Markets losing steam on the Central Banks triggered relief rally
FED and RBI triggered rally helped to cut the pent-up bearish undertone driving risk-on assets up for possible set up of 2015 low. The worry however is from lack of confidence (and steam) for extension towards 2015 high's in the absence of fundamental triggers. There are signals that dovish monetary policy (excess liquidity and low interest rates) driven rally is in struggle to expand the asset bubble beyond a point on fear of sudden burst, thus pulling in long-unwind and short-build.
FED and RBI didn't "walk the talk" to stay in support of risk-on assets. While FED is seen to be under pressure from G7/G20 countries (and the IMF) to defer rate-hike action, RBI was seen to take the "monkey of its back" by delivering overdose rate cut. The benchmarks set by FED (on Growth, Unemployment and inflation) for shift into rate hike cycle are in favourable trend, and most built rate hike in Q4/2015. But now signals are visible for extended FED rate pause mode, pushing the rate hike expectation to mid 2016. On the other hand, RBI was vocal on lack of long term comfort on inflation and the need to protect "silent savers" from "vocal borrowers". The 50 bps rate cut on 29th September came as a very pleasant surprise.
The risk-on assets have mostly factored the liquidity driven tailwind, and now the focus is on the macroeconomic fundamentals and timing of the end of ultra-accomodative monetary policy stance of major Central Banks. While it is believed that the worst is behind, the pace of growth recovery is not clear. The strategy ahead has to be built on the assumption that by end of 2016 (or early 2017), liquidity triggered rally would shift to fundamentals driven bullish momentum in 2017, which means that risk-on assets would stay volatile for rest of 2015 and through 2016 without establishing clear trend eitherway. It is great opportunity for traders, and quick return for investors if focus is retained not beyond 3-6 months.
Risk-on equity assets in sideways and at reduced volatility mode
Sentiment on G7 equity markets is not positive over long term and neutral in the short term at current value. DJIA posting new 2015 high over 18350 is sub 50% probability, so is breakdown below 15350 with intermediate support at 16850. The preferred short term scenario is for sideways mode at 16850-18350. Beyond here into 2016, it is high probability for 2015 low staying safe for punch of 2016 high above 18350. The support is also from US 10Y Treasury yield hold at lower end of 2.0-2.5% comfort zone considering 50 bps rate hike in 2016.
India domestic cues remain positive across most parameters supported by Government policy (and executive) actions, RBI monetary policy support, low Brent Crude at 42.50-52.50 and Rupee price stability at 64-67. India will continue to enjoy tailwind support from external cues. FII appetite for India debt is huge and long term appetite is adequate. FDI flows have gained pace with frequent news flow of ticket size of over $100 mio. ECB appetite is good from both sides for long term foreign currency borrowings, while offshore lenders more keen than before to lend long term Rupees. MARKET PULSE was highlighting the possibility of shift of operating Rate from Repo to R/R rate retaining LAF at 6-7% for gradual decline below 7% to 6%. RBI is seen to do this shift in baby-steps with operating policy rate now at 6.75%, with expectation for more towards long term stability target at 6%.
Nifty positive undertone retained while above 8085 (Bank Nifty above 16850-17000)
Nifty intra-2015 price movement began with posting of lower high's between March to August (from 9119 to 8530) followed by higher low's from September low of 7539 to 8088 before failure at 8336. So is Bank Nifty from 20907 to 18896 followed by recovery from 15762 to 17434 during the same time before failure above 18000. The said moves were more or less to expectation having set 2015 strategic focus not beyond 7500/7650-9000/9150 (15500/15850-20650/21000). What next? NIFTY recovery from 2015 low failed around mid-point of 8325 (Bank Nifty below 18250), and now need to hold above 8085 (16850-17000) to avoid set up of bearish momentum for 7950-8000 (16350-16500). There are no major cues to look for clarity beyond here, hence retain near term focus at 7950/8000-8300/8350 (16350/16500-18000/18150). Into short term, good to retain bullish bias into 8500-8550 (18350-18500). The strategic play is to stay end to end with stop on break.
India 10Y bond yield in sideways mode with most trigger points behind
Having completed the chase into 7.50% (from 7.65-8.0%) ahead of set time line, focus is now set at 7.50-7.65%, and do not see sustainable of overshoot eitherway. The traction is expected to be at 75-90 bps spread between 10Y bond yield and operating Repo rate and 5.50-5.60% with US 10Y Treasury yield at 2-2.10%. The short term strategy is to stay focused end to end and build medium term portfolio at 7.60-7.65% for next target 7.25-7.40 followed by 7.0-7.15%.
Rupee fortunes continue to remain in the hands of FII and RBI
Rupee recovery from September low of 66.86/66.41 is impressive, and now in sideways mode at 64.70-65.20 despite DXY rally from 92.50 to 97 during this time driving EUR/USD down from 1.15 to 1.10. What Next? Despite some irritants around, Rupee is holding firm on good FII/FDI flows and $ supply driven mode in the forward market and RBI holding fort at 64.70-64.85. The risk factor is from FII exit ahead of 2015 year end to cut leveraged investment and take money off the table to stay away during this uncertain correction phase. Another risk factor is from RBI to step up its $ purchases if DXY extends gain into/beyond 98.50-100 driving EUR/USD down into 1.05-1.0850. All combined, there is higher probability of USD/INR extending play into higher end of 64.70/64.85-65.70/65.85. The positive take-away is the shift of short term big-picture focus from 65.50-67 to 64.50-66 for rest of 2015. The hedge strategy remains unchanged - importers hedging near/short term exposures at lower end (64.50-64.85) and exporters covering near/short/medium term exposures at higher end (65.50-65.85) tracking 12M USD/INR at 68/68.25-70/70.25.
EUR/INR reversal from 74.65-75.15 (strategic resist cum sell zone) met 71.65-72.15 target, and now looks good for more into 69.65-70.15 ahead of 68.65-69.15. The strategic "sell-on-recovery" play is retained for now with trail stop at 72.25.
Moses Harding
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