Nifty Slides From Day High Amid Liquidity Fear Of Deutsche Bank & Comments Of FM And Closed Almost 1% Lower For The Week---What's Next ?

Nifty Fut (Sep) today (16/09/16) closed around 8809 (+0.40%) after making a day high of 8879 and last hour session low of 8769. With this, Nifty closed the week almost 1% lower, down on a weekly basis after many weeks.

Technically, now sustaining below 8825-8750* area, NF may fall further towards 8705-8665/30*-8575/45 in the immediate to short term.

For any strength, NF has to sustain above 8875-8905* area for further rally towards 8975-9025-9075* zone in the immediate to short term.

Today Nifty Fut opened gap up by around 26 points following overnight rally (1%) of the US market and soon after that broad based buying (short covering) took it sharply higher at around 8879.

But suddenly after EU market opens, there was some reports about Deutsche Bank (DB) that DOJ (US Department Of Justice) has slapped a fine of $14 bln on it (DB) in the mortgage case related to 2007-08 period (US housing crisis and CD related issues). 

As DB was already under pressure for various other issues like reported $40 tln derivative exposoure, NPA/stressed assets etc and one of the defaulting candidate in the European banking space, this news of $14 bln fine sent the scrip by almost 8% down and also soured the global market sentiment. 

European banks were also under pressure and another defaulting candidate Monte Paschi of Italy was also down by almost 7%.

Although, DB will contest this huge fine of $14 bln with the US DOJ, even if 50% of the amount will be highest fine in the recent history and can impair the liquidity of the German Bank. As par some estimate, anything above $10 bln may force the bank to default on its forthcoming bond redemption or delay the interest payment commitment.

Although, being "too big to fall", German Govt/EU will not allow DB to default & fall like Lehman Brothers in any circumstances, this news is certainly negative for the overall global market.

Global market is also come under another pressure after GS downgraded S&P-500 & Stoxx-600 citing "elevated valuations and the risk of shocks".

Yesterday's (15/09/16) overall US economic data (retail sales, IIP etc) were all bad and significantly below market expectation. As a result, Sep rate hike probability virtually doomed and risk assets has a relief rally.

But USD and bond yields has not reacted too much on the downside and on the contrary contrary closed strong. So, currency & bond market has not anticipated any Sep rate hike at all and they are looking for any BOJ action 21-st Sep and ongoing US election cues & Fed hike probability in Dec. 

Technically, unless & until S&P-500 stabilized over 2140-2170 area, the present rally may be a dead cat bounce.

Domestically, India's trade deficit figure again highlighted the tepid trend in the exports and going ahead, the present debate of Rupee devaluation may heats up, considering various pros & cons of the same.

Some of the headwinds for India may be tepid private investments and slow progress of major reforms so far, despite hopes of enhanced rural spending because of good monsoon and consumer spending for the expected 7-CPC induced liquidity.

IT sector was in the limelight today as H1B Visa fees hike bill temporarily halted in US before the election and new decision may be taken only after the election. 

Today, Indian FM has meetings with the PSBS chiefs, but nothing new has emerged from this and FM has also expressed some grave concern about the NPLS/stressed assets of the Indian Banking System and noted that proper resolution is necessary to address the problem of India's Twin Balance Sheet issues.

FM also expressed limitations of more PSBS recapitalisation funds by the Govt at this juncture ( " There are budgetary constraints on recapitalising banks"-FM). This comment by the FM may also help the last hour broad based selling, specially for the PSBS.

Although, Govt is infusing Rs.70000 cr to the ailing PSBS over five years (2015-20) under project "Indradhanush", as par various reports its may be too late & too little. Considering the magnitude of stressed assets and present trend of actual resolution (recovery), PSBS may need at least around Rs.600000 cr by March-2019 (FY-18) to be BASEL-III compliant; otherwise as much as 11 PSBS may fail to meet those norms.  

FM also hoped that the RBI may notice the sudden drop of 1% in Aug CPI and act accordingly (indirect pressure of Oct rate cut ??).

But going by the sharp divergence of CPI & WPI, RBI may not oblige this time for a "Diwali gift to the nation" and may prefer to wait to see the inflation trajectory for the next few months for a probable 0.25% rate cut in Dec'16. 

The new RBI Gov may rather give thrust on the full transmission of previous repo rate cuts and an effective time bound resolution of the NPA mess in its Oct meet. So far Banks has transmitted only around 50-60% of the1.5% RBI rate cut since late 2014.

Also reports that Telecos has submitted bank guarantee for only Rs.15000 cr in the latest telecom spectrum against Govt budgeted estimate for FY-17 as Rs.100000 cr may drag the overall market sentiment to some extent as Govt's ambitious FY-17 fiscal deficit estimate is dependent much on the proceeds from the telecom spectrum auction.

Today Nifty was supported by ITC (positive management commentary and expansion of chocolate confectionery business to malls), Grasim (reported increase in price for its fibre yarns and fund raising plan), BPCL (increase in petrol price), RIL (resolving of various telecom issues ??), Infy (H1B visa bill halted in US & special dividend).

Nifty was dragged by Yes Bank (SEBI investigation and downgrade by UBS), Tata Steel (may not undertake any sale or JV for its UK plants unless & until woes of pension funds resolved).

ICICI Bank also fall from the day high after reported less than estimated advance tax figure.

Wockhardt gained significantly on the report of one of its plant being cleared by US FDA; but later the Co denied any such new information from the US FDA.

Sugar sectors was also in the limelight today as there are reports that production is in the downtrend in Brazil and in India prices may jump towards 50/- a kilo from the the present level of 40/- amid incremental festive demand and supply constraints.

Update overnight US markets & CPI data:

Yesterday's (16/09/16) core CPI data for Aug came at 0.3% (MOM; estimate: 0.2%; prior 0.1%).

On YOY basis it came at 2.3% (against estimate of 2.2%; prior: 2.2%).

The head line CPI numbers are in line or above Fed's projection and as par its own text book, Fed will have to increase rate by Dec'16 and for that FFR is pricing a hawkish comments by Yellen next week for preparing the market for Dec action.

But on closer look, the apparent surge in the headline CPI came on the back of significant inflationary pressure on housing rentals and health care costs and there are no great inflationary pressure on other goods & services. The divergence in core CPI & PCI also suggests this (difference is now 0.7% against the usual 0.3%). 

Fed relies more on core PCI rather than CPI.

Although, recent overall US economic data suggests falling consumer consumption, slower job growth and tepid activity in manufacturing & services sector, expect a slew of positive data in the coming days just before US election and if everything is alright (Clinton do not withdraw herself and wins), Fed will hike in Dec just to ensure that it does not fall behind the curve and there is no further uncertainty about the yearly rate hike plan of Fed by 0.25% each year going ahead.

Looking ahead, global risk assets & bonds also may be under pressure for:

1. Hawkish Fed in order to prepare the market for a probable Dec hike. Fed will never hike unless & until FFR indicates at least 75% probability of rate hike. At present its around 52%.

2. Growing uncertainty about out come of US election. Probability of Trump is getting higher day by day and it may be a close fight this time. Forthcoming series of Presidential debates may further guide the market. Any higher probability for "Trumpism" may be devastating for the global risk assets/financial markets.

3. Concern of "Real Brexit" is getting higher now. As par reports, UK may invoke Article -50 by early next year and ready to give up the EU's single market access and UK bank's crucial access to clients in the EU in order to achieve the objective of the immigration restrictions as par wishes of the voters in the referendum. If UK exit from EU eventually, it may bring more uncertainty and chaos for the whole EU concept and more nations may follow the same to "print & trade" in their own devalued currency rather than whims & fancy of the ECB/EUR. This may be devastating for the risk assets and market is also not prepared for any real exit of UK from the EU.

4. Rather than Fed, BOJ may shock the market in the coming weeks, if they unveiled any plan for current bond buying tapering to steepen the JGB yields for the benefit of the banks & the pension funds. Also, BOJ & ECB are increasingly finding it difficult to buy eligible bonds and in that scenario, they have to invent something new concept like buying ETF (BOJ is already doing that; ECB may follow later) or even foreign bond buying (as BOJ was planning).

5. As market is too much addicted with the unlimited stimulus by the central bankers, any indication of tapering may cause significant panic in the global financial market.

6. It seems that central bankers are increasingly out of effective ammunition to fight the deflation of the real economy and what ever is left, they want to preserve it for a "rainy day". Instead they are increasingly pleading with the Govt for more fiscal measures and structural reforms.

In a bull market, prices often goes up in an elevator (slowly), but goes down in an escalator (swiftly).