Nifty Ends In A “Free Fall” Mode Amid Demonetization & Fed Fears Of Rate Hikes Despite Positive Global Cues Supported By Rally In Oil And Fall In Bond Yields As “Trump Trade” Fades

NF May Touch 7675-7425 In A Few Days, If Sustained Below 7900.

Change In Downtrend May Only Happen By Consecutive Closing Above 8080 Zone For Now.

Market Wrap: 21/11/2016 (17:30)

Nifty Fut (Nov) today closed around 7959 (-1.43%) and lost another 115 points amid ongoing fears of economic slowdown and impact on GDP & earnings after NAMO led “Surgical Strike” on the “parallel black economy” of the country coupled with rumour of more such “strikes” on the “black/unaccounted assets” in the coming days. 

As par various rumours, Govt may target now illegal (“Benami”) Property and gold in the country with various rules & regulations to ensure legal transactions.

Indian market today opened in positive tone supported by Asian/global cues amid weakness in USD & rally in Oil. But the domestic market came soon under intense selling pressure after opening minutes high of around 8109 and closed in a virtual free fall mode just around the Brexit day low (7925), which is acting as a near term technical support for the NF. 

With today's closing, Indian market has erased the entire gains of 2016 in just 8-9 trading sessions ("in a bull market, prices goes up in an elevator, but goes down in an escalator").

It seems that no one interested to be a “hero & then zero” in order to catch the "falling knife" as there was no visible buying interest. Some intraday rebounds are happening just for short covering which is being used by trapped bulls for long unwinding and fresh shorts by bears in a typical action of a “dead cat bounce”. RMS action (margin issues) from the retail desks may be also accelerating the panic selling in the market.

Apart from fears of Fed rate hikes in Dec’16 & probable two hikes (at least) in 2017 and the subsequent FII(s) outflow as a result of strong USDINR, there are multiple domestic headwinds now for the Indian market in the form of immediate effect of demonetization, political wars, probable delay in roll out of GST, long term effect of “war on black money” on GDP & earnings recovery cycle etc.

The present correction in the Indian market may not be a “time correction” and it’s may be a “price/structural” correction as well and Nifty may fall to around 7200 level by Dec’17 on the double whammy of hawkish Fed and demonetization. Both short & long term collateral damage may be more than the intended benefit of the demonetization as unaccounted wealth may be around 5% of the available cash flow.

It also appears that Govt is also confused for the short term effect of this demonetization fiasco as in the last few days it has rolled back quite a few steps after the “historic” announcement by NAMO on 08/11/2016.

After the demonetization announcements, Bank Nifty (BNF) rallied for quite a few days on the hope of greater CASA, lower cost of funds & better NIM. There was also a perception that inflation will fall as a result of demonetization, which eventually helps RBI to further cut its repo rates by 0.50-1.00% (??) in FY: 17-18.

As par latest RBI data, so far around Rs.5.44 lac cr is deposited, Rs.1.30 lac cr is withdrawn and Rs.33.6k cr has been exchanged. Thus net windfall gain in CASA stands now around Rs.4.14 lac cr, which may be also below market estimate. Moreover, this withdrawal may increase significantly in the coming months, when issues of availability of currency notes and ATM will be sorted out and withdrawal restrictions will ease.

Banks are definitely lowering its MCLR gradually on the back of better liquidity and favourable bond markets & previous RBI repo rate cuts, but where is the fresh credit demand? 

Most of the corporates & SME(s) are already over leveraged and there is lack of adequate demand which may further contract due to demonetization in the short term and destruction of wealth (mainly black/unaccounted money) in the long term.

Now, in the current environment of loan default fear mongering after the recent spate of KFA fiasco and the demonetization effects, retail clients may also show less interest in taking fresh loans. Thus, going forward, credit demand may be tepid despite lower lending rates.

As a result of direct consequences of demonetization, real estate prices has fallen significantly  all over the country, which may cause more stressed assets for the Indian Banking system in the coming months. Banks, which have greater exposure in retail & commercial LAP assets may also suffer significantly in the coming days.

Thus the resultant temporary cash flow issues and the long term effect of huge fall in real estate prices along with significant contraction in domestic household savings may be more headwinds for the banks against apparent tailwinds of growth in CASA & lower cost of funds and going forward, BNF may correct more towards 17600-14600 area, which may put more pressure on the overall market sentiment.

Globally oil rallied today after Russian (Putin) jawboning about OPEC production freeze/cut later this month. USD was under some pressure, as “Trump trade” fades on the perception that “Trumponomics” may bring stagflation in US in the coming years coupled with high inflation & lower growth. Metals and iron ore are also correcting on the perception that it will be not so easy for Trump to convince even the republican congress for a $1 TLN fiscal/infra spending to rebuild America.

Thus, going forward apart from hawkish Fed and EM currency jitters, US & EU political risks may be some of the additional headwinds for the global as well as the Indian market along with its own sets of domestic issues & political risks.

The intention of the Govt/NAMO to wipe out the corruptions is definitely good, but the implementation & planning may not be so. Govt has to eradicate the basic causes of corruptions and black money in the system and by simple demonetization it can’t be achieved as most of the so called black/unaccounted money has already converted into other forms of assets.

The resultant chaos and suffering of the common man on the street as a result of this demonetization may pose a higher political risk for the NDA Govt rather than any meaningful benefit.

Traditionally, the great story of Indian consumption was largely dependent on the so called “black/cash economy” and for the last few years it was transforming gradually from the “informal” to “formal” economy for a number of steps undertaken by the Govt to reduce cash transactions. But there were no lack of loop holes and leakages either.

Thus, for the last few years the highly expected earnings recovery remains elusive despite several “green shoots” in the economy for this slow transformation of “black economy” into “white economy”. 

With the sudden “surgical strike” on the “black economy”, permanent wealth destruction may happen or currency may convert into other forms of assets (gold/foreign currency/real estate) and the lack of sufficient liquidity may also affect the consumption story of India at last for the next 5-10 years. Thus any meaningful recovery in earnings may continue to be remained as "elusive".