Nifty Closed Almost Flat As Inflation Spike Dashed Immediate Oct Rate Cut Hopes, But Positive Global Cues Supported By Oil Helped--What's Next ?

Nifty Fut (Aug) today closed at around 8657 (-0.24%) after making an opening high of 8706 and day low of 8601.

Looking at the chart, sustaining below 8675-8690*, NF may again fall towards 8590-8540*-8480 and 8390-8270*-8160 zone in the immediate to short term.

On the other side, sustaining above 8715 area, NF may again rally towards 8740-8785*-8825 and 8875*-8950-9075 in the immediate to short term.

While Indian market was in the holiday mood in the long weekend for the country's 70-th birthday, there were some important developments globally:

1. Oil rallied quite significantly amid OPEC talk of production cut in Sep; although Russia denied it.

2. Retail sales in US came much below consensus and subsequently FFR was indicating around 50% probability of Dec rate hike against earlier 70%.

3.Japan GDP came at 0.00% against 0.2% on a QTR basis; while it was 0.2% vs 0.8% on an annualized basis. 

4. There was some report that Abe Govt is negotiating with some Japanese banks to borrow at 0.00% against previous assumption of negative rate.

All these pushed the USDJPY towards 100 level, but rally in oil helped the risk trade to some extent and we have modest US market rally.

But, looking forward, it will be very interesting to see the BOJ/Abenomics action, as it seems that they have very limited options now to stimulate the Japanese economy amid stronger Yen.

Brexit related uncertainty is again hovering around and as par some reports, UK may invoke Article-50 by 2017 and by 2019, they will take final decision for exiting EU depending on trade negotiations & other deals. 

But, the real street is already suffering from this "Exit" uncertainty and one example may be the RBS decision to prune operations in UK and subsequent loss of contracts and jobs at Infy. As par reports, after Brexit, many bankers & finance professionals are desperate to leave UK and they are looking for suitable jobs elsewhere. Property prices are already falling in a shaky UK market also.

Going ahead, FOMC minutes, US IIP, housing data and a host of Fed speakers may drive the global market this week.

Indian market opened strong today supported by positive global cues for the last two days despite Friday evening CPI shocker. But, soon after opening gap up, sellers pushed the index lower and the selling accelerated more after WPI report came in.

July WPI printed as 3.55% against consensus of 2.55% (MOM: 1.62%). 

The upper trajectory of both CPI (6.07%) and WPI is virtually diminished any rate cut hope in the forthcoming Oct RBI policy meet. 

It may be very difficult for RBI to cut rate in Oct, if this trend will continue in Aug CPI as the headline inflation number is much above RBI's comfort/target zone of 5%. Now, for CY-16, average 7 months CPI is around 5.55%, which may be far more than RBI's comfort zone and reduced room for Oct rate cut.

 

Average retail food inflation surged by 8.35% in July against 7.79% in June. But this may be also interpreted as "topping out" and after Aug, there may be some visible effect of better monsoon and food supply management (pulse import, prohibition of future trading in Sugar etc).

But still, without food inflation factor, which may have an impact of around 0.65% on the headline inflation this time, it may be very tough for the CPI to reach RBI target of 5% by CY-16,because there may be wage inflation impact for 7-CPC induced liquidity in the months ahead. Thus, market may be looking for only 0.25% rate cut in FY-17 against earlier 0.50% and rate sensitive stocks were under some selling pressure.

That said, apart form some CPI "topping out" interpretations, market also got some support from the report that Govt is working "overtime" to implement the GST from April'17 and subsequently NF today hold the crucial 8600-8560 zone. But, GST rate finalization may be the most vital part of its roll out from FY-18 and we have to wait until Dec'16 winter Parliament session for any last minute political drama.

Market is not discounted for:

1. No GST by April'17 (GST is not a done deal yet; its just a beginning for the actual roll out process; there will be immense political drama and various administrative hurdles for April'17 roll out). 

2. No rate cut in CY-16 by RBI.

3. Not so much market friendly new RBI Gov after real Rexit; Indian bond market may sell off.
 

Global Risks:

1.. Any real Brexit possibility.

2.. Oil capitulation.

3.. China jitters (Yuan devaluation to 6.95 level and Chinese credit bubbles).

4.. EU banking crisis (Italy & DB).

5. Any probability of Trump being the next US President.

Any of the above event can cause significant global as well as Indian market correction despite liquidity power of the Central banks and Sep-Oct'16 period may be quite vital (before the US election in Nov).

Analytical Charts: SGX-Nfty