to counter Chinese moves to protect their top line balance sheet. FIIs are caught on the wrong foot in the cross fires, unaware and confused on the way forward - to hold or exit or add! It was sudden and unexpected, when all was looking well post relief from Grexit and dilution of FED rate hike impact on markets given the ultra-dovish monetary policy in rest of the developed markets.
Sentiment in risk-off (and stay away) mode
DJIA sharp downside break of 17000/17150-18350/18500 stability (and consolidation) zone and US 10Y yield under pressure at lower end of 2.0-2.40% and Gold recovery from 1170-1185 to 1260-1275 are not positive take-away for the way forward. The worry is from set up of pessimism on the global economic growth, pressure on unemployment and consumption. While investors chase risk-off sovereign assets, Brent is sharply down from $70 a barrel to $45 on fear of demand compression ahead. The risk on Emerging markets is seen from the USD strength against EM currencies while losing steam against major currencies, building risk of flight of capital from EMs to home markets. All taken, China triggered shock waves on Emerging markets is there to stay for long, pushing global investors to run for cover into return-home mode.
DJIA intra-week crash (of over 1000 points) from 17568 to 16459 is bearish for 15850-16000 with resistance zone now at 16850-17000. Investor risk aversion mode build fear for extended run into 14850-15350. US 10Y Treasury yield is set to crack below 2.0% into its long term base at 1.75-1.90%. It may be a high risk chase to stay "long" at 1-10Y spread below 1.5%. FED may need to defer its rate hike stance to end 2015 or beyond into H1/2016. Gold also benefits from the mood-swing diluting bearish momentum and turning bullish for complete recovery of 1220-1235 to 1070-1085 fall, triggered by rate hike fear and resultant USD strength. Gold is now seen firm into 1200-1235 with support base at 1135-1150. Brent has punched a new 2015 low at 45.07 below January low of 45.19, retaining bearish momentum into December 2008 low of 36.20, completely unwinding the multi-year rally from here to March 2012 high of 128.40.
What is in it for India markets?
The only positive cue for India is the bearish momentum on essential import of commodities. While Brent Crude stability at $35-50 is good for the CAD and inflation, higher Gold price at 1135-1235 and weak Rupee at 65-70 knocks out some benefit. The concerns however is a big list from growth, fiscal deficit, foreign investor appetite and dilution of hope from domestic policy initiatives to spur growth momentum beyond majority forecast for FY16 GDP growth at 7-7.5% against target of 8-8.5%.
We have already shifted NIFTY focus at 7950/8000-8350/8400 (and Bank Nifty at 17100/17250-18100/18250) not withstanding delivery of 25 bps rate cut on or before 29th September policy review. While the trend is down, will global headwinds gain speed to trigger new 2015 low below 7940 (17174)? This probability is not ruled out now.
10Y bond relief from 7.90-7.93% is in struggle to extend gains beyond 7.73%. While 7.68-7.73% is set as duration-cut zone, surprised to see weakness from here extend beyond 7.78% in an otherwise risk-off investor mode. The fear is obviously from the FIIs stance now - to hold or exit or add. The worry is also from sudden shift of Rupee value from 63.35 to 65.85, causing rate cut delay till Rupee stability at 65.60-67.10. Nevertheless, current India-US yield spread at over 5.65% (current at 5.73%) is good to prevent FII exit. The domestic appetite will be good not for hold, but for rate cut action as demand-supply equilibrium continue to stay against. But, over long term, 10Y bond yield is biased for move into lower end of set FY16 strategic trading range of 7.65-7.90%. We have already seen back-and-forth here, and there are no cues now to drive sustainable breakout either way. For now, it is high risk to chase weakness beyond 7.78% and rest of FY16 trading range is now squeezed at 7.65-7.80%.
USD/INR is at striking distance of target 66.50/66.65-67 from set strategic base of 63-63.35. The rally from 63.30 to 65.92 was at break neck pace with weekly close at 65.83. While near term consolidation is seen at 65.65/66-66.65/67, do not rule out extension into all time low of 68.85 seen in August 2013. Confirmation of this will be on close above 67.10. RBI will be in supply mode at 66.60-67.10 to retain stability at 66-67, while watching next steps of China. The risk is also from USD back into its bullish rhythm against major currencies with possible DXY hold at 93-93.50. All taken, near term trading range is not beyond 65.60/65.85-66.85/67.10, overshoot either way not expected to sustain. For now, retain 12M $ focus at 69.75/70-70.75/71 for long term hedge strategy.
Rupee is down badly against the Euro from combination of Euro strength against the USD and Rupee weakness against the USD. EUR/INR is sharply up from set 68.65-69.15 base to 74.50-75 on spike in EUR/USD from 1.08 to over 1.1350 and USD/INR up from 63.35 to 66. What next? EUR/USD has broken out of set strategic focus at 1.08/1.0850-1.13/1.1350 after series of back and forth moves and looks set for extension into 1.1450-1.1550 (DXY base at 93-93.50). Rupee weakness into 66.60-67.10 against Euro strength into 1.15-1.1550 sets up next target for EUR/INR at 76.50-77 with support at 74.50-75. Need to be cautious on sudden reversal of Euro against the USD. For now, set focus at 74.50/75-76.50/77 and be prepared for downside break out into previous resist zone of 72.65-73.15.
All combined, India Financial markets will stay under pressure from Tsunami kind of headwinds from external sector against limited domestic fire power to ring fence the external impact. The only positive take away is the lower Brent Crude below $50, unaware of how long it would last. Domestic cues are not very supportive given the downside revision on GDP growth target at lower end of 7-8% against slow down in policy initiatives. There is too much of smoke without fire at this time, which is serious worry for domestic stakeholders and external investors.
Tighten your belts for rough weather ahead!
Moses Harding
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