Global Wrap: 11/12/2016
(20:30)
For SPX-500, more
strength may come only sustaining above 2275 for 2345-2390 zone; else will come
down.
For DOW-Fut, more strength
may come only sustaining above 19875 for 20100-20415 & 21400-215775;
otherwise it will come down.
Now, it’s almost 100%
certain that Fed is going to hike rate by 0.25% on 15th Dec, market
may be already discounted for that. But the real question is, will it be a “dovish”,
“hawkish” or “owlish” hike?
Most probably, it will
be a “dovish hike” for the time being as Yellen may wait for actual plan for “Trumponomics”
and its implementation before giving any midyear hike indication around Feb’17 (for
June’17 hike).
Now,
it’s almost certain that Fed is going to hike in the Dec’16 meeting next week
in an “annual exercise” since Dec’2015 after so much fumbling and missing its
own dot plots, thus making its own credibility at stake.
But,
the real question may be about Fed’s stance this time; will it be a “dovish” or
“hawkish” or even an “owlish” hike?
As
par FFR indication, market may be also expecting at least two hikes in 2017
(June & Dec’17) @0.25% each by Fed at this point of time.
But
till Trump’s actual plan for the fiscal spending package & funding mode and
its subsequent approval by the US Cong, Yellen may not comment too much about
any probable June’17 rate hike and she may be neither too hawkish or dovish on
15th Dec presser, rather than she may take the script of an “owlish”
central banker i.e. always watchful.
Market
may take it as an indication of a long pause by Fed, before any real action in
June’17. Also for the 2017 dot plots, if Fed feel that the Trump’s election
rhetoric about $1 tln fiscal spending and other measures, such as cut in US corporate
& personal taxes are really coming, then Fed has to “telegraph” the market
well in advance for a probable June & Dec’17 rate hikes @0.25% each and for
that market may began to discount the same from Feb’17, after Trump take charge
of the White House on 21st Jan’2017.
Some
section of the market is also talking about 3-4 hikes in 2017 by Fed for the “Trumpflation”
factor and to ensure that US rate does not fall behind the curve.
But,
in reality the current perception of the “Trumponomics” may be just a verbal
jawboning till now as Trump will take charge of the Oval office only in late
Jan’17 and it may not be so easy for election rhetoric to turn into an
immediate action.
Although,
“President Trump” may try to keep at least half of the rhetoric of “Candidate
Trump” including the trade protection & ‘America First” concept and the “Trumponomics”,
it will be very gradual and in a measured manner, considering various reality
of the global geo-politics and also US politics.
Keeping
in mind this “reality”, Fed may opt for two rate hikes in 2017 @0.25% and may
also do the same in 2018 under Yellen. Thus, by 2018, Fed rate may be increased
by at least 1.25% including the Dec’16 rate hike of 0.25%, which may translate
a FFR of 1.625% from the present level of 0.375% (0.25-0.50%).
After
2018, when terms of Yellen ends (?), Fed may go for more rapid rate hikes,
specially by then real “Trumpflation” may be in place, thanks to “Trumponomics”.
In that scenario, Fed under a new “hawkish” Chair elected by Trump or even by
Yellen (if she will continue for another term to keep in balance) may opt for
at least 3 hikes in a year (if not 4) @0.25% or even by an occasional 0.50% to
take the FFR towards 3.125% (3.00-3.25%) by 2020. Fed’s rate hike will depend upon the actual US
CPI & employment trajectory, keeping in mind about “costly oil”.
Although,
overall US economic data may be above comfort zone for the Fed, too much strength
in USD may be also bad for US exports and partially for its economy and corporate
earnings. Also, there may be various geo-political & banking risks, especially
in EU and China jitters. There may be also significant US political risk itself
and the US credit scenario may not be so bright on the back of higher
delinquencies in retail loans (home/auto/student) and corporates are not
confident enough for fresh investments. As of now, for the last few years, most
of the US corporates are primarily busy in their “own shares buyback” to
utilize the “idle cash” in the book, rather than expanding or diversifying.
There
may be significant US political risks this time as “Trump” is not a matured
political leader, although he may be a great corporate leader, giving so much
attention to all the finer details of his housing project (micro manager).
Also, with the current conspiracy theory of a Russian involvement on the US
election & politics may turn into a serious issue in the coming days and
Trump may be termed as a “Russian Puppet”. After all, America will not approve
for a “Russian Puppet”, even if he has an ultra nationalistic agenda.
All
these may kept Fed for a “dovish” or “owlish” hike this time without any
definitive forward guidance for future rate hike paths till at least Feb’17 and
US bond yields/USD/SPX-500 may fall by some extent after Fed next week as “Trump
Trade” may fade. But at the same time, divergent monetary policy between Fed
& ECB/BOJ and other G-10 economies may limit the fall of USD.
As there may be
divergence in the technicals & the underlying fundamentals (news flow or
events), one may look at the technicals for a light position ahead of Fed as
time & price is the ultimate, despite all the confusions.
SPX-500 Fut:
LTP: 2261
Has to close
consecutively (at least 3-5 days) over 2265-2275 area for further rally towards
2290-2315* & 2345*-2390 zone; otherwise SPX may fall towards 2250-2230*
zone and sustain below that may further fall to 2210-2190* & 2160-2120*
area in the near term.
DJ-30 Fut:
LTP:
19645
Has
to sustain above 19675-19875* area for more strength towards 20100*-20235 &
20415*-20750 And 21400*-21575 zone; else DF may fall towards 19540-19480 area
and sustaining below that, it may further fall to 19250-19000* & 18700-18490*
and 18190-17790* zone in the near term.
It’s very rare for a positive
co-relation between US stock market & USD, despite steepening of bond yield
curve for long (2% spread between yields of 3MTSB/bill & 10YTSY/bond, supporting
the EQ). The spread may be an expectation of improving economic activity in the
coming months in US backed by higher growth & inflation. But, eventually “Trumponomics”
may also lead to stagflation of higher inflation and stagnant/lower growth in
the US economy. Also, the whole plan of incremental fiscal spending by Trump
may be too much dependent of easy monetary policy of ECB & BOJ any
deviation from there may be also a headwind for the required funding for Trump’s
fiscal spending plan.
Moreover, a strong USD for a long
time may not be good for US as well as the global economy.
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