*Market Wrap: 09/12/2016 (17:30)*
*Will there be a “Santa Rally” for a probable “Dovish Hike” by Fed Next
Week?*
*Technically Nifty Fut (Dec @8275) has to sustain over 8310-8335 area
for further rally towards 8385-8435 & 8485-8545 Zone.*
*On the other side, sustaining below 8280-8255 zone, NF may further fall
towards 8175-8055 & 7980-7900 area by the next “Fed” week.*
Nifty Fut (Dec) today closed around 8275 (+19 points), almost flat
(+0.24%) in a choppy day of trading after making a day of 8294 and
session low of 8255, which may be a perfect “text book” technical “Doji”
or a sign of indecision before a big event next week (Fed meet).
Today was basically a consolidation day for the Indian market after over
2% rally for the week and more over 4% rebound from the recent low of
7915 in Nifty on 21/11/2016 marked by “Trumpism” (surging US bond yields
& USD) and surprise “Demonetization” by the Govt. Along with Fed cues
next week, domestic market was also cautious for the IIP today (after
market hours) and CPI, to be released on coming Monday.
Just now, IIP for Oct’16 flashed as (-) 1.9% against estimate of (+)1%
(MOM: 0.7%), which may be very tepid itself and may also dip further in
Nov-Dec, thanks to the demonetization led economic disruptions. The
unexpected dip in Oct IIP despite being a festival month may be due to
seasonal factors like closure of factories in the “Diwali” month. But
the overall data may be pointing towards contraction, although IIP data
has no major impact on the Indian market, being in old series (?).
Market is expecting CPI to be as around 3.85% in Nov’16 against Oct
figure of 4.20% due to demonetization led low demand. Although, core CPI
may dip by around 0.20%, food inflation may surge as well for
demonetization led disruptions in the supply chain on the ground level
(semi urban & rural area, where cash is still very rare with little
digital economy) and together with that, surging oil prices & USD in the
global front, may keep the “inflation warrior” RBI Gov in “hawkish or
owlish” mode in the months ahead.
Today, banks gave a good support for the market on the back of
withdrawal of excess CRR on incremental demonetized deposits and also
for the news of NSE IPO, where SBI, IFCI, IDBI, ICICI, Axis has
significant stakes. Also, there was news for SBI Life IPO @460 per share.
“Bold stance” by RBI this week in withholding the rate may have saved
the domestic market from further fall, despite all round pressure on it
to act immediately due to downside risks of the Indian economy because
of demonetization chaos.
As a prudent step of RBI, USDINR lose some strength and Indian bond
yields surged, which may helped a lot to restore the confidence of the
FPI(s) on the Indian currency, reminding us the “Rajan era”. The
strengthening of the INR may be one of the reasons for some FII buying
in the market after the recent steep correction apart from their year
ending portfolio adjustments.
Also, as there is not any fresh significant panic on the ground due to
demonetization and some normalcy is gradually returning after slow pace
of remonetization, market may also be in an “wait & watch” mode for the
high frequency Dec’16 data and preferring for “short covering” at every dip.
Indian market may be relieved to some extent for the perception that
almost all the old demonetized “hidden wealth” has been deposited with
the banks and going forward it may act as a “stimulus” for the economy,
specially the “unexpected wealth” in the JDY accounts. Banks will be in
a position to start lending again in a big way and the so called “black
money” will be turned “white”, helping the Indian consumption story
again, even after paying 50-85% tax on it.
But it may be a complete wrong perception as banks can’t rely on its
“temporary” deposits and start lending in a big way, even if there is no
incremental demand for the credit in the economy. As of now, there is
enough normal liquidity with the banks except some fragile PSBS and
banks are now very cautious in extending loans for their previous “bad
experience” of the NPA(s) and issues of “twin balance sheets”. Some PSBS
has to be also well recapitalized by the Govt to stand on its own feet,
before staring lending in a big way again.
Even before the demonetization and “surgical strike on the black money”,
private investments were tepid amid poor capacity utilization. As there
was no significant demand as expected, corporates & SMES were also not
very keen to take fresh loans to expand amid stressed balance sheets for
most of them. But there was also some slow recovery signs in the economy
of late.
But, the sudden demonetization has destroyed the “animal spirit” of the
economy and overall GDP can dip by around 0.40% pm till full
remonetization. Going by the present trend of currency replacements,
full ATM recalibrations and printing capacity, it may take at least
March-May’16 for normal remonetization of the economy, which may
translate a loss of GDP growth of around 2% by FY-17 (short term effect).
For the vast Indian rural economy, even 50 days may be extremely painful
and if it’s another 150-200 days, then there may be significant social
unrest also, beside permanent destruction of the rural and semi-urban
economy.
Also, apart from the short term effect, the great story of Indian
consumption may also be seriously affected even after full
remonetization due to Govt’s stance of “war on black/unaccounted money”.
As par some reality check, 30-40% of overall consumer demands,
especially for high value items may be suffered for this “surgical
strike on the black money” as most of it it may be already converted
into other classes of financial assets or moved out of the country or
simply destroyed. The so called “big bang” consumers may not also feel
much confident for a “buying spree”, even after some of the “previous
wealth” will return to their hand with or without IT scrutiny.
After failing to see any significant “gain” for the “pain” of the
general public after demonetization, Govt is slowly now changing its
narrative from the “war on black money & counterfeit notes” to the theme
of “digital cashless economy” and has “offered” various “rebates” for it.
Although, “digital economy” was already there in India much before the
demonetization, most of the people were not enthusiastic about it except
using debit/credit cards. Even, concept of “online or mobile” banking
was seen as “very risky” and for the recent unusual surge in usage of
card swipe machines (POS), there is frequent "network disruption" also.
Now, after demonetization led banking chaos, those people are being
“forced” to take up the “digital banking” route. But the fact is that
this is being limited to urban or some semi urban people and that too
with the relative young people. There is huge problem of the concept of
“digital banking & economy” for the innumerable middle aged people,
senior citizens, pensioners and also for the vast rural people, who
don’t have any such digital concepts and are not tech savvy either.
Also, there is severe lack of affordable digital infrastructure in
India, especially in the semi-urban & rural areas.
Digital economy is certainly a good concept for a clean economy, but
proper implementation of the same will also require some modest time; it
can’t be possible to digitize a vast economy like India overnight or
even in fifty days. It will take at least 2-3 years to have all the
required digital infra in place and for the digital knowledge of the
common people. Govt should have ensured such digital infra in the last
two years before going for a sudden demonetization.
Now, this demonetization can’t be rolled back (reversible) also, despite
SC pressure & some questions raised on the whole "secret exercise" on
the Govt and in that scenario, one can expect more “pain” in the coming
months despite changing narrative of the Govt to “digital economy”. As
par some reports, Govt may be thinking of introduction of “plastic
currency” notes instead of “paper currency”. All these may cause more
confusions and loss of confidence on the currency of the country and on
the banking system. For the vast common people of India, the “digital
economy” may also be meaningless. All these may translate into loss of
consumer confidence and subsequent consumption in the months ahead
despite remonetization.
Govt may be also relying too much for incremental surge in direct tax
collections from the demonetized banking deposits for its political
agenda of “fight against corruption & black money” and any possible
redistribution of the same to the “poor” people from the so called
“rich”. But the fact is that IT department is short of manpower itself
to detect each & every black money bank account and then chase it to
recover the taxes. Even if all is okay, then it will take significant
time to extract the “wealth” from the “rich” to the “poor”.
One of the option for the Govt to conclude this “war on black money” to
a logical conclusion before series of state elections and 2019 general
election may be by putting some types of BTT (banking transaction tax at
source) in the forthcoming budget.
“Fight against corruption & black money” “minimum governance”, and
“unemployment” & “development” were one of the few election rhetoric of
NAMO in 2014 election. Though, there was no incident of any major
corruption scandal at the top Govt level for the last two years and the
Govt has also spent a lot (capex) for development (infra/rural etc),
“too much governance” and “unemployment” may be the major problem for
NAMO in the 2019 general election.
Thus the present demonetization & “war on black money” and even
“surgical strike at LOC” may be a political narrative for the Govt/BJP
facing the series of state elections and 2019 general election. For the
vast un/under employed electorates, the tag of “World’s fastest growing
economy” is useless, until he/she got a decent job, earning enough to
meet the minimum monthly expenses for a small family and spends some in
the weekend. Only then Indian consumption story will get the consistent
boost of “clean money” and a Govt will also enjoy enough political support.
But, in this “experience” of demonetization, NAMO may have already made
a political blunder without much thinking of consequences and lack of
proper implementation. The biggest issue of unemployment may even get a
boost for the immediate effect of the demonetization, which wracks havoc
for the unorganized sector in the semi-urban & rural areas beside
significant effect on the SMES. Big corporates and companies don’t have
any major problems as they are already digitalized, but one can also
expect temporary slide of sales, which may also persist longer affecting
their earnings. Indian corporate earnings (Nifty EPS) may dip by at
least 5-10% in the coming months on an average.
Globally, all eyes are on OPEC meet this weekend and despite some doubts
about an effective implementation of the OPEC cut agreement amid present
supply glut, Oil has rallied today as some “trusted” analysts has
predicted for $70 oil in the coming months on the back of an OPEC cut
optimism.
After the “dovish” ECB yesterday, all eyes will be on the Fed & Yellen
next week. Its almost 100% certain that Fed will raise interest 0.25% in
an annual exercise and thus the event may have been already discounted
by the market also. But, the real action will come after Fed/Yellen
statement/comments for any forward guidance about 2017 rate hikes.
Market is also expecting at least two rate hikes in 2017 (June-Dec) for
the perception of “Trumpflation” and fiscal spending by the new Trump
administration.
Going by the past history of Fed and the “uncertain” nature of Trump
this time, Yellen may opt for a “dovish hike” instead for a specific
hints for any future 2017 hikes and market may take it as “long pause”
before any further Fed action till June or Dec’17. In that scenario of
“dovish hike”, US bond yields & USD may also fall significantly, which
may cause a “Santa Rally” for not only the US/EU market, but for the EM
market also, including India.
If Fed opts for a “hawkish hike” with a “promise” for “every meeting
being live”, specially April-June’17, then US bond yields & USD will
surge more causing extensive damage to the EM currencies and the market
including India, despite having relatively stable macro (before
demonetization).
As the entire concept of “Trumponomics” may be still rhetoric now, Fed
may prefer to wait for the new Trump administration to take charge of
the Oval office in Jan’17 for an actual plan of fiscal spending package,
source of funding etc and depending upon that, Yellen may offer some
definitive forward guidance to the market only in March-April17 for a
possible hike in June’17.
Thus, probability of a “dovish hike” may be more than the “hawkish hike”
at this point of time, but the big question may be also that, how long
the US stock market can withstand the strength of dollar, despite
perception of lower corporate taxes, higher Govt spending, higher
inflation & GDP, higher employment and incrementally higher corporate
earnings (core EBITDA). Eventually, an excessive strong USD may be bad
for both US and the rest of the worlds, especially EM.
*For SPX-500 (LTP: 2254), a major technical hurdle should be around
2260-2265 zone in the days ahead.*
<https://2.bp.blogspot.com/-w_wYgcUUDv0/WErfJez6d8I/AAAAAAAAJvU/skhUzqwsZLsf_-OnlVSx6KJS67JP1IatACLcB/s1600/SGX-NF-WK-09-12-2016.png>
SGX-NF
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Thanks & Regards,
Asis Ghosh
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