Markets play tunes to Central Banks actions and expectations
RBI gave solid push to India Financial markets through overdose steroid of 50 bps rate cut, which drove the markets up from 29th September cutting the pent-up bearish undertone. What followed thereafter from other Central Banks put halt to the rate cut driven euphoria; delivery of rate & reserve ratio cut by PBoC sent nervous signals to dilute the bullish momentum, and into down-hill momentum post FED signals of possible December rate-hike, against expectation build up for delay into 2016. During this phase through October, Global markets stayed in mixed undertone between risk-on and risk-neutral mode. DJIA posted solid recovery before stability below strategic resist zone of 17850-18350; US 10Y yield up from 1.95-2.0% to 2.15-2.20%; USD Index DXY up from 92-93.50 to 96.50-98 driving EUR/USD down from 1.15-1.1650 to 1.0850-1.10 and Gold unwound the rally from 1100-1110 to 1185-1200 with push back into 1135-1150. Brent Crude continue find support at set strategic buy zone of 42.50-47.50 for consolidation at 47.50-50.
NIFTY post-policy recovery held at 8300-8350 strategic resist zone for weak close at 8035-8085, while Bank NIFTY under performed with sharp unwind from over 18000 for close below 17400. With most cues neutral, Rupee built traction with DXY recovery for unwind of recent recovery from 66.35-66.50 to 64.65-64.70 with close at intermediate support zone of 65.20-65.35. 10Y bond yield is the worst hit with sharp unwind from 7.45 for close at strategic support zone of 7.63-7.65%. Rupee continue to retain its strength against Euro with swift rally from over 75 to below 71 before stability at intermediate zone of 71.65-72.15.
India equity market sentiment stay low against near term uncertainties
MARKET PULSE strategic focus on NIFTY for rest of 2015 was set at 7500/7650-8350/8500; breakout bias (ahead of 29th September RBI policy review) was set for 7000-7300, taking 8850-9150 off the radar for FY16. Thanks to RBI 50 bps rate cut, extension to 7000-7300 was averted for recovery into 8200-8350. Bank NIFTY big-picture focus was set 15350/15500-18350/18500 with post-policy review at 16500/16850-18100/18350. NIFTY weekly/monthly close at 8035-8085 (Bank NIFTY at 17250-17400) on reversal from 8335-8350 (18000-18050) is not positive take-away into the new week/month.
There is no clarity on the global cues; growth worries remain with bit of comfort from the US and China. There will be clarity from pipeline US economic data on possible FED December rate hike, which is 50% probability now. Will continue to watch DJIA at 16850-18350, upper-half of set 2015 strategic focus range of 14850/15350-17850/18350. DJIA building steam into 17850-18350 will be immediate relief for India equity market. Attention will be more on domestic cues watching Bihar election results, which is in any case not make-or-break event. Given mixed cues and lack of clarity, it is good to stay with set post-policy NIFTY focus at 7950/8000-8300/8350 (Bank Nifty at 16850/17000-17850/18000) retaining neutral breakout bias between 7650 and 8650 (15850 and 19000). The strategy is to play end to end with stop and reverse on sustainable breakout eitherway on daily closing basis (Watch daily update for execution guidance).
India 10Y bond under pressure with all positive cues behind
10Y bond rally into 7.45-7.50% couldn't sustain for swift reversal into 7.60-7.65%; this move was no surprise having set long unwind target at 7.50% and await correction to 7.60-7.65% for reinstatement of investment book. Now, close at 7.63-7.65% has unwound most of the unexpected extra 25 bps cut! What next? There's more bad news ahead. While no more rate cut from RBI in rest of FY16, probability of 50 bps hike by FED during this period is high. This would set up US 10Y stability at 2.35-2.50%. If India 10Y bond to stay steady at 7.50-7.65%, yield spread squeeze at 5.10-5.25% should emerge sustainable only through stability of CPI inflation at 4-5% in 2016, which is low probability event. The liquidity dynamics will stay in favour of more of supply than demand. Most Banks and non-Bank investors continue to hold "long book" and turned "overweight" post-policy without taking money off the table at 7.45-7.50%. The only comfort is from RBI appetite at 7.65-7.75% (absorbing 90-100 bps time value premium over the operating Repo rate). It also may not look good on RBI to allow 10Y yield back into 7.65-7.75% (at 5.50-5.55% spread against pre-FED rate hike range of 2.10-2.20%) post delivery of 50 bps rate cut, which may then look like an act in haste. All taken, recovery into 7.45-7.50% in rest of FY16 is low probability, unless FED reverse its stance shifting rate hike action beyond Q1/2016. The risk is high for stretch weakness beyond 7.60-7.65% on spike US 10Y beyond 2.15-2.20%. For now, prefer stability at 7.60/7.62-7.65/7.67% with good long unwind (and duration cut) appetite at lower end and RBI bids at higher end to arrest 7.72% 2025 Bond value going below par into discount.
Rupee under pressure from external cues
Rupee (post-policy) swift recovery from 66.35-66.50 ended at 64.70-64.85, seen as RBI $ buy zone, importer's near term hedge zone and strategic trader's 12M $ short-squeeze & long initiation at 68.75-69 for completion of the chase from 71-71.50. The USD recovery from 64.70-64.85 finds resistance at exporter's near term cover zone of 65.35-65.50. What Next? USD/INR close at 65.20-65.35 is bullish while DXY stays firm at 96.50-98.00 (EUR/USD at 1 09-1.1050). FII appetite is also seen diluted post FOMC, thus cutting down exporter $ supply in the forward market. While Rupee has solid medium-long term comfort from steady CAD and robust FDI/ECB flows, near/short term prospects continue to stay weak and uncertain. The long term comfort sets up solid support for Rupee at 66.50-66.85 (12M USD/INR at 70.75-71.25), while near term uncertainty (which may emerge sudden and swift) make it prudent to unwind short USD/INR exposures at 64.50-64.85 (12M at 68.75-69). For now, big-picture range for rest of 2015 is not seen beyond 64.50/64.85-66.50/66.85 with near term zoom-in focus at 64.70/64.85-65.55/65.70. Given the RBI $ appetite at lower end against reduced FPI flows, do not rule out shifting play to 65.20/65.35-66.35/66.50 on DXY shifting play from 96.50-98 to 97.50-100.50 (EUR/USD from 1.09-1.1050 to 1.0650-1.0950). The relief (into 64.85-65.20) is from DXY into correction/unwind phase into 95-96.50 (EUR/USD at 1.1050-1.12), seen as low probability in the near term. It is tight rope walk, hence prudent to avoid being overweight on risk. For the week, good to stay tuned at 64.95/65.10-65.55/65.70 and prefer RBI presence both ways to restore price stability till FED rate action.
EUR/INR now around mid-point of set big-picture focus at 68.65/69.15-74.65/75.10. As expected, stretch below 71.90 held at 70.85-71.00 before consolidation at 71.65-72.15. What Next? EUR/USD bullish momentum into/beyond 71.90-72.15 may not sustain with focus now tuned at 68.65/69.15-71.90/72.40 with bias into lower end.
Have a great week ahead; Good luck!
Moses Harding
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