*Market Wrap: 14/12/2016 (17:30)*
*Technically Nifty Fut (Dec @8204) has to sustain over 8260-8325 area
for further rally towards 8365-8435 & 8485-8545 zone in the near term.*
*On the other side, sustaining below 8230-8165 zone, NF may further fall
towards 8125-8040 & 7980-7900 area in the short term.*
*A high probable “Dovish Hike” by Fed today may ignite some relief rally
for EM currencies & Indian market also; but stronger USD in 2017 may be
one of the headwinds for the EM & Indian market along with increasing
domestic political risks.*
Nifty Fut (Dec) today closed around 8204 (-0.29%), almost flat after a
moderate day of volatility, which saw an opening minutes high of 8229
and subsequent session low of 8172.
Indian market opened and stayed most of the day in a negative note
following tepid global cues ahead of Fed and domestic headwinds of
economic slowdown and political disruptions (Parliament logjam) due to
ongoing demonetization fiasco. It’s now almost certain that April’17
roll out of GST is not possible due to ongoing political & economic
chaos after sudden decision of demonetization by the Govt on 8^th Nov,
just ahead of winter Parliament session in an apparent act of “political
suicide”.
Also, in one of his speech, PM mentioned about “possible 2017” roll out
of the GST, virtually ruled out any immediate possibility for
“April’17”. Certainly, Govt will try to reassure the market that it’s
their “constitutional compulsion” to implement the GST from Sep’17, but
going by the present political scenario and series of state elections in
2017, preparedness of the stake holders to accept & implement GST after
the demonetization disruptions and also 2019 general election, GST may
be implemented only after 2019.
In short, apart from overall economic slowdown, this demonetization may
be proving as a costly “political blunder” instead of a “political
master stroke” by NAMO, whereby nearly all the opposition political
parties which were seen as a mere “signboard political party” at the
national level till a few weeks ago, has got a “new life line” for their
political battle of "rich & poor" and it may turn out to be a “major
political risks” for the BJP as well for the whole country in the months
ahead.
Going forward, if remonetization do not happen quickly, then one can
expect a major political turmoil for India, which was so far
“politically stable” for the last decade. As ordinary people from the
grass root levels and also the middle class section has suffered mostly
in this poorly planned demonetization and “war on black money” theme,
even hard core BJP/RSS cadres are not convinced enough for the political
or economical “gain”, which is so far elusive against the “pain” and
it’s going tougher day by day to “sell” the changed narrative of
“cashless digital economy” from the initial theme of “fight against
corruption & black money” to the public.
All eyes will be on the public meeting of NAMO on 19^th Dec and 2^nd Jan
for any major announcements of social scheme for the “Aam Admi” to
reduce the “short term pain” and a probable “address to the nation” on
2^nd Jan’17 for any major change in policy.
Market may also watch RG’s "explosive" jibe of exposing a “personal
corruption” by NAMO and hacker group “Ligeon’s” claim of “Wiki Leaks”
types of confidential documents/mails, both of which promised a “major
earthquake” for the Indian politics.
After the current winter session of Parliament ends day after tomorrow,
“united opposition of 17 political parties” is planning to launch a
nationwide "political battle" against the Govt/BJP for the
demonetization “pain” suffered by the ordinary people of the country and
in response, BJP may also unleash some more “economic bazookas” with a
promise for a “dream budget” this time with some tax incentives and push
for “digital cashless society” theme.
All these may translate into a major political battle for the
forthcoming state elections involving "patience" of ordinary people and
ultimately GST & other vital economic reforms like “Land & Labour” may
be in jeopardy. Investors, especially FII(s) may not be amused for such
political & reform risks for India even in the long term.
After yesterday’s tepid CPI, today WPI came at 3.15% against market
expectation of 3.10% (MOM: 3.39%; YOY: -2.05%). Although, the rapid fall
in headline inflation may be good for the economy at a glance, the
reason behind it may not be good. Overall WPI data may also reinforced
the sharp slowdown in the economy due to sudden cash crunch in the
ground level after yesterday’s surprise fall in the CPI.
In a country, where “cash is king” for almost 98% of the economy and
digital infra & required concept is also at very nascent stage for vast
populations of the nation, it may take significant time of at least 2-3
years for a complete “digital economy”.
At the present trend, complete remonetization may take at least another
4-6 months (March-June’17) for normalization and that may be too long
for the vast populations of the country. As par some reports, Govt may
be planning to release new currency note of 1000/- by Jan’17 and may
also withdraw the just released new 2000/- note again in a bid to attack
the “accumulated black money” again. This time, people will not be
allowed to deposit or exchange more than 50k per ID. Govt may be also
mulling for plastic currency note instead of paper currency and planning
various other measures against illegal gold, real estate, DEMAT
accounts, P-Notes etc in a bid to carry forward its stance of “surgical
strike on black money” for a logical conclusion ahead of series of state
elections and also 2019 general election.
All these speculations (?) may cause public loss of confidence on the
currency & banking system of the country. Also, the stance of “war on
unaccounted money” and push for “digital economy” may cause significant
erosion in the traditional support base of the BJP (small traders) as
too much governance may also invite more corruptions.
NAMO may be the most trusted popular political leader after Indira
Gandhi, but both of them may be autocratic also. This autocracy may be
the single most "political blunder" for NAMO as there is no one to say
even "no" for this hurriedly conceived demonetization plan without
thinking much about "after shock". India may now miss Rajan as this
demonetization would have been "impossible" under him as RBI Gov. As par
various reports, NAMO or even previous UPA Govt sough suggestion for
this types of demonetization from Rajan earlier and he stressed for the
"surgical strike" on the "source" (tax reforms & corruptions) rather
than the "symptoms" first (demonetization).
Globally, all eyes will be on the Fed dot plots & economic projections
and Yellen’s presser today for any definitive hints about 2017 rate hike
cycles as 0.25% rate hike is now almost certain.
A “no hike” may also be seen as loss of confidence of Fed on both US &
global economy and may also cause turmoil. On the other hand, a 0.50%
rate hike may also be seen as an extremely “hawkish” Fed, which may also
cause significant meltdown for the EM currencies as USD & US bond yields
to soar. In both the above scenario, US EQ market may also fall; but no
hike or 0.50% hike may be the most distant possibility today (most
unlikely).
Fed will most likely to go for the “Dovish Hike” script today and its
dot plots may indicate two rate hikes in 2017, instead of four as in the
last Dec’2015 rate hike.
As market is also discounting the same for 2017 (June-Dec), going by the
present FFR indication, USD may fall as a knee-jerk reaction as it may
be seen as a long pause by the Fed before the next rate hike (at least
six months).
Again, divergent monetary policy between Fed & other G-10 central
bankers may limit the USD fall along with the perception of
“Trumponomics” (incrementally higher fiscal spending, higher borrowing
costs-US bond yields, higher inflation and stronger USD).
Apart from the Fed statement, Yellen’s comments at the presser may be
more important for the market to get a clear picture about US growth
prospects and the rate trajectory for 2017.
All in all, Yellen may be “non-committal” and sounds more “data
dependent” at this point of time in her comments amid lack of “wage
inflation” in the US economy and clear plan for the much talked fiscal
spending plan of Trump, who is due to take charge of the Oval office on
20^th Jan’17. Thus it may be a “Dovish Hike with Owlish outlook” by Fed
this time and USD may be in a range instead of free fall.
On the other side, if Yellen sounds like a “Hawk”, very optimistic about
US economy outlook in 2017 and not concerned too much about recent dips
in wage growth, USD may soar further causing significant pains for the
EM currencies and the market.
Also, US EQ market may correct as a result of stronger USD/Bond yields
coupled with “Trump Trade Fade” theme.
For Indian market, a “Dovish Hike” by Fed this time may be positive for
some days (relief rally), but unless & until NF sustained over 8325-8485
zone consistently, all rallies may be proved as “dead cat” amid theme of
stronger USD & demonetization nightmare and political risks.
Apart from the short term impact of economic slowdown & corporate
earning dips for this demonetization, there may be much more adverse
effect on the overall consumption story of Indian economy because of
Govt’s stance of “war on black money”.
The long term effect of “destruction of accumulated wealth” and
“rebuilding” or “redistribution” of the same may be much more painful
and will take more time for the Indian economy as traditionally, India’s
story of consumption may be too much dependent on this “unaccounted
wealth”. It may sound odd, but it’s a hard reality as of now.
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SGX-NF
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Thanks & Regards,
Asis Ghosh
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