Sentiment mixed on risk-on assets in the long term while good in the short run
India macroeconomic fundamentals are seen to be in sustainable recovery mode. There is better comfort on growth pick up in the busy season and beyond into 2016. Government is seen committed to it with firm support from RBI. There is no major concerns from inflation with greater comfort on the CPI against sub zero WPI at widened spread of over 8% between them. The risk from external sector stay diluted for now with signs of FED delaying the inevitable rate hikes into 2016. FIIs are already pumping in liquidity for leveraged "carry" play. Then, why India equity markets in struggle to establish sustainable bullish momentum? While shift of NIFTY focus from 7500-7650 to 8100-8250 (Bank Nifty from 15350-15850 to 17350-17850) is relief, the positive take-away is the cut of bearish momentum for risk below 7500 (15350) into 7100-7250 (14350-14750). All taken, short term (for rest of 2015 and FY16) relief is seen to be firm against mixed undertone beyond there! What Next?
India Equity market retain bullish consolidation
While away, Nifty held above set strategic support and buy zone of 7500-7650 (low at 7691 on 29/9) for recovery into 8100-8250. MARKET PULSE expectation was for punch of 2015 low in Q4/2015 before set up of medium term rally. Thanks to RBI liberal dose of 50 bps rate cut (and catalyst support from expectation of rate-steady FED), 2015 low is already punched at end of Q3/2014 at the doorstep of Q4. The near/short term outlook is positive, if not bullish. It is premature to pull 8850-9000/9150 into the radar, but July high of 8654 is pulled into focus, supported by huge FII appetite and low short term money market rates with more than adequate system liquidity. Except for take-profit long-unwind (for completion of chase from above 7650 to 8250), it is not prudent to "short" the market at this stage. For now, NIFTY short term focus is shifted to 8000/8150-8500/8650 with bias into higher end, retaining investors (and traders) sentiment in buy-dips mode.
Bank NIFTY held at 16500-16650 strategic support zone with low punch at 16648 on 29/9 for solid recovery into 17850-18000. While 2015 high of 20541/20907 is distant away, July high of 19229 is pulled into the radar. Going forward, Banks will benefit from significant difference between cost of outgoing and incoming deposits and m2m gains on the investment book. The pockets get deep to absorb NPA woes. For now, focus is set at 17150/17650-18650/19150 with bias into higher end in buy-dips mode.
India Bond market retain bullish mode looking for more from RBI and FII hunger from FED relief
India 10Y bond yield hit a low of 7.45% post 50 bps rate cut gift from RBI before consolidation at 7.50-7.60%. The support was also from US 10Y bond rally from 2.20-2.35% to 1.90-2.05% retaining the yield spread at comfort zone of 5.50-5.65%. While RBI 50 bps cut defies logic (post the pre-policy tough talk and most expectations of not beyond 25 bps cut), the intent of RR may be to take the "monkey off the back" by putting an end to rate cut noises around. In the process, "silent savers" have been put at the alter of sacrifice! Be that as it may, the short term appetite is huge with 75 bps "carry" between Repo/CBLO rate on the 10Y yield with limited downside risk not beyond 7.65%. Having said this, sky rocketing prices of food items and high probability of firm long term base of Brent Crude price at $42.50-47.50, structural risk on the CPI is not yet out of the way. Despite fundamentals not supporting stretch beyond 7.45-7.50% in the short term, sentiment and liquidity play will limit downside pressure.
MARKET PULSE was on the buy-mode from 7.90-8.05% for end of FY16 target 7.50%. RBI helped to get it ahead of time by end of mid FY16 for taking money off the table well ahead of time for much better return than anticipated. The focus now set at 7.45/7.50-7.60/7.65%. It is sub 50% probability for stretch beyond 7.45-7.50% in rest of 2015 and FY16, while 7.60-7.65% and beyond will be good to reinstate strategic book with tight stop at 7.75%. It will be period of consolidation with most trades at 7.50-7.60%, breakout trigger in traction with US 10Y range at 1.90-2.15% retaining yield spread at 5.50-5.65%. It is time to realise profit and act on breakout of 7.45-7.60%.
Rupee firm on external support from rate-steady FED and FII liquidity
From where we left USD/INR held above 65.50 (stop loss sell point) for pre-policy rally from 65.55 to 66.41 (high on 29/9) ahead of 66.50-66.85 strategic sell zone for exporters. The post-policy Rupee rally from 66.41 to 64.69 is sharp from combination of accelerated FII supply and RBI off the $ bid. The intent of RBI may be to avoid provision of cheap Rupees to FIIs, and instead provide the benefit to importers who were in panic mode post Rupee sudden push down from 63.35 to 66.85 in quick time. What next?
MARKET PULSE had set rest of 2015 USD/INR focus at 63/63.35-66.50/66.85 with 65.50 as the breakdown trigger point, and see no reasons to review this focus now. However, near term play has shifted from 65.10-66.85 to 63.35-65.10. In the longer end, 12M $ is down from upper-half to lower half of set 68-71 slicing through the 69.75-70 intermediate support zone. The export hedge strategy to absorb 70.50-71.50 has worked well, time decay premium being icing on the cake. It is unfortunate that Rupee valuation continues to stay in the hands of FII and RBI. When FII flows in plenty either-way, a go-slow RBI stance cause excessive appreciation or depreciation irrespective of economic fundamentals. Hence, the risk management strategy has to be more tuned to FII and RBI behaviour and sudden change of stance and/or mood-swings. For now, zoom-in focus is set at 64.60/64.70-65.10/65.20 with bias for extended Rupee strength into 64-64.10 against sub 50% probability for complete unwind of 63.35-66.85 move. On the longer end, 12M $ focus is set at 68/68.25-69.75/70 for hedge strategy.
EUR/INR nicely traded end to end of set strategic focus at 72.65/73-75.15/75.65 with push back from 75.67 held at 72.70 before up to 74.52. The cross-pair is relatively less volatile from combination of Rupee and Euro strength against the USD. What next? Given the bullish consolidation mode of Euro and firm Rupee in the short term, EUR/INR has firm resistance at 74.50-75.00 against solid short term support at 72.50-73. Good to stay focused end to end awaiting more cues for better clarity.
Have a great week ahead....Good luck!
Moses Harding
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