Tough battle for India against combined might of FED, ECB and PBoC when RBI ammunition goes off target
RBI was generous with ultra-accomodative 50 bps rate cut on 29th September policy review, but it turned ineffective on India risk-on assets post knee-jerk reaction which couldn't sustain beyond couple of weeks. RBI big supportive act (and measures) is seen as inadequate when FED prepares for shift from accomodative to vigilant stance with start of rate hike cycle in mid December and if data turns supportive in 2016, shift from vigilant to hawkish is not ruled out. ECB is also showing signs of possible end of accommodation in 2016 for shift to neutral stance by end 2016. The other worry is from PBoC importing inflationary pressures building downside risks on the Rupee and upside pressure on commodity prices. All these combined have made India as "high risk" destination on quick reversal of sentiment from being seen as the best-in-Emerging markets, not long ago! The sentiment reversal has gained momentum since mid October when RBI is left with few ammunition, which it can't afford to let go till mid 2016. When FIIs in exit mode, DIIs support can only delay the inevitable and also serve as providing better exit value for FIIs! When external tailwind support has turned on the head at Tsunami force, stakeholders look internal for support from domestic cues and dynamics. Post ECB not being very generous and FED rate hike risk ahead, global markets are nervous with DJIA index in sideways mode 17100/17250-17850/18000 with multiple failure below 18000 against firm hold above 17150. USD Index lost bullish momentum at set pre FOMC cap of 100-100.35, got pushed back from new 2015 high of 100.51 to below 98.50 into 97.50. EUR/USD got 400 point intra-day relief from below 1.0550 to over 1.0950. US 10Y yield couldn't sustain overshoot beyond set tolerance range of 2.20-2.35%.
The impact on India risk-on assets are severe in the absence of RBI monetary bandwidth and lack of clarity on the critical policy guidelines around GST, Land reforms and other measures around "ease of doing business in India" and providing investment opportunities seen as low short term risk against high long term reward. India equity market is already in struggle to avoid new 2015 low, 10Y bond yield back at pre 50 bps rate cut levels and Rupee punching new 2015 low at 67.01 pulling all time low of 68.85 into striking distance. All combined, what it needs in India is "walk the talk/noise" actions from the Government when RBI supportive role is limited in the medium term. RBI has already front-loaded supportive rate actions as combination of steroid (ahead of start of recovery) and as catalyst (to step up momentum for shift from lower to higher gears). Will it work against other major Central Banks?
Can India domestic cues ring-fence external impact? No great confidence as yet
It is high time the Government shifts to higher gears on its economic growth and development agenda. The initiatives and measures undertaken towards this agenda are many. While some are still in the ideation to policy preparation level, most have not shown desired results. With Land reforms expectation gone behind, GST roll-out target of April 2016 will also go behind if not cleared in the current winter session of the Parliament. The India macroeconomic fundamentals are definitely better than what it was a year ago, but sustainment at current levels and building improvement on them against external headwinds is not an easy task, hence the loss of confidence on the Indian economy and financial markets. The catalyst to growth has to be from accomodative monetary policy (both on rates and liquidity) and risk-on credit appetite of financial intermediaries. While RBI has limited bandwidth on monetary policy, large Banks are credit averse nursing plenty of problems around Capital, NPAs and Profitability. The investor (both domestic and foreign) appetite is good but continue to stay suspect on many factors that do not balance short term risk against long term reward.
All combined, it is not clear on India's ability to ring-fence the pipeline external impact, hence the foreign investors shift appetite to either wait-and-watch mode or exit till clarity on sight of better prospects. Till then, any relief on markets will only be used for exit shifting to risk-off asset classes. The appetite of foreign investors may shift from equity to high yield fixed income at Rupee fair value zone of 67.20-68.85. The domestic investors appetite will stay balanced between equity and fixed income for building strategic portfolio for 2016 while Nifty at 7500-7650 and 10Y bond at 7.78-7.93%. The picture ahead is not gloom and doom as yet; hope for slow-pace sustainable recovery is alive, hence good to buy on 3-5% correction from here on the equity and debt markets. No cheers as yet, but not prudent to dump India Financial assets.
India equity market : No comfort on reversal of bear phase, but short term base is not far away
The lower high's trend since March 2015 high of 9119 is only gaining momentum. It is possible that December high of 7979 (on 2/12) may stay safe through the month, while November high of 8116 and October high of 8336 have moved out of the radar. The risk is now on September low of 7539 and 29th September pre rate cut low of 7691. It would need miracles (accomodative FED, more generous ECB and quiet PBoC) to shift Nifty focus back at 7965-8115, which was set by MARKET PULSE as long-unwind and short-build zone. NIFTY weekly close below 7800 (at 7781) is very negative to set up pull-bias into 7680-7715 ahead of 7515-7550, seen as safe value-buy zone with stop below 7500 for 7000-7150. For now, watch immediate resistance at 7850-7885 ahead of 7965-8000 to hold for continuation of bear phase into 7680-7715 enroute to 7515-7550. It would be lucky not to see a new 2015 low print below September low of 7539. Continue to retain 7500-7550 as make-or-break zone between 7000-7150 and 8000-8150. It is near zero probability for Nifty 2015 close move above 2014 close of 8282 for negative return of 3.5-13.5% against big-picture rest of 2015 trading range within 7150-8000. The rest of 2015 big-picture strategy is to play back-and-forth with buy appetite at 7680-7715 and 7515-7550 (stop at 7480) and short-build at 7850-7885 and 7965-8000 (stop at 8035).
Bank Nifty is sharply down by 9.8% from 2015 close of 18736 and by 19.2% from March 2015 high of 20907. Since then, November high at 17450-17500 is very firm and October high of 18029 has gone out of focus. It is less said the better on the fortunes of Banking stocks except few Banks who are largely insulated from the woes of Capital, NPAs and Profitability. But when the systematic important large Banks are under pressure, the small Banks can do little to come for rescue to arrest the slide. The unwind of benefits from 50 bps rate cut on the Investment portfolio is another major hit on the banking system. The pull bias is into November low of 16587 and 29th September rate cut low of 16648 ahead of 7th September and 2015 low of 15762. The index has been volatile in back-and-forth mode at set pre & post rate cut focus range of 16500/16650-17350/17500. MARKET PULSE set 17350-17500 as too hot to hold zone for 16500-16650, not ruling out revisit to set 2015 strategic base of 15750-16000. For now, watch immediate resistance at 17150-17200 ahead of major 17450-17500 to retain the current bear phase for 16500-16650 enroute to 15850-16000. It would be lucky not to see new 2015 low below September low of 15762. The outlook for 2015 close is between 15750 to 17500 for negative return for 2015 at 6.5-16%. The big-picture strategy is to sell at 17450-17500 (stop/reverse at 17550 for 17900-18050) and to buy at 16500-16650 and 16000-16150 (stop at 15900).
The unwind of bearish momentum for shift to consolidation phase would be from DJIA index upside break of set hot-to-hold zone of 17850-18000/18350 for punch of new 2015 high over 18351 shifting trading range from 17000/17150-17850/18000 to 17850/18000-18850/19000. DJIA has remained steady in 2015 trading around 2014 close of 17823 now post swings between set 2015 strategic focus range of 14850/15350-17850/18350 with back-and-forth moves at 18351 to 15370 to 17977 between June and now. It is positive that global investor appetite on DM equity assets will cushion downside risk on India.
India Gilt Market : 1.25% rate cut in 2015 leaves no impact on the 10Y yield
India 10Y benchmark yield 2014 close was around 8% and the new 10Y benchmark 7.72% 2025 (issued in May) is now at 7.75% unwinding most of the impact of 1.25% cut in 2015. The intra-2015 low held solid multi times between June - August at 98.70 (around 7.93%). RBI overdose 50 bps rate cut triggered sharp rally to 2015 high at 101.64 (around 7.45% on 5/10). MARKET PULSE target for end FY16 was 7.50% with 2015 best case not beyond 7.65-7.70% against outlook of Repo rate at 7% in Q4/2015 and 6.75% in Q1/2016. The ahead of time hit of target 7.50% helped an early unwind of strategic investments and duration-cut of core SLR book to sub 2 years. The reversal from 7.45-7.50% has met 1st target 7.75-7.80%. The way forward is not good with limited investor appetite who are in shock to see huge erosion in the mark-to-market value, most turned from positive to negative. The upside momentum in US 10Y yield into 2.35-2.50% also exerts pressure for short term consolidation in India 10Y at 7.70-7.85% at India-US yield spread at lower end of 5.35-5.60% tolerance zone. With 7.70-7.85% as best case scenario, the worst case at 5.50% spread will shift focus into 7.85-8.0% with big-picture focus at 7.70-8.0%. All combined, 10Y bond appreciation in 2015 will be close to par against 2014 close of around 8% against 2015 close outlook at 7.78-7.93%. The sharp decline in 1Y yield from 8.50% to 7.25% in 2015 is the blessing in disguise for borrowers, while retail investors have nothing to regret to get similar yield in the longer end despite 1.25% rate cut. The poor thing are the Banks whose opportunity (and real) loss on investment book is more than the one-off NII benefit from interest differential between outgoing and incoming deposits, which will be knocked out on revised Base Rate application method proposed by the RBI. For now, 10Y bond finds immediate support at 7.78-7.80 from RBI and 7.83-7.85% from strategic investors. Beyond here will be panic for revisit to 7.93% (old 10Y bond at 8%). The immediate resist zone is at 7.65/7.68-7.70% initiating huge appetite for long unwind (of strategic investments portfolio) and duration-cut (core SLR book).
India Currency market : Rupee shift status from one of the best to weak in the absence of FII appetite
Rupee is now down by 5.8% against 2014 close of 63.03. It is not seen to be over as yet with subsequent post of new 2015 low punch at 66.90 (27/11) and 67.01 (4/12) post quick and shallow correction from 66.90 to 66.43 (1/12). MARKET PULSE set end December 2015 forward USD/INR focus at 66.50/66.65-67/67.15 for hedge strategy, post end of spot chase from 64.70-64.85 to 66.70-66.85 and 12M USD/INR from 68.75/69-71/71.25. Rupee performance in 2015 is not considered bad against over 11% rally in USD Index from 2014 close of 90.27 to 2015 high at 100.51. The woes on the Rupee is also from PBoC currency administration which exerts downside pressure on EM currencies and Rupee can't stay as odd man out. The way forward is not good in the absence of FII flows which has triggered importer dominance in the forward market while exporters enter only on signs of RBI support to Rupee to hedge not beyond near term receivables. The immediate support for USD/INR is at 66.35-66.50 ahead of 66-66.15 (bull trend reversal only below 65.85) with RBI Rupee support zone at 67-67.15. With firm short term base at 65.85-66.35, bias is clearly in favour of Rupee weakness beyond 67.20 into August 2013 low of 68.60-68.85. For now, retain near term focus at 66.35/66.50-67/67.15 (end December 2015 forward USD at 66.50/66.65-67.15/67.30 and 12M USD/INR at 70.50-72.50, breakout eitherway is tough to hold. The hedge strategy is to stay in traction with spot Rupee outlook at 66/66.35-68.50/68.85 (stop at 65.85 and 69). RBI also has the need to build $ reserves at 66.15-66.50 for Rupee support at 66.85-67.20. All taken, Rupee exchange rate outlook revolve around extent of RBI #USD/INR purchases and Rupee protection $ supplies for net adjustment with OMO bond purchases. RBI may turn as net $ supplier in the near term to retain USD/INR play at 66.20-67.20.
EUR/INR 3-step down-hill chase from September at 75.50, 74.50 and 72.50 was script perfect for end of chase at 69.90-70.15. It was seen as high-risk to hold short at lower end of set big-picture focus at 70-76.50. It is not surprise to see sharp post ECB overnight reversal to over 72.50 against 400 pip correction in EUR/USD from below 1.0550 to over 1.0950. What Next? With EUR/USD resistance at 1.0950-1.1050 against 1.0450-1.0550 support, EUR/INR play is now seen restricted at 70.65/71-73/73.35. The upside risk is from Rupee not building traction with Euro recovery against the USD. All taken, retain 69.90-70.15 as strategic short term base and loss of steam at 73.10-73.35 for end-to-end focus for now.
Global currency outlook : USD retains bull trend into 2016
DXY loss of steam over 100-100.35 (at 100.51) is not surprise. This target was set as end of intra-2015 bull chase from 90-92.50 ahead of mid December FOMC. The reversal from over 100.35 was at faster pace for consolidation at 97.50-98.50, below the set zoom-in focus at 98.50/98.85-100/100.35. DXY bullish momentum in 2015 is strong from combination of advantage from both economic performance and interest rate differential between USD and other major economies. With this major advantage, 2015 close at/over 97.50-100.50 against 2014 close of 90.27 set up positive close at/over 8-11%. USD is expected to retain this advantage in 2016 at diluted pace. For now, short term big-picture strategic focus set at 96.50/97.50-100.50/102.50 not ruling out new 2015 high above 100.51.
EUR/USD complete back-and-forth of set 2015 big-picture focus at 1.05/1.0650-1.15/1.1650 with 1st failure on both side overshoot and for hold at outer corridor on 2nd attempt. The post ECB relief rally from 1.0450-1.0550 short-squeeze zone (low at 1.0538) was at break-neck into 1.0950-1.1050 (high at 1.0980) before consolidation at 1.08-1.0950. For now, retain focus at 1.0450/1.0550-1.0950/1.1050 in consolidation mode, breakout eitherway is not expected to sustain. The hedge strategy for 2016 is held in traction with intra-2016 consolidation at 1-1.10 building momentum for 2017 recovery into 1.15-1.25.
USD/JPY boxed at set zoom-in focus at 122/122.35-123.50/123.85 in multiple back-and-forth mode since November. The underlying bullish undertone is valid with immediate support base at 121.65/122 for upside break of 123.50-123.85 enroute for knock at 2015 high at 125.85. The hedge strategy for 2016 is tuned at 120-130.
Moses Harding
Note : This is the last update for 2015. Hope you found MARKET PULSE analysis supportive to your hedge/trade/investment strategies. Wish you all a merry Christmas and Happy New year! Ciao in 2016. Till then, take care; Cheers!
Moses
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