Impact shift from China to the US:
China woes on global (and emerging) markets are seen to be behind in the short term, thus providing temporary relief. However, the impact left behind is severe across Equity and Currency markets. During this period DJIA crashed from 17750-18150 to 15350 before stability at 16000-16650. In the Indian markets, NIFTY went down-hill from 8650 to 7550 before stability at 7635-7885; more pain in Bank Nifty from 19100-19250 to 15700-15850 before stability at 16250-16750. Indian Rupee got pushed down from 63.30-63.75 to 66.85-67 before stability at 65.85-66.85, while USD Index eased from 97-98.50 to 92.50-93 before stability at 95-96.50. The Chinese impact on global markets is not a surprise, but the impact momentum caught many off-guard. Now, expect China to stay steady on its monetary and exchange rate policy till wounds are completely healed.
The focus now shift to FOMC rate decision this week. While the macroeconomic fundamentals (uptrend in growth rate and employment) are shaping well for start of rate hike cycle, deflation risk and plea from other Central Banks (including IMF) for deferment to 2016 is loud. Will FOMC budge or go ahead with token hike to begin the cycle to exhibit positive vibes on growth, and to dilute expectation of QE4 from some analysts? While there is certainty of hike before end of 2015, retain 51% probability for rate hike now and 49% probability of signal of hike in the next meeting; impact from either of the move will be the same on financial markets.
India macroeconomic fundamentals are trending in the desired direction. CAD is down at lower end of 1-2% and better comfort on growth for trend into higher end of 7-8%. However, there is some discomfort on inflation and fiscal deficit for FY16 against risk from below average monsoon and its impact on revenues and relief support cost. It is also high time the Government to reaffirm its plans to roll out big bang policy initiatives and execution strategies. The hope on India is yet to be translated into on-ground impact. Combination of the said outlook both on domestic and external cues, there are few positive take-away ahead in the short term to wish for set up of bullish momentum. It is at best into neutral consolidation mode in search of short term bottom to signal end of bearish undertone. The markets have already punched 2015 high and now punch of low is not far away before set up of sustainable relief recovery momentum.
Equity is not the best asset to hold in the short term:
DJIA 2015 May high at 18350 is now behind, and out of focus for rest of 2015. Will the August 2015 low of 15370 remain safe? MARKET PULSE set 14850-15350 as the base to end the reversal from 18350-18500, seen as "too hot to hold" zone for 2015. The relief recovery from above 15350 is losing steam at set resistance point of 16650 for consolidation at inner ring of set near term focus at 15850/16000-16500/16650. What next? The immediate resist zone is at 16650-16700, seen near term "cap" with stretch not beyond 17000-17150 while retaining short/medium term base at 14850-15350 for build-up of portfolio for chase of sustainable recovery (in 2016) into 18350 and beyond for minimum 20-23% return. For the week, set range focus at 15700/15850-16650/16800 with stop at 17150 for near/short term target below 15370, but not beyond 14850-15000. There are 2 options ahead: rate pause would provide short-life relief into 16800-17150 before down to 15700-15850, while a rate hike will shift focus to lower half of 14850/15350-16650/17150 at 14850/15000-15850-16000.
NIFTY 2015 high at 9119 (and FY16 high at 8844) is behind and out of focus. The near/short term "cap" is pulled down at 8500-8650. The uncertainty is from the hold of base at 7500-7650 with 51% probability of extension into 7000-7150 before set up of sustainable relief recovery momentum. The attention here is both on the FED and RBI. While delivery of 25 bps rate cut by RBI is seen as certainty on or before 29th September (which has been factored for hold at 7500-7650), FED rate hike and "time lag" between FED hike and RBI cut will set up the bias and momentum from now on. FED rate hike (and delay in RBI rate cut to 29th September or beyond) will quickly extend bearish momentum below 7500-7650 to 7000-7150. On the other hand, rate pause by FED and 29th September rate cut by RBI will shift play into higher end of 7500/7650-8000/8150 for near term consolidation. Thereafter, breakout bias is neutral between 7100-7150 and 8500-8650. It is good to stay focused at 7500-8100 with stop on break (on daily close basis) for 7000 or 8600.
Bank Nifty 2015 high of 20541/20907 is already behind, and out of focus. The bias is for near term stability at 15700/16100-17200/17600 with neutral breakout bias into either 18650-19050 or 14100-14500. The medium term outlook on Bank stocks is linked to earnings improvement from significant cost saving between outgoing and incoming deposits/borrowings and mark-to-market benefit from investment book. The concerns are from extent of drop in yield on assets and provision pressure on stress loan book. Both combined, Banks with less NPA load, high short term liabilities and sufficient excess SLR will stand to gain valuation from earnings improvement. It is good to cherry-pick these stocks for medium/long term hold.
Fixed Income assets safe to hold for capital protection in 2015 and valuation build in 2016
India Interest outlook is in favour of staying invested in Fixed Income despite risk of hardening US yields. While the short term money market yields are in decline since delivery of 75 bps rate cut in Q1/2015, 10Y benchmark 7.72% 2025 is volatile in traction with US 10Y yield, with yield spread of 5.35-5.85%. MARKET PULSE strategy is to cut duration around par value (yield around 7.72%), while building duration at 7.90-7.93%. This stance worked well with multiple back-and-forth moves between 99.95-100.05 (7.71-7.73%) and 98.70-98.85 (7.92-7.94%). What next? While there is clarity on the worst case scenario on India 10Y bond yield at 7.90-7.93% (with intermediate support at 7.80-7.83%), there is no comfort as yet to look for extended rally beyond 7.72-7.75% into short term best case scenario of 7.62-7.65%. US 10Y yield support is firm at set medium/long term base 1.95-2.10% with buy appetite at resistance 2.50-2.65% retaining 1.5-2.0% in 1-10Y yield spread. The short term stability at 2.10-2.60% is seen to cover both extremes of FED rate action (0-0.5% rate move) between now and end of 2015. All cues combined, it is good for long term investors to build portfolio in 2 lots at 7.80-7.82% and 7.90-7.92% (with stop at 7.95%) for 7.62-7.65% by end of FY16; and if all goes well thereafter, FY17 target for India 10Y yield is set at 7%. It is good investment as alternate to fixed income Bank term deposits or AAA Corporate bond. For now, ahead of FED and RBI rate decision, focus is retained at 7.72/7.75-7.80/7.83%, not ruling out extension into 7.88-7.93% on FED rate hike fears and risk from RBI remaining suspect on sustainability of FY16 CPI at 4-5%. It is good for traders to stay focused end to end; worst case at 7.88-7.93% (on FED hike and RBI suspect tone post 25 bps cut) and best case at 7.62-7.67% (on FED pause and RBI optimistic tone post 25 bps cut).
Rupee under pressure but most of worst is behind
USD/INR near term stability range is firm at 65.85/66.10-66.85/67.10 and has seen more than once back-and-forth moves, thanks to RBI Rupee support at higher end and huge importer appetite at lower end. MARKET PULSE hedge strategy is tuned with end September 2015 $ at 66.20/66.35-67/67.15 and 12M at 70.25/70.50-71.25/71.50, which has worked well with end to end moves both ways. What next? Rupee is (and will be) under pressure from external cues and neutral (and mixed) impact from domestic cues. While the comfort is from low CAD print at 1.2% against Brent Stability at $40-55, risk is from set up of importers-lead and exporters-lag against FII pull-out mode (in rest of 2015) and wait-and-watch in H1/2016 awaiting FY16 performance of India economy for better clarity for FY17. The DXY impact on Rupee is also not in favour given the bullish undertone at 93.50/95-99/100.50. All taken, the breakout bias of 65.85/66.10-66.85/67.10 is for 68.60-68.85 in Q4/2015 before stability at 67-69. For now, retain spot focus at 66.20/66.35-66.85/67.00, end September at 66.35/66.50-67/67.15 and 12M at 70.25/70.50-71.25/71.50 (with bias into 72.75-73.25, adjusting for 12M FX premium trend down to 6-6.15%).
EUR/INR bullish momentum is high voltage from the set short term base of 68.65-69.15 (outlook based on USD/INR spike from 63.35 to 66.85 and EUR/USD stability at 1.0850/1.10-1.1350/1.15) while stretch beyond set "cap" at 75.65-76.15 (to 78) was momentary before stability at 73.85/74-75/75.15. What next? EUR/USD bullish momentum from 1.1035-1.1085 has hit 1.1335-1.1360 target (from 1.1086 to 1.1349). The pre FOMC range now set at 1.1185/1.1210-1.1385/1.1400 for post FOMC trigger into either 1.0850-1.10 or 1.1550-1.17. Combining this with Rupee outlook, EUR/INR short term base is now seen at 73.65-74.15, searching for medium term "cap" at 76-78 and may be beyond. For now, set focus at 74.50/74.85-75.85/76.20 with neutral bias on breakout direction.
Have a great week ahead & Good luck!
Moses Harding
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