Global Equity and Bond markets outlook : Sentiment shift from long term risk-aversion to near term risk-on mode

Can Draghi (and ECB) emerge as saviour when QE is seen to contain the worst, and not effective for prevention or cure!

The latest statement of Draghi on QE came at the best time when the global risk-on markets were in free fall since the start of 2016. There has been huge erosion in investors wealth. Everyone was seen moving away from equities to Gilts, cash and Gold. Brent Crude was looking heavy even below $30 highlighting the hard fact that worst is not yet behind. DJIA 2-year rally from 15340 (February 2014 low) to 18351 (May 2015 high) went behind pulling in February 2013 low of 13784 into the radar. DJIA bearish momentum since start of 2016 is extreme for steep and swift fall from 17850 (door-step of short-build zone of 17850-18000/18350) for hold at value-buy base of 15350-15500. But for the Draghi rescue statement, it would have been more blood on the street.

India equity is stuck between the devil (lack of external appetite for India equity) and the deep sea (China currency impact on Emerging markets). Nifty is down from 2015 high of 9119 for punch of new 2015-2016 at 7241 and it's worse for Bank Nifty down from 20907 to 14754. The only comfort is that MARKET PULSE saw 2015 high as too hot to hold and recent low's as strategic value-buy for opening the 2016 book. It did overshoot beyond 7300-7350 (14850-15000) before recovery, thanks to Draghi QE statement.

What Next? Is it relief rally or consolidation before another deep dive or shape up to bull phase?

Obviously this last mile QE is not going to set up a sustainable bull phase when ultra-dovish monetary policy support since 2008-2009 has not resulted in beneficial impact on macroeconomic fundamentals. So, the option is between consolidation between recent high and low or recovery to recent high preparing momentum for punch of new 2016 low. How far the relief could stretch? Now that Draghi is expected to execute the QE in March, it may be a month of "buy-on-dips" and sell ahead of or post event in March. The positive take-away however is the shift from "sell-on-recovery" to "buy-on-dips" mode and trigger short-squeeze.

DJIA near term focus was set at lower-half of 15350-17850/18350 at 15350-16600/16850 with close above 16000 on recovery from 15350-15500. The immediate term bias is into 16600-16850 from combination of short-squeeze and risk-on buy for quick bucks. What is not sure at this point is the strength of momentum beyond 16850? Let us freeze our attention on 15850-16850 and stay neutral on breakout extension which is seen limited at 15350/15500-17200/17350.

Nifty near term focus was set at 7300/7350-7950/8000 with breakout bias into 7000-7150 before sharp recovery. It was a sharp fall from 7972 to 7241 in 2016. Thanks to Draghi, Nifty closed the week above 7380-7415, seen as intermediate support turned resistance which pulls 7500-7650 resistance which is the doorstep of upper-half of set 2016 big-picture range of 7000/7150-8000/8150. For now, good to stay tuned at 7200/7350-7650 in buy-on-dips mode and in caution at 7615-7650 (stop at 7665); break here will get the focus back to 2016 high at 7972 before down.

Bank NIFTY near term end2end focus was set at 14850/15000-17000/17150, down-hill from 17067 got stretched marginally to 14750 before Draghi triggered recovery over 15350-15500, seen as intermediate resistance zone. MARKET PULSE set immediate focus at 14750/15000-16000/16250 with bias into higher end. The worry now is most cues turning against banking stocks barring a few select ones. While all have NPA woes at different degree, some have the desired cash power through other income (despite losing the valuation gains on its investment portfolio) and high provision coverage.

Gilts retain its shine from higher allocation given the dynamics shift between risk-aversion and risk-neutral

US 10Y yield is volatile at 1.95/2.0-2.30/2.35% with mixed expectation on the timing of next round of FED rate hike. While there is unanimity on the quantum (25 bps), the street is divided on the timing (next FOMC or pause with caution). This stance keeps it volatile within set focus range, thus setting up traders delight. Now, with ECB coming into play with more QE and deeper NIRP stance, US 10Y yield focus is set at 1.95-2.20%, not ruling out downside break if "What Next" syndrome strikes ECB shifting the sentiment back to risk-off and risk-aversion mode. Even a 25 bps hike by FED may not turn out to effective shifting the play not beyond 2.20-2.35%.

The external dynamics have turned supportive for India Gilts despite possible status-quo on policy rates through 2016. US 10Y yield stability at 1.95-2.20/2.35% with India-US yield spread of 5.50-5.80% sets up sideways mode in 7.72% 2025 at 7.70-7.85% (7.59% 2026 at 7.55/7.60-7.70/7.75%). DII attraction will be from "interest-carry" of 90-110 bps and FII pull from short term stability of Rupee at 66.85-68.35. It is good to stay focused end2end and await Budget FY17 for better clarity. There may not be significant expectation or take-away from next couple of RBI monetary policy review meetings.

Have a great week ahead.

Moses Harding
harding.moses@gmail.com
9674734145

Global Currency Outlook : Boxed between FED, ECB and PBoC monetary triggers! Read on....

USD retain bullish consolidation mode building steam for upside break

DXY take-off in the last one year (from 92.62 to 100.51) was from uni-directional bias from the monetary policy stance of major Central Banks. While FED started the rate hike cycle in late 2015, ECB and PBoC worked towards keeping their currency weak through liberal dose of liquidity at near (or sub) zero interest rates. All combined, USD derived fundamental advantage from better growth momentum and interest rate advantage over major (and emerging markets) currencies. During this period, EUR/USD crashed from 1.1601 to 1.0495, USD/JPY moved up from 116.06 to 125.63 and USD/INR up from 61.29 to 68.17.

In the last one month, the collapse in risk-on equity markets triggered the need for FED to defer the next round of rate hike, thus pushing the US 10Y yield down fro  2.35-2.50% to 1.95-2.10%. The value erosion in global equity markets beginning 2016 is huge and investors are scared to panic. While ECB responded to investors cries with review of QE support, PBoC is seen in over drive to arrest hard landing of its economy through artificial weakness of Chinese Yuan. The combination of delay in FED rate hike and more stimulus from ECB make the monetary impact on currency exchange rate neutral for now, and what is unknown is the extent of China impact on global currencies. During this one month period, the currency markets have been in back-and-forth mode in the absence of clarity to set up breakout momentum either way. DXY is now seen in sideways mode at set 97.50/98-99.50/100, EUR/USD at 1.07/1.0750-1.10/1.1050, USD/JPY at 115/116.50-120/121.50 and USD/INR at 65.85/66.20-67.85/68.20.

Risk-on play add strength to the US Dollar

The risk-aversion triggered YTD 2016 crash is exaggeration (and over done) from fear and panic. This needs to be normalised, which sets up the near term bullish consolidation undertone. DXY is likely to be firm at upper-half of 97.50/98-100/100.50 (at 99-100.50) with momentum for new high above 100.51. EUR/USD failure at 1.0950-1.10 is no surprise for shift of play into lower-half of 1.0450/1.06-1.10/1.1150 (at 1.0450-1.08). USD/JPY reversal from over 120 held at strategic support base of 115-116.50 and has now gained momentum for revisit to 123.50-125 on break of intermediate risk-neutral zone of 118.50-120. All combined, the sentiment has shifted from negative to neutral to accumulate USD on dips.

USD/INR bullish momentum beyond 67.20-67.35 (into 68.17) is driven by panic and fear. However, the strategy to stay risk-off (or neutral) at 65.85-66.20 on liabilities (importers) and at 67.85-68.20 on assets (exporters) has worked well. 12M $ met target 72.25-72.50 to pull in carry-trade flows from shift of liabilities from Rupees to US Dollar. MARKET PULSE in its 2016 outlook (and review) set rest of FY16 big-picture trading range for spot USD/INR at 65.85/66.20-67.85/68.20, 1M $ at 67.15/67.50-68.15/68.50, 3M $ at 68.15/68.50-69.15/69.50 and 12M $ 71.25/71.50-72.25/72.50 with end-to-end focus and overshoot eitherway not expected to hold for long. It was swift end-to-end move from lower to higher end since start of 2016. MARKET PULSE do not see reasons to review the set ranges and allow consolidation till ECB "walk the talk" on QE. The ideal January 2016 close was seen at 66.85-67.35, which is now the target being the intermediate zone between 66 and 68.20. However, retain end March 2016 target at 68.35-68.85. All combined, it is only a relief phase as nothing else has changed but from the support statement from Draghi. The overdose liquidity steroid (from major Central Banks) has not helped in reviving the global economic fundamentals, and it is not prudent to expect it now. The global investors are not likely to stay risk-on for long, and relief recovery will only lead to portfolio normalisation searching for exit. Hence FPI support for Rupee may not be there. RBI has the need to shore up its reserves to cover pipeline liabilities and to build purse to ring-fence China impact. For now, see spot USD/INR in sideways mode at 66.85/67.20-67.85/68.20, seen as RBI admin range. The strategy remains more or less the same for importers to hedge 1M $ liabilities at forward rate of 67.20-67.50, exporters to cover 3M exports at forward rate of 68.85-69.15 in traction with 12M $ at 71/71.25-72.25/72.50.

MARKET PULSE EUR/INR outlook was for consolidation at 71.65/72-74.65/75 post the completion of down-hill chase with strategic base at 69.90-70.15. The next round of chase from 70.15 to 74.65 (high 74.70) is also done, followed by sharp fall below intermediate support zone of 73.15-73.50. The momentum was built from uni-directional moves in EUR/USD at 1.07-1.10 and USD/INR at 66.20-68.20. The trading range is now reviewed down at 70/70.35-73.15/73.50 with attention around intermediate risk-neutral zone of 71.65-71.90. While there is better clarity on EUR/USD trend down at 1.05-1.10, it is bias neutral for USD/INR at 67-68.

Have a great week ahead.

Moses Harding
harding.moses@gmail.com
9674734145

Review of 2016 Global markets outlook : Shift from risk-off to risk-aversion mode...Read on..

It is extremely unfortunate that 2016 outlook has to go on the "review table" within 2 weeks of trading sessions.

Shift from "something is wrong somewhere" to "something is wrong everywhere" sentiment

MARKET PULSE market outlook stance since mid 2015 was not positive, to say the least. The bullish undertone was reversed at March 2015 high for serious intra-2015 reversal with expectation of formation of strategic base in Q4/2015 for sustainable recovery in 2016-2017. All combined, the investment strategy was to stay largely in cash and short-duration fixed income portfolio. During this phase, Nifty was driven down from 9000-9150 to 7500-7650 and Bank Nifty from 20650-21000 to 15650-16000 before minor recovery to 8000-8150 (16850-17100), seen as make-or-break intermediate resist zone. India 10Y bond yield stayed volatile within set big-picture focus zone of 7.50-7.85% despite 1.25% rate cut in 2015. It is more pain for foreign investors given the 2-step Rupee weakness from 58.35 to 63.20 to 67.70. The last lap from end 2015 to date is at accelarated pace of 2.5% in 2 weeks to the discomfort of short term "carry-trade" importers and "interest-arbitage" foreign currency loans.

The cues in Q4/2015 didn't turn up for better. RBI was seen over-board with its rate cut actions, FED got into rate hike cycle and China stepped up "currency war" to speed-break growth depression. To rub salt into the wounds, big-bang policy reforms in India was not forthcoming with wash out of monsoon and winter sessions of the Parliament. I have been tweeting my concerns on "something is wrong somewhere" syndrome to stay in "sell-on-recovery" mode and now it has turned out to be "something is wrong everywhere" mode to delay (or defer) the shift to "buy-on-dips" mode for strategic play. All combined, the investor sentiment has shifted from euphoria to panic and the mood is down from greed to fear. Cash investors are seeing serious erosion of capital while leveraged investors have gone below the surface struggling for breadth for survival.

It is shift from good to bad to worse with the worst not yet at sight

Global markets are leading the shift to from bad to worst. The shift in DJIA trading range from upper-half to lower-half of 15350-18350 strategic focus in few trading sessions of 2016 sets up the panic mode. It is high probability that long term strategic base of 14850-15350 is at risk. Despite FED shift to rate hike cycle, 10Y bond yield slide from 2.35-2.50% to 1.95-2.10% is from set up of risk-off mode. Gold swift recovery from 1035-1050 to 1100-1150 is the signal for further shift into risk-aversion mode. The sharp decline in Gold from $70 to below $30 signals height of negative outlook on global growth recovery. The impact on DXY is neutral with consolidation at 97-100 for Euro relief at 1.07-1.10. The safe-haven shift to JPY provided accelarated recovery in JPY from 123.50-125 to below 118.50. All these external developments are serious worry for the Indian markets when FII flows set up the directional bias.

It is less said the better on the domestic cues. Fiscal prudence is low priority agenda now against pressure on the revenue and higher public spend to retain growth momentum at 7-7.5%. Inflation outlook is not positive despite "manna from heaven" Brent Crude price. CAD has already seen the best. All combined, FII appetite for India assets will be near zero with high dependence on domestic investors who are already down or out.

In search of the "floor" in India equity market

MARKET PULSE set 2016 Nifty focus 7485/7535-7615/7665 and stood neutral between shift of play to 7000-7500 or 7650-8150 awaiting clarity in Q1/2016 and end of FY16. Bank Nifty focus was set at 15850/16100-16850/17100 before shift into either to 16850-18350 or 14850/15100-16100/16350. It was also expected that Bank Nifty will under perform with most Banks caught between the devil and deep sea - revenue pressures against higher provisions. What Next?

Nifty close below 7485-7535 intermediate support zone provides confirmation for shift of play into 7000/7150-7500/7650. The strategic play remain in sell-on-recovery mode with stop at 7665 in search of base at 7000-7350 for relief recovery with attention at 6985-7035 support. If held here, it would be 1st confirmation for rest of 2016 stability at 7000/7150-8000/8150. Bank Nifty is set for further value erosion below set strategic base at 14850-15000 with stop loss reviewed down from 17150 to 15850 with rest of 2016 focus at 13850/14100-15500/15750. Despite lack of clarity on formation of strategic base at 7000-7150 (and 13850-14100), it would be prudent to churn allocation of portfolio from 75% cash and 25% short-duration fixed income to 25% cash, 50% long-duration fixed income and 25% equity. Will review this stance on Nifty close below 7000, Bank Nifty close below 14000 and 10Y bond yield close above 7.93% (old) and 7.75% (new).

India Bond market is down but not yet out of favour given the support from risk aversion mode

India 10Y Gilt yield is under pressure at 7.75-7.95% (7.72% 2025) and 7.60-7.75% (7.59% 2026) with "carry-trade" in favour of domestic investors. 10Y yield - Repo rate spread of 1.0-1.20% is too good to ignore while India-US 10Y yield-spread at over 5.60-5.75% is not bad for FII investors when Rupee is seen to be in fair-value zone at 67.50-68.85. The concern is from demand-supply dynamics not in favour with huge pipeline supply in FY17 against limited demand. MARKET PULSE strategy is to shift from low to high duration fixed income portfolio while 10Y bond yield at 7.83-7.93% (old) and 7.68-7.75% (new). With RBI monetary policy review turning non-event, attention will be on the 29th February Budget for better clarity. Till then, any relief recovery into 7.72-7.77% (old) and 7.57-7.60% (new) will attract long unwind to create space for pipeline supply at higher yield. The major risk also remains from US 10Y yield hold at 1.95% for shift back to 2.20-2.35% if FED delivers follow-on 25 bps hike in the next FOMC.

Rupee depreciation is at alarming rate with no relief at sight

MARKET PULSE USD/INR outlook was for near term consolidation at 66.20-67.20 in January before shift of range to 67.35-68.85 by end of FY16. The strategy therefore was to hedge 1M imports at 66.35-66.50 and cover 3M exports above 68.50 in alignment with 12M $ at 70.25/70.50-71.50/71.75 retaining short term bias into 72.50-73 by end FY16. While Rupee trading played to the script, the pace was ahead of time. All taken, the hedge theme was to stay risk-off on imports at spot 66-66.20 and risk-neutral on exports at spot 67-67.20 retaining appetite for stretch into 67.60-67.85. What Next? The cues ahead are mixed. The comfort is from DXY hold at 97-100; recent high around 100.50 is expected to stay safe for a while not ruling out extended EUR/USD relief beyond 1.0950-1.1050 to 1.1350-1.15. The concerns are from FII fear and importers panic on Rupee stretching weakness beyond 67.70-67.85 now. It is good to be fleet-footed at 66.85/67.20-67.85/68.20 in traction with 1M $ at 67.15/67.50-68.15/68.50, 3M $ at 68.15/68.50-69.15/69.50 and 12M $ at 71.25/71.50-72.25/72.50. Given the sharp weakness in Rupee at start of 2016 from 66-66.15 to 67.70-67.85, it is important for RBI to restore confidence retaining value at 67-68 and to prevent shift of play to 68-70.

EUR/INR is volatile with back-and-forth moves at set strategic trading range of 69.80/70.15-73.15/73.50 from both ways volatility at 66.20-67.70 and 1.05-1.10. The trading range is meanwhile reviewed at 71.65/72-74.65/75 with neutral bias on breakout direction. The strategy is to stay risk-neutral on exports at 74.65-75 and risk-off on import at 71.65-72.

Wish you have a great week ahead!

Moses Harding
harding.moses@gmail.com
9674734145

Extreme risk-off start of 2016 sets up bearish undertone ahead...Read on...

China plays havoc in global markets

The outlook for 2016 was based on FED hawkish monetary policy stance and "fear of unknown" dynamics from China and the Euro zone. The start of 2016 is dominated by geo-political issues in the Middle East and China extending the "currency war" into 2016. The collapse of Brent Crude below $35 and China growth concerns made investors run for cover shifting appetite from risk-off assets to cash, Gilts and Gold. PBoC also caught the FED on the wrong-foot pushing US 10Y yield to lower end of 2.10-2.35% and diluting DXY bullish rhythm unwinding recent recovery from lower to higher end of 97-100. DJIA gave up more than 50% of recent recovery from 14850/15350 to 17850/18350 with failure to hold base at 16850/17100. Gold has come back into investors focus with solid recovery from set short-squeeze zone of 1035-1050 to 1100-1135. While all these were not unexpected, India was seen to be relatively "safe" against domestic positive vibes. But it was not to be driving the equity assets down by 5% - Nifty from 7965-8000 to 7515-7550 and Bank Nifty from 17000-17150 to 16850-17000. Chinese Yuan impact on the Rupee was marginal with push-back from 66-66.20 holding at 67-67.20 before consolidation at mid-point 66.50-66.70. 10Y bond stood resilient around mid-point of set sideways range of 7.68/7.70-7.78/7.80. While most moves were as per script on the trend (and directional bias), the break-neck pace was surprise. What Next?

Good to stay risk-neutral and light for now

The extreme pain inflicted in the 1st trading week of 2016 will put investors and strategic traders on the back foot and let the fleet-footed traders play on the undercurrent momentum, thus adding to volatility eitherway. The impact on global markets is on DJIA shifting play from upper to lower half of 15350-18350 at 15350-16850 (stop at 17150 retaining the bearish chase) and stability in 10Y bond at lower half of 1.95/2.10-2.30/2.45% with most trades at 2.05-2.20%. DXY also shift play into lower half of 96.50/97-100/100.50.

The impact on India markets will be more downside risk on the equity market, neutral consolidation in the Gilt Market and bearish consolidation in the Rupee market. For the week, set NIFTY focus at 7480/7515-7665/7700 retaining sell-on-recovery mode while below 7750-7765. Bank NIFTY too retain its bearish undertone with focus now at 15750/15900-16350/16500 and relief recovery only above 16650. The near term big-picture focus on NIFTY is set at 7150/7250-7650/7750 and Bank Nifty at 15000/15250-16350/16600 retaining hope to find relief support ahead of strategic cheap-value buy zone of 7000-7150 and 14650-15000, where it is good to open up the investment book for 2016.

Retain 10Y 7.72% 2025 bond focus at 7.68/7.70-7.78/7.80% (at elevated spread of over 5.60%) while the new 10Y 7.59% 2026 bond adjust to 5.35-5.60% yield spread against US 10Y sideways mode at 2.05-2.20%, thus setting up sideways play at 7.55-7.65% in the new 10Y benchmark.

Rupee is now back to stability post the sharp weakness from 66-66.20 to 67-67.20 in traction with end January 2016 USD/INR focus at 66.35/66.50-67.20/67.35 and 12M $ at 70.25/70.50-71.25/71.50. There are no cues to review this outlook for now. The hedge strategy is to buy 1M $ at forward rate of 66.35-66.50 and sell 3M $ at 68.35-68.50 retaining Q4/FY16 USD/INR outlook at 66-68.50 within set 65.65-68.85 big-picture focus.

EUR/INR focus now at upper-half of 69.65/70.15-73.15/73.65 range at 71.65-73.65 from combination of firm EUR/USD at 1.08-1.1050 and steady USD/INR at 66.20/66.35-66.85/67.00. It's good to retain back-and-forth focus being neutral on breakout bias.

Good luck and have a safe week ahead!

Moses Harding
harding.moses@gmail.com
9674734145

India fortunes revolve around "blessing in disguise" theme; will it fructify for 2016 prosperity? Read on....

India retain shift from hope to confidence  while the rich economies boxed between optimism and despair

MARKET PULSE highlighted (in its 2016 outlook update) the positive bias on India Financial markets retaining hope from domestic cues supported by minor tailwind support from external dynamics. Uday Kotak interview endorse this statement with precision clarity. I enjoyed reading Uday's view points more than once. The domestic optimism revolve around step-up pace in domestic investment and higher consumption, which highlights sustainable domestic capacity expansion. The catalyst play will be from Government's policy executions that would add to foreign investment flows and expand India economic capacity to build for external consumption. Uday has rightly pointed out the growth pick up in UPA 1 regime (2004-2009) from arbitrage themes providing higher margin by acquiring cheap (at deep discount) and selling at huge premium. The arbitrage play also extended to liquidity (driven by ultra-dovish monetary stance of developed economies) and interest rate (elevated domestic interest rate regime) against relatively stable Rupee exchange rate. This arbitrage play  (for higher margin) may not be available now on better policy & regulatory transparency and financial market efficiency. Uday also commented on three basic themes around productivity, efficiency and cost optimisation, by being frugal. When majority of the GDP contribution is controlled by the Government and PSU entities, the change has to be led by the Government. The bottom-line for long term India prosperity is in the way the PSU entities gear up for upgrade of productivity and efficiency being frugal and cost-revenue efficient. It is also critical for private investors to shift the investment theme from quick-money and one-off arbitrage play to consistent and sustainable long term revenue play. This combination of Government and private mind-shift supplemented by foreign investments will set up strong base for India prosperity in 2016, making it a glorious run for the next 10-25 years! As India completes 25 years of economic liberalisation (1991 to 2015), our generation (now in the age group of 50-65 years) has contributed lots to domestic consumption and investment. The next 25 years is the opportunity for the next generation (in the age group of 25-40 years) to lift it up to much higher levels against lower base and higher compounding impact. India outlook may look vulnerable in the short term, but the long term prosperity theme is very much in tact!

The worry however is from the play in external dynamics. It is not sure at this stage either for shift to optimism (led by the US economy) or into despair (pulled down by the China and other emerging markets and the Euro zone). While it is make-or-break game for the global markets, the impact from FII appetite (either complete exit or flood like entry) will lead to extreme short term volatility eitherway. The positive take-away is that the India market impact will be shallow from FII exit and extreme on accelarated inflows, which retains India status as a preferred destination among BRICS and other emerging markets. Uday's point of view that India should go out alone (and not in the company of BRICS) is a good point for discussion by the powers that be.

Elevated interest rates against easing inflation and fiscal prudence is comfort

The blessing in disguise for India is the elevated interest rates despite sharp decline in wholesale and retail inflation. India stands out in this dynamics against the peers who are mostly in low inflation and low interest rate play. The outlook on India is CPI stability at 4.5-5.5% and fiscal prudence into lower end of 3.5-4.0% to drive gradual decline in Bond yields through 2016-2017 for base set up for inflation around 4% and operating policy rate around 6%, thus setting up 75 bps rate cut between mid 2016 to end 2017. This outlook will retain FII appetite on Gilts and Corporate bonds against relatively stable Rupee exchange rate with annual depreciation rate at 3-5%. All combined, investor appetite will stay skewed towards debt/fixed income in H1/2016 before shift to risk-on equity assets if domestic cues turn favour and external dynamics stay neutral.

India Financial markets short term outlook is between bearish to neutral consolidation

MARKET PULSE zoom-in focus for NIFTY is set at 7500/7650-8000/8150 retaining breakout bias into 8000/8150-8500/8650. So is Bank Nifty at 16350/16500-17000/17150 before shift into 17000/17150-18000/18150. The 2-step immediate term resistance is set at 7965-8000 (17000-17150) and 8100-8135 (17350-17500) against 2-step strategic bids above 7650-7685 and 7515-7550. At this stage, combination of disappointment from domestic cues and despair from external dynamics could trigger downside risks for Nifty shift of play into 6850/7000-7500, hence hold stop at 7485 while retaining 2016 Nifty big-picture outlook at 7500-8500/8650.

India 10Y bond play need to be passive absorbing weakness into 7.78-7.93% through H1/2016 against duration-cut mode at 7.65-7.70%. While retaining 2016 range outlook at 7.45/7.50-7.90/7.95%, short term pull will be towards higher end before gradual decline into lower end. The risk factors are from stubborn CPI at 5.5-6.0% and accelarated shift of FED policy rate from 0.25-0.50% to 1.0-1.25% which could delay the 7.45-7.50% target to 2017 while retaining sideways play at higher end of 7.70-7.95%.

MARKET PULSE retain zoom-in focus on USD/INR at 66/66.20-67.20/67.35 in the short term. The hedge strategy is to hedge 1M imports around 66.50, cover 1M exports around 67.50 in traction with 12M $ at 70.25/70.50-71.25/71.50. The medium term outlook is retained for shift of play into 67-70 in H1/FY17.

All combined, there is nothing to panic and hats off to Uday Kotak for the confidence boosters to stake holders and critical pitch pointers to the Government and regulators.

Best wishes and Good luck!

Moses Harding
harding.moses@gmail.com
9674734145

Global Markets 2016 outlook : Nothing to fear with no major cues for cheer! Read on.....

US financial markets retain bullish advantage from growth comfort and interest rate dynamics against dollar strength

The external impact on India Financial markets is neutral and mixed. The confidence is from sustainable US economic recovery extending support to India capacity expansion through higher domestic consumption and improved exports. The demand-supply dynamics in commodity assets stand in favour to retain price advantage to hold Current Account Deficit and inflation expectation steady for further baby-steps monetary easing by the RBI. The concern however is from the shift of FII appetite to US markets (from EMs) chasing low risk - high reward risk-on asset classes. The fear mitigant for India is the shift of inflows from hot money short term FIIs to sustainable and accelarated longterm FDI/ECB investors. Given the positive outlook on the way forward, FED has already shifted to rate hike cycle in Q4/2015 notwithstanding resistive outcry from the IMF and other developed & emerging economies with 25 bp hike, not to be seen as baby-step at this stage. The expectation in 2016 is for quick shift of policy rate from 0.25-0.50% to 1.0-1.25% corridor by not later than mid 2016.

The fear of unknown is from the Euro zone and China that are in economic struggle despite ultra-dovish monetary support. While the ammunition at disposal is very limited, the extent and duration of retaining the supportive dynamics is not clear. Having said this, it is very low probability of seeing monetary reversal stance in 2016. The impact from here on India markets will be on Rupee price stability keeping short term foreign investors away for now.

India markets in nervous undertone with expectation shift from optimism to hope

India Financial markets fortunes are mixed without clarity eitherway. The strong external tailwind support is now behind with consolation that it may not turn on the head now, at least in H1/2016. The direction bias will be set from developments in the domestic sector. The expected big bang policy reforms didn't materialise and not seen to be forthcoming soon. The shift from optimism to hope has already resulted in sharp unwind of bullish set up since March 2015. The bottom-line for India in FY16 is the downward shift of sentiment from euphoria to optimism to hope. Can the Government restore optimism in 2016 or allow further slippage from hope to disappointment? At this stage, It is good to set the bias for shift from hope to optimism given the positive cues from the external sector on the CAD, Inflation and Rupee exchange rate.

Can India restore GDP growth optimism from 7-7.5% to 7.5-8% in FY17? Can India see soft landing of CPI inflation around 5% in 2016? Can India restrict fiscal deficit at lower half of 3.5-4.0% in FY17? Will India continue to get external support to hold CAD at 1.5-2.0% in 2016? Will Rupee be stable at 66-70 with not more than 3-5% depreciation in 2016? Will RBI get the desired bandwidth to lower the operating policy rate from current 6.75% in 2016? The directional bias on India risk-on financial markets for 2016 will be dependent on outcome from these critical fundamental cues. The worry is that in the absence of strong FII support, upside gains will be shallow while downside risks can run deep! Despite dilution in external tailwind support for India Financial markets, MARKET PULSE continue to retain hope on long term India economic prosperity. The Government has already opened the doors wide for external investors, and working on policy, regulatory and administrative initiatives to make India as "easy to do business" destination. The public investment into core sectors are being beefed up to provide comfort to domestic investors to pad up to build significant size for capacity expansion. It is true that the pace is slow, but need to give benefit of doubt to the intent and sustained efforts to knock out the resistive political hurdles!

What is the take-away? It is not wise to look beyond 3 months, hence there is no strategic long term play for time horizon beyond 2016! It is prudent to stay short sighted and be fleet-footed to either take monies off the table and stop running the losses taking comfort as long term positions. It has been rewarding 2015 for fleet-footed investors (and traders) across asset classes and it shall be so in 2016 as well, looking for long term trend clarity eitherway!

India equity market in sideways mode given the lack of clarity against limited investor support

NIFTY 2015 high of 9119 looks distant away while low of 7539 is at risk in 2016. MARKET PULSE set end of 2015 Nifty focus at 7500/7650-8000/8150, seen as intermediate zone between 2016 big-picture focus range of 7000/7150-8500/8650. Bank NIFTY is also supported now at intermediate zone of 16150/16500-17350/17700. What Next? MARKET PULSE retain outlook (set on 5th December 2015 update) for 2-step strategic buy entry in Nifty at 7680-7715 and 7515-7550 (Bank Nifty at 16500-16650 and 16000-16150) and 2-step short-build zone of 7965-8000 and 8100-8135 (and 17150-17200 and 17450-17500). Given this outlook on India equity, DJIA index is firm with 2015 low of 15370 looks distant away against high probability of 2016 high above 2015 high of 18351. The end of 2015 consolidation outlook at 17000/17350-18000/18350 has held well building steam for shift higher beyond 18350.

The risk on India equity is from FII play when Nifty under pressure below 2015 low and DJIA looking firm for move beyond 2015 high. The flow dynamics will be between sell-on-recovery stance of FIIs and buy-dips support from DIIs, which provide comfort for Nifty stability at 7500/7650-8000/8150 (Bank Nifty at 16000/16350-17150/17500) in Q1/2016. At this stage, MARKET PULSE stay neutral on FY17 shift of NIFTY focus into 7000-7500 or 8150-8650 (Bank Nifty into 15000-16500 or 17500-19000). Government and RBI have to be on over-drive to arrest downside risks on India equity markets on shift into new financial year in the absence of FII appetite in 2016. All taken, it is prudent to stay risk-neutral in Q1/2016 (ahead of Q1/FY17) awaiting better clarity ahead.

India Bond market in consolidation mode from FII appetite shift from risk-on equity to risk-off Gilts

MARKET PULSE squeezed end of 2015 focus on India 10Y yield at 7.70-7.80% (post end of 2015 chase from over 8% to below 7.50%). While retaining bearish undertone, set RBI support at 7.78-7.80% ahead of 2-step 2016 strategic buy zone in 7.72% 2025 bond at 7.83-7.85% and 7.93-7.95% against duration-cut zone of 7.68-7.70%. This outlook was set in traction with US 10Y yield stability at 2.20-2.35% against yield spread of 5.35-5.60%. It was also set as high-risk short-build on India 10Y bond when India-US 10Y yield spread stay elevated at 5.55-5.60% and India 10Y-Repo rate spread at 1.0-1.10%. What Next?

India 10Y bond is under pressure from domestic low demand - high supply flow dynamics and gradual lift-off in US Treasury yield in 2016. There is limited scope for squeeze in India-US 10Y yield-spread below 5.35% despite US 10Y spike into 2.50-2.65% by mid 2016 against stubborn CPI inflation print at upper-half of 5-6% and Rupee downside risk into 67-70. All combined, see good FII appetite in India 10Y bond at 7.80-7.95% (against Rupee value at 67.35-68.85). This FII strategy in 2016 is not bad against 3-5% Rupee depreciation and 12M Libor weighted average not beyond 1.25%. The big-picture DII play (including Banks) will be between duration-cut zone of 7.65-7.70% and duration-build zone of 7.90-7.95%. The strategic traders appetite will be to build shorts at 7.68-7.73% with caution on shorts at 7.78-7.83% and to build long at 7.88-7.93%. It would need supportive RBI (with 25-50 bps rate cut) and neutral FED (with extended pause post 2nd round of 25 bps hike) to get the India 10Y bond focus into 2015 high of 7.45-7.50%. Most will agree that it will be manna from the heaven if it comes true!

Rupee set for repeat of 2015 with downside risk not beyond 5%

Post the USD/INR intra-2015 bull chase from 63-63.35 to 66.85-67.10, MARKET PULSE set end of 2015 focus at 66.20-67.20 in alignment with RBI admin range of 65.85/66.10-67.10/67.35 for end of 2015 close at 66.35-66.85. During this time, 12M $ rallied from set strategic base of 68-68.25 to resist zone of 71.25-71.50 despite time-value decline from 7.5% to 6.25% in traction with 1.25% rate cut from RBI. Rupee value-decay of 5.25-5.50% in 2015 is not bad against average time-premium of around 7%. What Next?

Not withstanding the beneficial impact on Rupee from lower Brent Crude at $35-50, Gold at 1035-1135 and FDI/ECB inflows, the headwind force is severe. The downside risks are from cues around USD strength against major currencies pushing DXY beyond set 2015 strategic resist zone of 100-100.50, squeeze in 12M time-value to 5-5.5% against steady Repo rate at 6.50-6.75% and hardening 12M Libor into 1.25-1.75% in 2016. The PBoC impact on EM currencies will also add to pressure on the Rupee. The flow dynamics has also turned against with FII $ bids in the cash market and risk-off importer demand in the forward market. One can't ignore huge RBI $ appetite when $ supply turns excessive from lumpy inflows. All combined, MARKET PULSE retain set 2016 zoom-in focus at 65.85/66.10-67.10/67.35 and await orderly or one-shot adjustment into 67.10/67.35-68.85/69.10 at start of FY17. Also retain 12M USD/INR strategic focus at 70/70.25-72.50/72.75.

Post the EUR/INR intra-2015 down-hill chase to set strategic base at 69.90-70.15, correction from here held at short-initiation zone of 72.85-73.35 before consolidation at 70.65/71-73/73.35. The outlook for Q1/2016 is for consolidation here tracking EUR/USD play at 1.05/1.0650-1.10/1.1150 against USD/INR at 66/66.20-67/67.20 and stay neutral on breakout eitherway. It may not be sustainable below 69.90-70.15 against possible intra-2016 shift of EUR/USD play into 1.0/1.0150-1.05/1.0650 against USD/INR shift to 67.10/67.35-68.85/69.10.

Commodities retain bearish undertone from demand-supply dynamics driven by weak global economic recovery

Brent Crude extend weakness below set long term strategic base of $37 on intra-2015 push-back from $70. Is it good (and prudent) to chase weakness into (or below) $35-37? While the demand pick up in 2016 will stay muted, the attention will be on the extent of supply squeeze to retain fair value play at $35-50. Having said this, long term hedge demand will emerge on extended weakness below $35-37 to stay risk-off (or neutral with 50% hedge) to mitigate risk from possible relief rally into $48-50. At this stage, big-picture focus is retained at 35/37-48/50 and it would be high risk chase on extension eitherway.

Gold held at strategic base at 1000-1035 post sharp intra-2015 unwind from over 1300 before stability at end of 2015 consolidation range of 1035/1050-1085/1100. What Next? The worst case scenario for 2016 is not seen beyond $950, while best case is seen restricted at $1135-1185. Gold has clearly lost its safe-haven status but seen fairly priced at 950-1000 for 2016 stability at 950/1000-1135/1185.

What is 2016 strategy?

2015 has been extremely good for fleet footed play both for investors and traders. Shift of risk play between on and off and staying neutral at intermediate zone has given good double-digit returns to investors in the OTC markets and triple-digit returns (on the margin) to traders on the ETF platforms, across asset classes. The strategy remains valid for 2016 with review at Q1/FY17. It is caution for passive investors who rode the 2012-2014 bull trend; it is possible that 2015-2017 may turn as consolidation phase before exerting pressure on the 2015 high prints. So, it is loss of time-value against search of sustainable strategic "base" during 2016-2017. All combined, cues are mixed to have "long term" trend clarity eitherway; markets will be volatile, so are the views and trading strategies. It will be game of "wind surfing" for strategic investors/traders to stay in patience for the right wave for entry and plan quick exit before getting knocked out by contra waves. It will be greed to look for 90-100% of end-to-end moves and it would be prudent to stay content with 60-75% of set big-picture focus range. As always, stop loss has to be affordable and to what one can chew! It is good not to be a "boxer" in this market; one unexpected blow can knock out even the best (and the favourite) by an underdog!

Wish you all a very happy and profitable 2016.

Moses Harding
harding.moses@gmail.com
9674734145

Leave of absence : Shifting base from Kolkata to Mumbai

Dear all,

It has been a roller-coaster ride in 2015, and I hope you had a good and profitable ride "wind-surfing" the frequent swings in the markets. It is important to be patient for entry on the right wave and exit on time before a bigger wave topples you down! It is also important to cut the losses quickly and ride the profits with trail stop to catch 50-75% of the end to end move. In this process, even if the strike rate is 50%, you end up with decent profit on cash investment and great returns on leveraged margin.

I am in the process of relocation from Kolkata to Mumbai, and will be out of market for some time till end of 2015. I will be happy to take individual queries on the markets regarding hedge, trading and investment strategies. If you may need any guidance or validation comfort on your views, please feel free to post your queries with details on my mail id harding.moses@gmail.com or SMS/WhatsApp on 9674734145.

Will be back by 1st week of January 2016; till then, take care and wish you all the best of luck ahead when markets will turn erratic and volatile in illiquid holiday season!

Wish you all a merry Christmas and great New year (2016) ahead!

Moses Harding
harding.moses@gmail.com
9674734145