Nifty Closed The Day Lower Amid Weak EU Cues & Slow Progress Of GST And Closed The Fed/BOJ Week Almost Flat---What's Next ?

Nifty Fut (Sep) today (23/09/16) closed around 8833 (-0.59%) after making an opening session high of 8889 & day low of 8830 and closed the week dominated by the central banks (BOJ/FED) almost flat, after a bout of volatility. Today, although, Nifty traded in a narrow range most of the day, there was significant volatility in the mid-cap segment.

Looking at the chart, for the next week (Exp), sustaining below 8800 zone, NF may fall towards 8755*-8705-8650 and 8575/45*-8475-8435 area in the immediate to short term.

On the other side, for any strength, NF need to sustain above 8875 area for target of 8925*-8975/95-9025 and 9075*-9125-9185/9205 zone in the immediate to short term.    

 

Today Indian market opened nearly flat on the back of morning US Dow Fut level, which was also almost flat wrt the Nifty closing level yesterday. The US market came down from the high yesterday after effect of Fed's "Dovish Hold" begin to subside, although rally in Oil supported the global "risk on" sentiment to some extent amid weak USD, better oil inventory data and renewed optimism about OPEC/Non-OPEC talk of production freeze.

But later in the day, EU PMI data came below market expectation and there was also some renewed fear about "Real Brexit". As par some comments made by the foreign minister of UK, the country may invoke article-50 by early 2017 (Jan/Feb) and this caused some sudden "risk off" sentiment in the global as well as Indian market. The global market is not discounted yet for the "official divorce" from the EU and its probable contagion effect.

Although, this was promptly reprimanded by the UK PM's office, the underlying sentiment was not improved much. As par various reports, EU leaders are not showing any leniency towards UK for Brexit related negotiation and pressing Britain to take a final call sooner rather than later. 

One of the primary reason may be the forthcoming Italian referendum and any signs of weakness by the EU leaders, may also prompt Italy for an exit vote from EU and then many others country can follow. If this goes on, the whole idea of a common EU market with a single currency can also collapse.

Also, form this Brexit referendum, UK may be benefited most in comparison to other EU countries, specially Germany because of huge devaluation in the GBP, which helped the Great Britain a lot for its export. Contrary to the earlier notion, post Brexit overall UK economic data was better except housing market. Thus, Germany & other EU leaders may not allow UK to enjoy the dual benefit of staying in EU with a devalued currency (GBP) at the cost of others and UK has to take a final call at the earliest.

If UK begun the process of separation (exit) from the EU in reality, then significant uncertainty & lack of business confidence may come apart from the immigration & trade barriers issues. Also some other countries may follow the UK's exit path from the EU in order to deal its own currency which may be more serious and can't be resolved by ECB QQE also.   

 

Looking ahead, immediately global market may focus more on US presidential debate start from Monday rather than US incoming economic data, because eventually Fed may be more influenced by this election in Dec for its rate decision. 

In that sense, US election, Brexit, China Yuan inclusion in SDR and EU/China credit concern may be the main headwinds for the global sentiment in the coming days apart from BOJ/ECB's limit on fresh round of QQE.

Today, Indian market sentiment was also dragged to some extent after apparent slow progress of some vital issues in the GST council meeting. 

Although, there was broad political consensus on the GST threshold limit & dual control, the most contentious issue of finalization of GST rate (RNR) is still unresolved and there will be further meetings in the last week of Oct to arrive at a final decision about rate. 

Some tax experts are also apprehending about the timely launch of the GST by April'17 because of various pending legislative & administrative issues and advancement of the budget session.

Yesterday, Indian Govt also expressed some unhappiness about Moody's stance of refusal for any immediate rating upgrade despite incremental economic reform, GST progress, good monsoon, stable currency & fiscal deficit and huge FDI. Moody's primary concern was huge stressed assets in the Indian banking system and tepid private investments despite better macros and higher Govt capex for infra. 

Basically, Moody's want to see the benefit of the ongoing economic reforms on the ground and the resolution of the problem of "Twin Balance Sheet" in India. Moody's has a India rating just above junk (Baa3 with a positive outlook). Indian Govt has raised some questions over Moody's methodology about its rating. Although it mat be an indication of the Govt's frustration with the prime rating agencies (S&P, Moody's, Fitch), India just can't ignore them too as foreign fund inflows depend large on the ratings.

But, Moody's termed the India's overall reform as "slow & gradual" and it may upgrade in the next 2-3 years, if it convince that the reform process in India are "tangible". Clearly, Moody's may be looking for the 2019 general election risk and political consensus for some vital reforms and its visibility on the overall macro economy of India and banking sectors & the stressed corporates.

Today, Govt also allowed FPIS to directly trade in Indian bond markets without an intermediary (broker). As par some experts, this may invite huge flow of capital from the FPIS and may be positive for the Indian market/RETIS etc.This may also strengthen the corporate bond market and help to slash the cost of funds for the banks too in the long term.

Today Nifty was dragged mostly by Axis Bank (buzz of SUUTI sale at much below current market price; although Govt later denied any immediate plan); Infy, ICICI Bank, Tata Motors, SBI & Lupin (talk of inorganic expansion and patent dispute).

Nifty was supported by RIL, HDFC twins, TCS &  DRL.

Update: Overnight US market & Oil (23/09/16)

US S&P Fut yesterday closed almost 1% lower amid selling in oil and FB (video ads duration issues).

Oil was down almost 4% after apparent break down of production freeze talks between Saudi Arabia & Iran (as usual as in many past occasions).

When any OPEC (Iran/Saudi Arabia) or Non-OPEC country (Russia) talks about production freeze & not any actual cut, this usually means that they are producing at its best level and going forward, there is not so much scope of any further feasible production hike. 

Also, apart from OPEC & Russia, most of the other oil producing countries (USA/Canada) has no central authority to freeze or curtail any production and its not legally possible also.

Thus going ahead, oil production will continue to be determined by the market dynamics of demand & supply and not by any artificial control. So, any production freeze/cut talk may be just verbal (jawboning) in nature and in reality, its just not possible and even if, there is some kind of production freeze, it may be temporary in nature and can't alter the supply demand dynamics of oil, because production may just freeze at top end and its not an actual cut to match the underlying demand.

Technically, S&P-500 Fut (CMP: 2157), has to sustain over 2175-2195 & 2205 area for any further rally up to 2230-2260 & 2330-2365 in the near to long term; otherwise, it may fall towards 2130-2095 zone and sustaining below that may further fall to 1995-1980 & 1870-1800 zone in the near to long term.

For the last few years, market is actually being controlled by the central bankers (Fed/ECB/BOJ/PBOC) after the 2008 Lehman Brothers led crisis, where Fed basically underscored the event. After that, whenever, there was any shock like China Yuan devaluation, capitulation in Oil, Brexit referendum etc, these central bankers were acted in co-ordination to avert a "dooms day" scenario in the global financial market. ECB & BOJ always talked about new QQE and Fed deferred its hike, when ever there was any geo-political or economic crisis. 

Thus market is basically addicted or dependent too much on the ongoing stimulus (24/7 money printing) provided by the central bankers. Now, ECB & BOJ may have reached to their limit and Fed may also be in some kind of dilemma because of US election risk (Trumpism) and some geo-political shocks (Brexit, China/EU banking crisis) apart from the doubt about core strength of US economy itself.

Ultimately, at the end of the day after decades of QQE, growth & inflation is not so much visible in the "Real Street" as is quite visible on the "Wall Street" and in this US election, "Real Street" may matter and not the "Wall Street". 

Thus, going ahead "Trumpism" may be the greater risk than the Fed's symbolic "Yearly Hike" for the global financial market, at least for the short term and S&P may correct by around 15% in that scenario.

On the other side, if Trump loose, Fed has to hike in Dec and continue to hike at least once in a year to stay above the curve and for the stake of its own credibility until FFR reaches 3-3.5% and in that scenario, S&P may also fall by around 10% because global bond yields may gradually surge and which may reverse the present flow of liquidity ("hunt for yields") from the risk assets (strong USD).

Analytical Charts:

 SGX-NIFTY

S&P-500 FUT