Oct Fed Minutes Missed The Expected Hawkish Tone
Brace for a Santa Claus rally for global as well as Indian Market
For NF, 7720-7680 is now a big support;
Expect at least 8055-8200 by Dec'2015
SGX NF: 7785 (CMP)
NSE MF: 7727 (LTP)
Technically, 7720-7680 is now vital support for NF and sustain below that we may drift to 7630-7540 zone for the time being. On the other side, NF need to sustain above 7790-7800 zone for an immediate target of 7885-7910 for the day.
As par early SGX indication, NSE NF may open around 7780-7800 followed by overnight rally (more than 1% from negative territory) in US market after Fed minutes lacked the much expected hawkish tone.
Basically, Fed minutes tell us nothing new, which we didn't knew. USD reacted with a mild whipsaw movement. Fed basically leaves various options open for Dec hike and FFR is still showing 70% probability of the same before & after minutes and that token lift off may be already discounted by the market to a great extent.
Market is now looking for Fed cues about gradual pace of rate hikes in 2016. Will it be a one off 0.25-0.50% token rate hike or 0.25% hike in every bimonthly Fed meeting to make the Fed Fund Rate at around 1.25-1.50% by Dec'2016 ?
Going by the recent commentary of various FOMC members, Fed may be looking for some scapegoats to avoid Dec'15 lift off as that may "spoil the year end Santa Claus rally/party in the market" !!
Fed will determine or evaluate various options, whether it will be appropriate for a Dec hike. In the process they will look into the Dec NFP job data and inflation in US more closely. With crude hovering around $40 despite some geo-political shocks, inflation will be the main risk for a Dec lift off.
Fed may also look into various ongoing geo-political shocks in EU, like ISIS Paris massacre, ongoing Syrian war (which seems to be free for all), EU refugee crisis apart from possibility of any economic/financial system shock (like China jitters/slowdown etc) and might take some excuses from these events for a Dec hike itself.
ECB is also ready for more accomodative monetary policy (QQE) and the ongoing geo-political events may strengthen Draghi's jaw bone stance. BOJ may also ease more in Jan'16, if the tepid condition of their economy does not show any improvement.
Overall, there will be no dearth of global liquidity despite Fed rate hike in Dec and the USD strength already discounted that lift off to a great extent. In this scenario, if Fed does not hike rate at Dec'15, except more fireworks in the global market and S&P-500 is indicating a year end rally up to 2110-2135 area.
Back home, yesterday's market fall may be attributed to the FY-16 earnings downgrade by the analysts, fear of Parliament wash out again on the back of "intolerance" controversy/united oppositions after the Bihar result and lack of any fresh domestic cues (although the Govt is doing its best to unleash a slew of measures/economic reforms, which does not requite legislative approvals).
Analysts are now cutting FY-16 earnings growth to around 7-8% from earlier 15-16% projections for FY-16 after tepid Q2 results. Among blue chips large & midcaps, around 40% has reported Q2 numbers above estimate and 40% below estimates, while 20% reported in line.
7-th pay commission report may be made public today. As par market expectation, there may be 15% salary hike for Central Govt employees, which may be a good boost to our economy on the consumer side but slightly negative for overall fiscal balance. Govt may implement it in phases over the next three years instead of one time application.
Govt is already showing its pro-reform face after Bihar debacle and engaged in back door political management for passage of key reform bills in the forthcoming winter session of Parliament. If that does not materialize, we may see even an extreme step like joint session of parliament for passage of that as Govt may not wait indefinitely on the mercy of united oppositions and arrogance of RS numbers.
Market is already discounting "no GST" in this winter session of Parliament and anything happened above that (may be oppositions/Cong will support it directly/indirectly with some of their modifications for a face saving formula on both side), market will jump for a Santa Claus rally, may be towards 8055-8200 & 8365-8435 zone in the near future (around budget times in March-April'16) as dovish RBI may also cut by up to 0.75% in FY-17, inline with the falling inflation trajectory and Govt is also expected to deliver a "dream budget" proposal this time.
Analytical Charts:
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