Yellen played to the gallery with good intent to avoid adding fuel to the fire
Global markets are on fire (since mid August) from China impact driving risk-on equity and Currency markets sharply down. While the relief recovery from August low's provides comfort, the sentiment (and confidence) on the way forward remain weak with fear that the worst is yet to be sighted. The trigger for extended bearish momentum is with the FED from rate hike action, which would send the markets crashing down. Against this background, FOMC decided not to hike rates now, allowing time for restoration of normalcy and price stability on financial markets. If Yellen had gone by economic data alone, there is case for start of rate hike cycle moving away from the near zero policy rate. But, priority was given to resultant impact on financial assets, and more importantly downside risks on EM currencies. FOMC rightly chose not to hike rates when combination of growth pressure and collapse in EM financial assets (equity against currency weakness) will be against the interest of US financial system and its investors. Ahead of FOMC, there was pressure to defer rate hike action and it was no surprise that FED chose to stay status-quo with rate pause. More importantly, the guidance tone was mild shifting rate hike action to end of 2015, not ruling out further delay into 2016 if market normalcy is not restored by then from better comfort on global growth recovery. It is high expectation, though!
Yellen cheer diluted by lack of optimism on the way forward
While downside risks stay diluted, there is very little optimism on the way forward. The cheer from the FED is seen as short term relief, and not long term gain against global growth pressures and fear from follow-on China measures that would exert downside risk on the financial markets. All combined, it would be period of consolidation for risk-on assets in the near term with expectations of new 2015 low in Q4/2015. At this stage, all is not seen to be well despite relief from the FED. The time ahead (maximum 3 months before FED rate hike) is too short to wish for permanent relief.
Equity assets continue to stay in risk-off mode into the short term in search of medium term base
DJIA relief recovery from set strategic base of 14850-15350 (low of 15370 on 24/8) held at higher end of zoom-in focus range of 16000/16150-16850/17000 with intra-week recovery from 16330 to 16933 before close at 16384, unable to retain gain above set 16650-16660 intermediate resist zone. What next? The short term outlook is for consolidation between recent low and high at 15350-17600 with immediate focus at 15700/15850-16850/17000. The breakout bias is set towards set strategic support zone 14850-15350, seen as 2015 base. On the other side, relief stretch beyond 16950-17100 will be limited at 17500-17650 before down. The investment appetite can only be from staying away from long term US Treasury when 10Y yield at 1.95-2.10%.
India equity market is also tuned within set strategic focus at 7500/7550-8050/8100 (NIFTY) and 15700/15850-17600/17750 (Bank Nifty). Since expiry of August Futures, September delivery has already seen back-and-forth moves with crash followed by recovery with equal momentum. What next? RBI rate cut is not the game changer, nor the optimism from improved domestic macroeconomic fundamentals. The traction will largely be with external cues. At this stage, see high probability of consolidation within set focus big picture range. For now, immediate focus will be at upper-half, NIFTY at 7800-8100 and Bank Nifty at 16700-17700 before shift of play into the lower-half at 7500-7800 (15700-16700). Having said this, see low probability of unsustainable stretch beyond 8090 (17700-17750) into 8200-8350 (18000-18500) before down. At this stage 2015 high of 8650-9150 (19200-21000) is distant away, and rest of 2015 action is seen not beyond 7150/7500-8100/8350 (14700/15700-17700/18500). The strategic play is seen in "sell-on-recovery" mode with value-buy appetite at 7500-7550 (15700-15850) with room to add on extended bearish momentum into 7000-7150 (14300-14700). Retain strategy for build up of NIFTY portfolio at an average of 7250-7500 for 2016/FY17 target 8650-9150 for 15-25% return in 6-12 month period. It is good for FIIs as well against maximum 5-7% downside risk on Rupee.
Bond market in risk-neutral mode with best mostly covered
US 10Y yield has been volatile at 1.95/2.10-2.45/2.60% in back-and-forth mode from mood-swings on FED interest rate action. So is India 10Y bond at 7.68/7.73-7.88/7.93%. RBI delivering 75 bps rate cut in Q1/2015 has helped in driving the 10Y yield below 8% squeezing the India-US spread from over 6% to 5.50%, while FED preparedness for shift to rate hike cycle extends strong support for India 10Y yield at 7.65-7.70% against risk of end of rate cut cycle in India with another 25 bps cut on 29th September.
Now that FED rate hike is seen to be in December with low probability of October hike, US 10Y yield is seen in comfort at 2.0-2.35% range in the short term with most play at 2.10-2.25%. Given the risk of shift into 2.35-2.60% by end December 2015 and higher into 2.60-2.85% in 2016, most investors would prefer to stay at shorter end with low appetite to stay invested at medium/longer end. The 1-10Y yield differential at 1.25-1.50% is not good to cover 50 bps spike in 10Y yield in the next 6-12 months.
India 10Y yield at 7.68-7.71% (set as duration-cut zone) has factored in 25 bps rate on 29th September and US 10Y yield stability at 2.10-2.20% with India-US 10Y yield spread at 5.50-5.65%. India 10Y yield has been volatile at 7.68/7.71-7.90/7.93% since 20th August (100.05 to 98.70 to 100.14). MARKET PULSE urged trading this range, investing at 7.90-7.93% for exit (and short-build) at premium (below coupon 7.72%). What next? Staying invested at 7.68-7.71% now is high risk for domestic investors, despite possible stretch into 7.62% (high of 100.62 seen in June 2015). On the other hand, it is very high risk for foreign investors to stay on hold at 7.63-7.68% against the possible USD/INR appreciation from lower to higher end of 65-70 in the next 3-6 months. The risk ahead in the short term (3-6 months) is for Repo rate stability at 7% (10Y yield base at 7.63-7.68%) against US 10Y yield spike into 2.45-2.60% pushing India 10Y yield into 7.70-7.95% range play (with yield spread squeeze at 5.35-5.50%). For now, review big-picture focus range at 7.63/7.68-7.90/7.95% for rest of 2015/FY16. The strategy is to stay fleet-footed churning the portfolio duration on move end to end. While it is good to build long term strategic portfolio at 7.88-7.93%, focus beyond 7.63-7.68% is not in the radar till operating policy rate shift from Repo to Reverse Repo rate (overnight rate down from 7% to 6%). Given the lack of comfort from RBI for shift of CPI stability from 5-6% to around 4%, do not see cues to drive 10Y yield below 7.62% in FY17.
USD in consolidation mode retaining short/medium term strength
USD Index short term range consolidation range is fixed not beyond 92.50/93-96.50/97 till FED gets into rate hike mode, retaining bias for shift into 97/97.50-100/100.50 range before end of 2015. While DXY impact on USD/INR can't be ignored despite short term FII appetite for India assets, extent of flow-driven Rupee appreciation is not clear against lack of clarity on RBI $ buy mode. USD/INR downside break of set 65.85-66.85 focus (into 65.60-65.75) is from RBI off from $ bids to absorb FII supply. It makes sense when it provides cheap dollars for importers to hedge foreign currency liabilities. Having said this, excessive Rupee appreciation against EM currencies is also not good to keep CAD under check at 1-2% of GDP. All taken, USD/INR strategic focus is retained at 65-70 for hedge strategy. Rupee is down by big margin from July-August 2015 high of 63.30-63.70. Now, need to watch USD/INR support at 65.50-65.65; if RBI is not keen to set this as short term base, do not rule out stretch into medium term base at 65-65.35 which is expected to hold. Do not see cues for extended Rupee appreciation beyond here when interest rate dynamics turn against squeezing USD-INR premium spread from FED start of rate hike cycle and low short term money market rates. It is prudent to stay risk-neutral (or off) on USD liabilities at 65-65.65 as the reversal into 66.50-66.85 can be sudden and swift. For now, let us set focus at 65.50/65.65-66.20/66.35 with neutral bias on overshoot into 65 or 66.85. It is good time for RBI to build reserves at 65-65.50 and good for exporters to sell 12M at 70.75-71.25 at spot 66.35-66.85. The big-picture range on 12M is now widened at 69.50/70-71/71.50 till FOMC turn comfort for rate hike, which will put 66.85-67.10 at risk for 68.50-68.85 ahead of 70, between December 2015 - March 2016. It is low probability event for Rupee to extend and sustain gain beyond 65 at this stage.
EUR/USD retain its sideways mode at set big-picture focus range of 1.10/1.1050-1.1450/1.15 and there are no fresh cues to review focus now. Till clarity from FED on rate move, overshoot eitherway is not beyond 1.0850-1.10 and 1.15-1.1650. EUR/INR bullish pick-up from 73-73.50 lost steam at set short term cap of 75.50-76 for push back to 74.50, mid point of 73-76 big-picture focus. While the near term bias is for push back into/below 73, not sure of sustainability there for consolidation play at 72.50/73-75.50/76. It is good to stay focused end to end for now.
I will be away on vacation from 24th September to 14th October. Next update on return. Till then, take care and be safe!
Moses Harding
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