*Market Wrap: 05/12/2016 (17:30)*
*Hopes Of RBI Rate Cut & Probable “GST Delay” Might Also Helped The
Indian Market Today As Economy May Not Be “Prepared” To Take The “Double
Whammy” Of Demonetization & GST Almost At The Same Time *
*Technically Nifty Fut (Dec) now (LTP: 8173) has to sustain over
8195-8215 area for further rally towards 8285-8330 Zone.*
*On the other side, sustaining below 8155-8135 zone, NF may further fall
towards 8100-8040 & 7995-7900 area in the near term.*
Nifty Fut (Dec) today closed around 8173 (+0.79%) after an wild intraday
gyration of around 100 points, which saw a session low of 8076 and late
day swing high of 8175, supported by positive global cues after EU
markets open and recovered from initial losses, supported by short
covering as “NO” Italian referendum, was also on the expected line and
the market was almost discounted.
There may be significant political risk now in Italy, as its PM offered
his resignation and even a new election may be called shortly as the
present constitutional referendum is widely seen as a “Brexit” like
referendum for Italy, reflecting the same nationalistic & popular
politics (out of establishment), that the large part of the EU and even
US (Trumpism) is undergoing now. The next target of this “Exit EU”
policy may be France and if such trend is going on, then the concept of
the whole European Union (EU) may be itself in a serious question.
But, the market recovered as some section of the analysts and EU
officials were quick to point it that this constitutional referendum is
Italy’s internal matter and nothing to do with the splintering from the
EU/EZ and more over, today’s Austria voting also showed that people may
not want more disruptions like “Brexit”. In Austria, right wing party
favoring the Anti-EU sentiment was defeated in the Presidential poll
today in an unexpected result.
*Thus, the EURUSD was unable to break the key technical level of 1.05
(actually 1.04603) despite the Italian political and probable banking
crisis and some short covering helped the market (risk on sentiment).
Technically, one may watch 1.04-1.07 level on both sides for a break up
or break down.*
Apart from the EU political risks, monetary policy divergence between
the ECB & Fed may also drag the EURUSD in the coming days as Draghi may
choose to be remained accommodative with a dovish bias as a fall out of
these risks. As it is almost confirmed that ECB may extend the present
LTRO by another EUR 500 bln up to March’17 and as core CPI is nowhere
around the targeted 2%, ECB may not officially indicate any tapering on
its forthcoming meeting (8^th Dec) on the cover of the growing EU
political risks.
Also, the upbeat service PMI in UK and probable judicial delay for the
Brexit case in their SC may help the “risk on” sentiment today.
Oil was also under bid for “backwardation” despite some real concern
about implementation of the recent OPEC deal and more “offline” supplies
are coming “online” and a probable squeeze in demand from India as a
result of economic slowdown for demonetization. OPEC is also planning
for another meeting on 10^th Dec with non-OPEC countries for the
production cuts, but the current rally may be overdone.
Indian market was also opened and stayed most part of the day in a
tepid/negative note amid the global headwinds and domestic concerns of
demonetization & delay in GST, high oil prices and poor service PMI, but
covered smartly in the last hour of trade along with the global peers
and hopes of RBI rate cut on 7^th Dec.
Indian service PMI for Nov came at 46.7 against 54.5 for Oct, which is
the steepest one month fall in since 2008 Lehman Brothers led global
financial crisis and it’s also the lowest since June’15 as an immediate
fall out of severe economic slowdown and consequent job losses due to
demonetization (may be more than expected).
As par Markit, the cash-driven economy of India saw significant cut in
discretionary spending in financial services, hotels & restaurants,
renting and other business activities post demonetization.
Incidentally, India’s 60% GDP is dependent on the service sector and the
contraction of the same well below “boom/bust” line of 50 may not be
good for the overall growth of the country. Overall, the composite PMI
(service + Mfg) for Nov now stands at 49.1 against Oct figure of 55.4,
also below the “growth/contraction” mark of 50 after demonetization.
But, one of the immediate positive sides of the demonetization may be
fall in prices of some consumer durables items, autos. Real estate etc
where sellers (firms) have discounted their prices steeply to cope with
the limited demands out of cash crunch and may be also due to the Govt’s
stance of “war on black money”.
Thus, the falling inflation along with downside risks in growth for
demonetization may influence the RBI to cut rates in the day after
tomorrow by at least 0.25% along with some required liquidity management
steps and thus the domestic market rallied a bit today.
But, looking ahead a drastic rate cut by RBI may be another risk for the
INR and a weak Rupee may also accelerate FII outflow (monetary policy
divergence between Fed & RBI and bond yield & real rate of interest
differentials). Although, core inflation may be down for demonetization,
but food inflation may be up due to disruptions in rural economy and
mismatch in demand/supply dynamics. Thus, headline CPI may not reflect a
steep decline in the coming days and RBI may also wait for the Fed’s
guidance on future course of rate hikes in 2017 along with the actual
domestic inflation trajectory to stay pat in Dec’16.
As par latest report, an amount of around Rs.12.6 lakh cr may be already
deposited with the banks in HDCN amounting to almost 82% of the official
HDCN figure of Rs.15.3 lakh cr after various Govt approved “facilities”
to use the old 500/1000 notes and the latest IDS Amnesty scheme with 50%
tax. If this trend continues, then the gross bank deposits may also
exceed the official HDCN figures and thus put a serious question mark on
the whole demonetization exercise by the Govt and earlier estimate of
windfall gain of Rs.5 lakh cr by the RBI / Govt & subsequent fiscal
stimulus, that will not return to the system.
Although, the Govt may now try to confiscate the excess bank deposits
especially in the JDY bank accounts by introducing any “legal way” and
even may redistribute the same to these JDY accounts as a political
tool, it may be back fired amid continuous hardships being faced by the
common people for this demonetization, which is now being turned in to
another VDS scheme and “digital economy” theme.
The present demonetization may be the hardest step in the series of
earlier steps taken by the Govt in the last few years against “black
money” and the Govt may also take some future actions with Gold, real
estates and other financial assets to curb the “unaccounted black
money”. This “war” against the “black money” and “rich/poor” division
may be the ultimate political tool for the Govt/BJP eying for the series
of state elections and also the 2019 general election amid unemployment
crisis in India.
But, in reality lack of adequate consumer spending, private investments
etc may also accelerate the economy towards a contraction resulting in
more unemployment and hardships for the people, which may be another
political risk for the Govt.
Rather than the short term effect of demonetization & remonetization for
a few quarters, the long term effect of the “surgical strike” on the
“black money/informal unaccounted economy” may prolong the tepid Indian
consumption by at least 30%. Thus, real effect of this “war on black
money” may be seen after FY-18 onwards and there may be significant
downside risks for the earnings of Indian corporates.
Indian market may not be “too worried” at this moment, because of the
perception that eventually almost all the “so called black money” may
have returned to the banking system and ultimately may also return to
the “consumers”. But, it may also depend upon the Govt/IT action in
reality and after paying taxes of 50% with another 25% lock in for four
years; Indian “big consumers” may be left with only 25% of their
previous “wealth” in the foreseeable future. The sheer lack of
confidence on the currency and on the banking system and evaporation of
earlier “wealth” may also deteriorate their “animal spirit” of “big
buying spree” and for the next five years, we have tepid demands in the
economy as well.
Thus, in such scenario, where gains of demonetization are not visible,
people may closely analyze their pains, which may be also a “political
suicide” for the Govt/BJP and also a “political risk” for the country
rather than a “master stroke”.
Moreover, a slump in consumption may also hurt the business & private
earnings, direct & indirect tax collections of the Govt, thus
jeopardizing the fiscal math & budget deficit. All these may also weak
the Indian economy and currency in the months ahead.
Although, market may be relieved by some extent for likely delay in
passage & implementation of GST from April’17 as the Indian economy may
not withstand the “double whammy” of Demonetization & GST almost at the
same time, roll out of GST from Sep’17 may not be also sanguine given
the fact that there will be series of state elections and political
battles in the months ahead.
In that scenario, GST may be implemented only after 2019 general
election as Govt may not risk another “political suicide” and
disruptions in 2018 too, just one year before general election.
Indian market and FPI(s) sentiment may not be discounted yet for a
likely delay in GST after 2019 general election or even beyond Sep’17
and also for growing “political risks”, where regional parties/leaders
may try to fill up the vacuum for another effective national party
except BJP.
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SGX-NF
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EURUSD
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Thanks & Regards,
Asis Ghosh
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