*Market Wrap: 15/12/2016 (17:30)*
*Technically Nifty Fut (Dec @8178) has to sustain over 8275-8325 area
for further rally towards 8365-8435 & 8485-8545 zone in the near term.*
*On the other side, sustaining below 8250-8200 zone, NF may further fall
towards 8090-8040 & 7980-7900 area in the short term.*
*An “unexpected” hawkish Fed in 2017 may force RBI to recalibrate its
current accommodative stance for more neutral to save the INR & G-SEC
bond yields rather than aggressive rate cuts in the months ahead.*
Nifty Fut (Dec) today closed around 8178 (-0.24%) after a volatile day
of trading following overnight US Fed action of 0.25% rate hike with a
hawkish dot plots, projecting 3 more hikes in 2017 against expectation
of 2 hikes.
Indian market today opened gap down around day low of 8124 and soon
after that recovered quite smartly within a few minutes to session high
of 8264, presumably by huge short covering/intra longs of Nifty Futs by
institutional investors (?) for their trapped long unwinding at higher
level. But, soon after that selling pressure creeps in amid sell off in
the China market and NF closed below crucial 8200 level with a negative
tone and tepid global cues on the back of surging USD & US bond yields
as a result of hawkish Fed.
China market today corrected on the back of strong USD & probable PBOC
tightening and some regulatory action on institutional investors &
shadow-banking activity.
An unusual hawkish Fed, stronger USD & US bond yields may also force RBI
for a slow rate cuts in 2017 in order to balance USDINR interest rate &
bond yields differential as a weaker INR may also cause significant FPI
(s) outflow from both bond as well as EQ market.
Although, real rate of interest rate bond yield differential between US
& India is decreasing and supporting the INR at this point of time,
thanks to demonetization led slump in CPI, going forward the equation
may change. If US bond yields surge further towards 3% from the present
level of 2.60% courtesy Trump’s actual plan & size of the fiscal
stimulus, USDINR may further rally towards 70-72 level in 2017 and that
may be a major headwinds for the Indian economy & the market, coupled
with costly oil, FCNR & FCCB redemption pressure etc. In that scenario,
Indian inflation may also spike as it’s an import oriented economy with
theme of domestic consumption and little export, which may also force
RBI to abandon its rate cut cycle.
Yesterday, after hiking 0.25%, Yellen’s reaction was surprisingly
hawkish and despite looming threat of a strong USD & surging bond yields
on the US economy, Yellen has supported the 3 dot plots in 2017 (11 out
of 17 FOMC members has supported 3 rate hikes).
Although, headline US job numbers may be above Fed’s comfort zone, but
it also came on the back of a comparatively less participation rate and
lower wage growth. There is no “wage inflation” in the US economy as of
now despite decades of “easy money policy” (QE).
Thus, Trump’s rhetoric about more fiscal spending & structural reform
with a gradual reduction in monetary stimulus (QE) may be the theme for
the “Real Street” in 2017 and years ahead and Fed’s role may be limited
for the “Wall Street”.
As of now, Trump’s fiscal spending plan is uncertain amid various
divisions in the US Congress, but tax cut plan may see the day of light
quite early after Trump take charge on 20^th Jan’17 for consensus.
Again, depending upon the pace & size of “Trumponomics” & “Trumpflation”
and strength of oil, Fed may find it behind the curve in the months
ahead as it already waited too long for the 2^nd hike in the last one year.
Thus, it may not be unusual at all, if Fed decides to go for its 2017-18
dot plots to hike 6 times (3 times a year) in order to make the Fed rate
as 2.00-2.25% (2.125%) by Dec’2018.
A hawkish Fed in 2017-18 may also force other G-10 central bankers,
including India to go for less dovish stance or even some rate hikes in
order to keep their respective currencies in balance with the USD.
After last year’s rate hike by Fed in Dec’2015, market capitulated in
Jan-Feb’16 on the back of China & oil melt down as a result of strong
USD (Yuan devaluation). Capitulation in oil was also partly for strong
USD apart from the supply glut, which was followed by SWF selling.
China Yuan (USDCNY) is now trading around 6.92, already devalued by
around 6% in the last few months for “Trumpism” and “Brexit” without
much global panic/attention, which also helped China market a lot as an
export oriented economy. The same theme is applicable for Japan also
(devalued Yen).
But, further Chinese Yuan depreciation towards 7.15-7.25; i.e. around 5%
from the present level may cause another eave of capitulation in the
global financial market (risk assets), which is applicable for India also.
*Technically, consecutive closing above 6.97-7.00 level, USDCNY may
rally towards 7.15-7.25 zone in the near term.*
US market may also correct significantly from the record near Dow 20k
level as a strong USD & borrowing costs (US bond yields) may not be good
also for the US economy itself, despite perception of “Trumponomics”.
“Trump trade” may also fade after record rally as market might focus on
the reality rather than an election rhetoric.
*Technically, SPX-500 Fut, which is now trading around 2252, has to
sustain over 2265-2275 zone for further rally; otherwise it will come
down again.*
Indian market is already under pressure for various domestic headwinds
like demonetization led economic & political disruptions coupled with
high probability of "No" GST roll out in April’17 or even in Sep’17 and
actually underperformed the global markets in the last few months.
Domestic market may be further under pressure, if US & global market
start to correct in the coming days, especially after Jan’17, when Trump
take charge.
*Technically, unless & until Nifty sustained above 8325-8485 zone for a
few days, any “Santa” or “Pre-Budget” Rally in the absence of FII (s) in
this month of Dec may be utilized for long profit booking to prepare for
a probable Jan-March selling spree, despite a hope for a “dream budget”.*
*Time & price action may be suggesting that consecutive closing below
7900 zone, Nifty may head towards 7200-6800 level in the coming months
on the back of various global headwinds, high probable end of “easy
money era”, US & EU political risks, strong USD and domestic pains of
demonetization & “war on black money” (slow earnings recovery cycle &
slump in GDP growth and Indian political risks). There are too many
headwinds in comparison with too few tailwinds for the domestic market
as of now.*
Eight years of liquidity driven global bull market after 2008 economic
crisis may be over supported primarily by the central bankers (QQE) as
easy monetary stimulus policy (“24/7 money printing”) may be gradually
replaced by fiscal & structural stimulus in the coming months as a
result of political compulsion & nationalistic trend (“America First,
Great Britain First” etc).
We may see significant capitulation for the EM in the coming days and
India may not be an exception despite a “bright spot” in the global economy.
<https://3.bp.blogspot.com/-K7Z-TuFh2qg/WFK4ZI8ezaI/AAAAAAAAJz0/muZ2_SNL8Qspiob1T5PZnY8uSKHTr550ACLcB/s1600/SGX-NF-PATTERN-15-12-2016.png>
SGX-NF
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Thanks & Regards,
Asis Ghosh
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