Liquidity and zero interest rate driven rally in equity market is now behind
The multi-year bullish momentum on global equity markets triggered by ultra-dovish monetary policy regime of Developed economies is over for now. The risk-on benefits from combination of liberal dose of Quantitative Easing at zero (negative) interest rate policy is over done, and the unwind process has already begun at break-neck speed. The huge valuation build (on risk-on equity assets) in the absence of beneficial impact on growth (and consumption) has triggered the reversal, when FED prepares for start of rate hike cycle. The unwind momentum has gained speed despite other major markets (including Euro zone, Japan and China) stay in accomodative mode through 2016, and may be beyond. The impact on Emerging markets is excessive, building exaggerated momentum both on the up-hill and down-hill.
DJIA multi-year rally from 6469 (March 2009) and 15340 (February 2014) is done at 18351 (May 2015), for reversal to 15370 (August 2015 low) before marking time now at 15850-16350. The unwind of February 2014 to May 2015 rally is undone in 3 months. India got the better of beneficial impact among the Emerging markets. The valuation re-rating in equity assets since 2008-2009 is huge. NIFTY is up from 2250 (October 2008) to 9119 (March 2015) by over 300% in 7 years, while Bank NIFTY up from 3300 to 20900 during same period by over 500%. India markets got the additional benefit (since May 2014) from the NaMo impact, significant improvement on the CAD (from sharp decline Brent Crude from $115-130 during April 2011-June 2014 to $40-55 in August 2015) and soft landing of CPI inflation from over 10% to 4-6%. The foreign investor appetite was good from India growth acceleration against declaration in China.
India equity market under pressure in the short term searching for medium term base
India equity assets valuation is now largely dependent on external cues - direction bias from developed markets, FED rate hike (timing and quantum) and possible "bolt from the blue" from China. The domestic cues are also not very supportive to equity market. The expected sovereign rating upgrade in 2015 is now deferred to 2016, and may be beyond. Despite ease in monetary policy in 2015, FY16 GDP growth is under pressure at 7.0-7.5% against target 8.0-8.5%. The optimism on fiscal and current account deficit is at risk, which could delay shift of system liquidity from deficit to surplus. All combined, the trend into the short term is bearish with hope that medium term "base" will be sighted in Q4/2015 for decent recovery in 2016.
DJIA short term range focus is now set at 15350-16850 with breakout bias into 14700-15340, which should hold for punch of 2015 low here before recovery. FED delivery of 50 bps rate hike in September - December 2015 is also seen as high probability. So, combination of downside risks on DJIA index and spike in short term (overnight to 12 month) US yields pose serious threat to India equity market, not withstanding domestic optimism if any.
MARKET PULSE set 9000-9150 as 2015 high and preferred 7950/8100-8500/8650 consolidation in the short term. Also removed set "cheap-to-acquire" tag at 7950-8100 for shift to 7500-7650. Post China monetary and exchange rate measures, the range focus was reviewed at 7500/7650-7950/8100, not ruling out downside stretch into 7000-7150 in Q4/2015. As per script, NIFTY is down from August high of 8621 to recent low of 7626. What next? NIFTY is under pressure at 7500/7585-7800/7885; even an RBI rate cut with dovish guidance is tough to trigger bullish momentum beyond 7850-8100, seen as short term "cap". At this stage, the risk is for break of 7500-7585 into 7100-7185 which should hold. It is good for strategic investors (and big picture traders) to stay in end to end focus at 7000/7185-7885/8100 watching fragile intermediate support zone at 7500-7585. The only hope for near term consolidation at 7500-8000 is from RBI delivering an immediate rate cut ahead of FOMC meet. The impact from not delivering rate cut on 14th August is severe, and worst is not yet behind on further delay.
Bank NIFTY has solid resistance zone at 16500-16650 ahead of short term "cap" at 16850-17100. The immediate support is now at 15850-16000, which is at risk for stretch into 14500-14650, seen as medium term base. For now, it is good to stay tuned at 15600/15850-16350/16600 and act on break either way with big picture range focus at 14500/14650-16950/17100. Here again, an immediate rate cut could help 15850/16100-16850/17100 consolidation.
India Gilts in risk neutral consolidation mode
India Bond market provides comfort against weak equity market and weak Rupee. While the short term outlook is mixed between 25-50 bps rate hike by FED and similar quantum rate cut by RBI in rest of 2015, medium/long term outlook is good on hope from shift of operating policy rate from Repo to Reverse Repo rate. The overnight call money rate is seen to peak at 7.0-7.25% in Q4/2015 for slide to 6.0-6.25% in FY17. All combined, retain short term outlook on 10Y benchmark at 7.68/7.73-7.88/7.93% for back-and-forth play with most trades at 7.70-7.75%. Strategic investors can look to build portfolio in 3 lots at 7.76-7.78%, 7.83-7.85% and 7.90-7.92% for FY17 target at 7%, while enjoying "carry" of minimum 50-75 bps funding through Repo/CBLO counters. Risk to this outlook is from US 10Y yield spike beyond 1.95/2.10-2.45/2.60% and 1-10Y yield spread squeeze below 1.50%.
Indian Rupee is set for next round of value adjustment
USD/INR has already lifted short term strategic base from 63-63.35 to 65.50-65.85, and building pressure at 66.75-67.10 to pull 68.60-68.85 into focus. Most (if not all) cues are against Rupee in the short term. External pressures are from DXY bullish momentum into higher end of 95/95.50-100/100.50, downside risk on EM currencies from China and fear from FII loss of appetite, if not into exit mode. Domestic cues are not good to counter external headwinds on the Rupee. The impact will be from $ demand driven mode in the forward market from importers fear, exporters greed and squeeze in FX premium. Given these dynamics, RBI's FC reserves is too little to defend break of 66.75-67.10 in the near term. The near term trading range focus is set at 66.10/66.35-66.85/67.10, and prepare for shift into 66.85/67.10-68.85/69.10 focus soon. 12M USD/INR retain bullish undertone at 70.25/70.50-71.25/71.50 for set up of medium term "cap" at 73-73.25 before consolidation.
It is tough ride ahead; tighten your belts and have a safe week ahead!
Moses Harding
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