We are approaching the all important Fed day (Dec-16) after ECB failed to stimulate the market as expected. Draghi came with a "water pistol" instead of a "Bazooka"; but the market don't underestimate (fade) "Mario whatever it takes Draghi" so easily and the last Friday's NY Q&A session is an example of Draghi's jawbone (verbal intervention power).
Similarly, after months/years of verbal intervention, Fed now seems to be determined to act this time as they don't want to fall behind the inflation curve (although inflation in us is around 1.3%, nowhere near the Fed's target of 2%; but Fed is anticipating higher core inflation in the years ahead on the back of increasing current wage inflation trend despite tepid commodity prices).
There is no doubt that US economy is progressing quite well in the job market which is creating nearly 200 k jobs every month on an average with the current unemployment rate of around 5%. At this rate the unemployment rate may fall to 4% in 2016 in US !!.
But the manufacturing & trade data in US is quite sluggish and the ISM surveys indicates the 2009 pre-recession like conditions. Due to very strong USD and apparently sluggish internal real economy (as increase in inventory suggests), both exports & imports are suffering in US.
Another factor is that a relatively strong currency (USD) is equivalent to hike in the real rate of interest in an economy itself (1% strength in currency may be equivalent to 0.25% of rate hike).
Thus keeping in mind all the factors, as par text book economy, Fed might go in for a 0.25-0.50% rate hike on Dec-16th to balance everything (as Fed's inability to act this time may be also interpreted as their lack of confidence on US & global/China economy and market may be again sold off).
FFR is also indicating a probability of above 78% for rate hike this time and barring some unexpected geo-political factors and financial market dooms day (like sudden China crash etc), Fed is likely to go for a "one & off" rate hike this time (0.25-0.50% by Dec'15 & Apr'16).
Fed may not be ultra hawkish to increase rate @0.25% in every bi-monthly meet to go for a 1.25-1.50% FFR by Dec'2016 as recovery in US economy is still fragile. Moreover, in the 2016 US election year, Fed may not choose to experiment too much risking to de-stabilize the financial market. Thus keeping the Wall street in a stable condition, Fed/US Govt might go for some structural targeted mini stimulus in different QQE forms or even putting some sort of negative interest rate intended for the Main street in 2016.
Due to the Dec year end factor, Fed may not choose to act in this time of "Santa Claus" and instead give indication that they will start to act from early next year (Feb'16).
As the above likely Fed stance (0.25-0.50% one & off token rate hike by Dec'15 or Feb-Apr'16) is already being discounted by the market to a great extent, overall market reaction may be within a defined range except some whipsaw movements for a day/two. If the Fed indicates that they are going to hike in every/alternate bi-monthly meet for a FFR target of 1.25-1.50% by Dec'2016, then expect some volatile market in 2016.
Fed may also keep in mind the policy divergence between it & ECB. Also, continuous stance of QQE by BOJ and PBOC are making USD more stronger.
Even if Fed decides to go for a hike, there will be no dearth of liquidity because of continuous accomodative stance of other three major central bankers of the world. The four major pillars of our global economy (FED/ECB/BOJ/PBOC) will not let to happen a "dooms day" for the global financial market under any circumstances unlike in 2008 "Lehman Crisis".
India, as an EM is a "bright spot" due to its 4-D (democracy/demography/demand/deregulation) appeal. Due to the expected transmission of lower rates, tepid commodity prices and better operating leverages we may see incremental better earnings/margin expansions in the quarters ahead. Implementation of GST and other reforms will also likely to take effect after 2-3 years in the earnings.
Traditionally, Indian consumer demand is largely over dependent on so called "Black/unaccounted" money. The present transformation of the economy towards "White/clean/accounted" money is taking its time and that may be one of the reason of the tepid earnings despite better operating leverages.
Going forward, once this transformation is complete, we may see better consumer demands and earnings by FY-17-19 and by that time, NPL/NPA situations in Indian banking system may also be improved significantly.
Looking at the technical chart, expected Nifty range may be 7000-7500 & 8700-9200 in 2016/FY-17.
Analytical Charts:
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