Nifty Spooked Modestly As "Central Banks Fear" Are In Full Play Ahead Of Indian CPI Data

Nifty Fut (Sep) closed today around 8748 (-1.75%) after making an opening high of around 8805 and session low of 8727 amid US market sold off on last Friday followed by weak global cues today. 

Its like a small "global tremor" and subsequent "aftershocks" in the market (risk assets) as Fed & other central bank "fears" (hawkish stance) are in full play.

Technically now, sustaining below 8725-8700* zone, NF may target 8665*-8605-8560/40 and 8485-8405*-8349 in the immediate to short term.

For any meaningful strength, NF has to sustain over 8765-8795* zone for target of 8835-8870*-8925 and 8975-9025*-9075 in the immediate to short term.

Some of the primary reasons behind the present sell-off in the global "risk assets" (EQ/COMM) and Bonds may be due to:

1. Consistent hawkish stance (verbal jawboning) of various Fed members that rate hike is indeed coming and Sep is also a "live" meeting.

2. Recent hawkish stance of other major central banks, such as BOE, ECB & also BOJ. Although, the G-4 central banks are always "accommodative", they are reluctant to launch any fresh monetary stimulus (QQE) unless we have some types of "dooms day" like scenario for the global financial market. 

3. It appears that central bankers are increasingly out of their ammunition (QQE firepower) in the era of ZRIP/NRIP or even Nominal Rate Interest Policy as consumer demand is not picking up as expected (mismatch in demand supply dynamics/supply glut) and they are basically want to preserve some "Bazooka" for "rainy day" also.

4. Central bankers from BOJ to ECB and Fed to PBOC are virtually pleading for some Govt sponsored fiscal & structural measures rather than 24/7 money printing. 

5. The recent sell off started from the ECB disappointment and further ignited by the consistent hawkish tone of Fed.

6. There was also some market talk that BOJ will like to steepen the JGB (Japanese bond) yields in order to save the banks and pension funds. But, that may be equivalent to tapering of current bond buying and reduction in BOJ balance sheet, which is negative for risk assets. Already there is strong market talk that BOJ may announce Yen 10 bln/pm tapering in its Sep review meet.

7. There is also some report that going forward, BOJ will stop "surprising" the market in a "La-Kuroda" style, because of failure of the last NRIP announcement in Dec'15.

8. Thus, basically its a sell off started in the longer dated bond market, which is now snowballed in to a modest "risk assets" selling as some market participants think that going forward, easy money policy of central bankers may be waned by a great extent.

9. In the last few days, probability of Trump being the next US president is getting significantly higher just ahead of the vital Presidential debate. Also, as par reports, Clinton  suffering from Pneumonia is dampening the market sentiment. Trump is being seen as a major "disaster" for the risk assets, who openly accusing Fed as "political" and "it kept rate down under instruction from its political boss, so that all the risk assets does not go down & its a false stock market".

10. In addition to all of these, North Korea is also adding some geo-political headwinds and all these are causing some risk aversion and positive bond yields.

11. Oil is also under pressure as the last week's surprising US inventory draw down, but that may not be the true picture of demand supply mismatch and significant supply glut is still there. Also there are renewed concern about any production freeze.

12. As par some reports, 3M-HIBOR today suddenly jumped for the above fear of central banks liquidity restrictions and global "risk off" mode, which added more pain to the Asian as well as Indian market today.

Among all these global concerns, its almost sure that Fed will not going to hike in this month (Sep), just before US election in Nov. Fed is basically preparing the mkt for a possible rate hike in Dec, provided there is no unpleasant Surprise, like Trump wins the election. All these Hawkish Fed script may be designed to help the BOJ to weaken the Yen. Thus, it may be just a verbal coordinated intervention. Today another influential & dovish Fed member will speak in the evening and that will further give Fed thinking about all these rate hike plan.

Indian market was opened gap down today followed by the tepid global cues as above. But, after opening, Nifty was not crashed too much because of supports from the earlier battered IT sector (short covering and defensive play) & RIL (telecom play).

Nifty was dragged mostly by metals (strong USD may be bad for commodities), banks (rate sensitive play before CPI data), specially Yes bank (talk of hidden NPAS/NPLS after recent QIP fiasco) and pharma counters (talk of further extension of drug price controls).

The sentiment of the overall domestic market was also supported by some extent, after Govt notified the GST council today, which will meet on last week of Sep in order to proceed for the next steps like finalization of standard rate-RNR (most vital).

Just now Aug CPI & IIP data released:

Though IIP plummeted to -2.4% (against estimate: 1.37%; prior: 2.1%), headline CPI fall significantly to 5.05% from 6.07% against consensus of 5.15% (thanks to sharp fall in food inflation as widely expected).

But the combination of poor IIP & better CPI (falling towards RBI's comfort zone of 5%) may bolster the demand for Oct rate cut by RBI again and it will be interesting to see the reaction of the new RBI Gov for a "Diwali Gift" to the nation who is a known "inflation hawk" having "owlish" outlook. If there is an indication of any "Diwali Gift", we may have a relief rally on Wednesday.

That said, RBI may watch the CPI nos for the next few months and depending upon the Fed's action of likely rate hike in Dec'16, RBI may be on hold in Oct and may cut by 0.25%  in Dec'16. New RBI Gov may put more emphasis on transmission of old rate cuts and management/actual resolution of stressed assets in Oct meet, following the Rajan's path.

In that scenario, we may have a "dead cat bounce" as well in the days ahead.

Update: FOMC voter Brainard's much awaited comments:

Brainard is a known dove and her unscheduled speech (Q&A) just before the Fed black out period was being translated as a probable Fed attempt to raise the rate hike expectations before Sep policy meet; i.e. market was apprehending that Brainard may talk hawkish this time and this was also one of the reason for USD strength for the last few days.

But actually, in her script, Brainard offered nothing hawkish and on the contrary, she expressed her strong view against rate hike at this point of time (Sep) or even by Dec'16. She urged for "continued prudence in removing accommodation" citing weak external demand, tepid US inflation/growth and lack of rock solid US job market.  

Thus, in its latest drama/serial (verbal intervention), Fed actually made sure that it will not act in Sep, but may act in Dec depending upon the US election result just to ensure that it does not fall behind the curve.

Risk assets loves the Brainard stance yesterday and subsequently rallied quite smartly. But the real test of Fed will come in Oct-Dec period, when it has to ensure better US economic data just before Nov election in order to paint a rosy picture & its confidence on the US economy and at the same time Fed has to manage the rate hike expectations (FFR) too.

 SGX-NIFTY