Nifty Snapped Six Days “Demonetization” Fall And “Rallied” 1% Supported By Short Covering, Mixed By-Poll Results & Positive Global Cues; Is It Another “Dead Cat Bounce” Amid Multiple Domestic Headwinds Or A “Real Recovery”?

Technically, NF need to sustain above 8080-8250 zone for any real bounce in the present scenario and consecutive closing below 7900 area may invite 7200-6800 in the mid to long term.

Market Wrap: 22/11/2016 (17:30)

Nifty Fut (Nov) today closed around 8017 (+79 points) after a volatile trading sessions and in the process snapped the six days intense melt down after demonetization fiasco.

“Dalal Street” today opened in positive tone amid supported global cues but soon came under another wave of selling pressure (long unwinding) as chaos on “Real Street” continues amid this demonetization. The selling intensifies more after another emotional speech by the PM in the BJP parliamentary meeting today, which may be an indication of the confusion in the top level of the Govt. 

Although the initial By-Poll results were indicating “bad” for the BJP after the demonetization led public inconvenience, later the overall final result came as “mixed” and there was no surprise, even for the BJP. This may led some short covering as NF was also unable to break the key technical support zone of 7920 and the brief short covering rally from the session low of 7940 has helped the NF for a late day high of 8022.

But, this By-Poll mandate, which was being seen as a "litmus test" for NAMO’s demonetization effort is largely supported by two BJP ruled states (MP/Assam) and might be too little for any drastic change in the market sentiment as both immediate & long term effect may be more painful than gain as far as the nation’s GDP, consumption and earnings of the corporate India are concerned. Also this By-Poll voting was accompanied by relatively lower participation as people preferred to ques in the ATM/Bank line rather than the polling line.

Bank stocks were also under pressure initially today after Fitch warned about vulnerability of the PSBS for lack of adequate capital injection (Basel-III norms), huge stressed assets and tepid demand & private investment in the country. Greater CASA may help the banks to lower their funding costs and help them for better NIM, but it may be temporary as eventually most of the incremental deposits as a result of the demonetization may be withdrawn in future, once the situation will come to normal. But, there may be more incremental growth in NPA/NPL as a result of cash flow issues and crash in property prices for this demonetization & “war on black money”.

However, Bank stocks rebounded in the 2-nd half today led by short covering ahead of the FNO EXP this week. There was also some speculation that RBI may cut in its forthcoming policy meet in Dec'16.

But going by the overall situation on the ground, it may take at least three months for the currency circulation to be normal and in that scenario, inflation; especially food inflation may be spiked as demand is more than the supply due to ongoing severe cash crunch in the semi-urban & rural areas. RBI may watch the overall impact of this demonetization on the real economy, inflation trajectory, Fed’s actual stance in Dec’16 & projected guidance for future rate hikes in 2017 and depending on that RBI may choose to take some appropriate action (rate cut ?) in Feb’17.

At this point, a strong USD/INR is already causing significant outflow from the FPI(s) as a result of surging US bond yields & almost 100% FFR probability of Dec’16 rate hike by Fed. Thus, any drastic rate cut by the RBI may cause more weakness in the INR and in that scenario we may see more fund outflows by the FPI(s).

Apart from the demonetization & Fed fears, domestic market sentiment may be also affecting by the ongoing political battles, which may cause a complete wash out of the current session of parliament. Eventually, GST & some other important bills may not be passed and 2017 roll out of the GST may be put in serious questions amid chaos of demonetization & political “war of words” ahead of the series of state elections.

Indian market sentiment may be also affecting due to the ongoing tensions in the LOC (Pak), which may turn into serious “limited warfare” at any point of time ahead of state elections and falling approval of NAMO amid this demonetization fiasco.

Domestic market sentiment may also be affecting for the ongoing feud between Tata Sons & Mistry camp, which may also turn into serious “court room battle” from the “board room battle”.

Although, US market is trading at life time high amid “Trump rally”, it may also correct significantly as it’s very rare to have a combination of strong dollar & strong EQ market, despite perception of “Trumponomics”, which may turn US into stagflation in lieu of “Trumpflation” in the coming years.

Current rally in oil may be also not sustainable amid optimism of OPEC cut next week and jawboning & squabbling of various stake holders.  It may be very unusual, if OPEC can ink an official agreement for production cut/freeze in reality and even if it’s done, then the durability and actual implementation mechanism may be a great headwind. Eventually, such OPEC & non-OPEC (Russia) production cut agreement may be remained to be an illusion and moreover, Trump rhetoric about trade barriers & more US oil for America may be turn into reality 

Yesterday, in a You Tube presentation, Trump vows to scrap the TPP agreement. Trump also tweeted that; Nigel (a key Brexit leader in UK) should be given the job of new UK ambassador in US, which prompted an instant reply from the UK Govt that there is “no vacancy”. 

Previously, Trump was seen as a supporter for UK’s soft Brexit effort in its negotiation with the EU, but the latest act of Trump may be another example of “out of establishment” and may also put some pressure on the diplomatic & trade relations between UK & US.

Overall, trade barriers & "America First" rhetoric of Trump as a "President" may not be good for the global financial market and specially for the EM/Indian market.