Global & Indian Market Outlook For 2017: Where We May Go ?

USD Strength & Geo-Political Risks And China Jitters May Be Some Of The Themes in 2017

India Nifty may fall towards 7050-6550 zone first in 2017, rather than going for 9200-9655 area.

Global Mantra For 2017 (Part-I): 17/12/2016 (11:30)

We should start from where it all begins; US10YSY NOTES (barometer of the US & global economy)

US10YTSY NOTES: Will it take support from 121.70 area or fall more?

LTP: 122.8175

Technical support is around 122.20-121.70 zone; consecutive closing below 121 may fall more towards 116-109 area.

The present downtrend may change only consistent closing above 124-127 area for rally towards 128-130 zone.

As US 10YTSY BOND YIELDS & USD are inversely proportional to thus US10YRSY NOTES/BONDS, one can expect USD to lose strength, only when this US10YTSY will break above 124-127 zone; otherwise USD may be strong and every dips may be a buying opportunity (technically).

 US10YTSY

USDCNY: Another China jitters in 2017?

Apart from “Trumponomics” & “Trumpflation” perception for selling in bonds, another primary reason may be the dumping of USTSY bonds by China/PBOC and other private investors.

China & PBOC may be running out of options now as USDCNY is getting stronger day by day, especially after “Trumpism” and “Hawkish Hike” by Fed last week. A strong USD is causing significant USD outflow from China’s FX reserve and to shore it up, PBOC may be selling its USTSY holdings at record pace, which is again causing plummeting of USTSY bonds and subsequently, both 10YUSTSY BOND yields & USD are soaring. This, in turn again pressurizing PBOC for more US bond sales and the spiral circle is continuing as of now. PBOC may be putting some restrictions on the M&A activity as it may be a disguise for USD outflows.

Looking at the chart, USDCNY, which is now trading 6.96 may further rally towards 7.15-7.25 area, if sustained over 6.97-7.00 zone in the coming days.

USDCNY appreciated by over 10% in the last eleven months (since Nov’15) and 5% in the last four months (since Sep’16) on the back of Chinese outflow pressure & “Trumpism” (trade protection & “America First” policy by Trump, which has considerably weakened some of the EM currency like Mexico, China etc).

Although, weak Yuan as a result of “Trumpism” were earlier seen as beneficial to Chinese economy for export edge, the real fear of outflow concern now creeps in as a result of “excessive” strong USDCNY.

Also a strong USDCNY is causing significant spikes for Chinese imports, which may be also affecting its domestic economy and cost competitiveness of the export in turn.

Apart from the strong USDCNY & outflow concern, China has its own problem of huge NPA/NPL (stressed banking assets), shadow-banking and recent regulatory action on some specific institutional investors.

Any China jitters will not only cause significant meltdown for the Chinese market, but it may also affects adversely the global financial market & India also (“risk off” trade due to Chinese jitters as in last year after Dec’15 Fed hike).

Technically, for China-A-500 index (LTP: 10065), sustaining below 10140-10000 zone, it may fall more towards 9900-9200 area in the coming days; i.e. China market may correct further by 8-10% & USDCNY may further rally by another 4-5% in the short term.

The primary reason behind plummeting of 10YUSTSY bonds & surging of US bond yields may be selling by PBOC and “Trumponomics” & “Trumpflation” may be the secondary reasons as it’s just an election rhetoric as of now and not a reality. 

But, Trump’s post election victory speech may also act as an catalyst for the surge in US bond yields & USD (“We will rebuild America again”) and actual “Trumponomics” may take considerable time & modification in the coming months (corporate & personal tax cuts, actual size of fiscal spending, ease of doing business in US, enhanced import duties on US imports to encourage “Made in US” theme etc).

 USDCNY

 China-A-50

What about USDJPY?

LTP: 117.86

Technically, sustaining above 119-122 area, USDJPY may rally further towards 126-131; otherwise it may come down and consistent closing below 116-113 zone, may further fall towards 110-105 level.

As par some reports, BOJ may be thinking to tighten or hike its rate in 2017 in order to steepen the JGY bond yields and to have equilibrium with the JPYUSD interest rate differential (hawkish Fed).

In 2017, Japan is also expected to come out of its decade old deflation spiral as a result of devalued Yen (costly import) and higher oil prices, apart from some higher wage inflation.

USDJPY appreciates by almost 20% from its late June’16 low of around 99 to around 119 as of now on the back of dovish jawboning by BOJ, mostly verbal intervention  and specially for the “Trumpism” & PBOC led surge in US bond yields & USD. If we consider President-Elect Trump’s victory speech day on 08/11/2016 and today, USDJPY alone appreciated by around 18% in the last six weeks, whereas BOJ & Abenomics has failed to do so by their decade old QQE & verbal intervention. BOJ must be thankful to both Trump & China, as a weak Yen is helping a lot for Japan’s long awaited sign of recovery, being an export oriented economy. Going forward, 115 may be an equilibrium rate for USDJPY, which may help both side of Japanese economy (domestic & export).

Yesterday’s (16/12/2016) incident of seize of the underwater drone of the USA by China in disputed South China Sea has increased some geo-political tension between US & China and consequently USDJPY came down slightly (safety of Yen theme).

US election conspiracy theory by Russia/Putin and any link with Trump may be some of the US political risks, apart from Trump’s own uncertainty of policy action (geo-political) and lack of political experience which may keep the USD in pressure in 2017.

 USDJPY

Will Draghi allow EURUSD to fall below parity (1.00) towards 0.90 in 2017?

LTP: 1.0445

Technically, sustain below 1.05-1.03 zone, EURUSD may fall towards 1.00-0.90 area; otherwise it may bounce back towards 1.11-1.16 area again in the near term.

Although there may be a “real” scarcity of eligible bonds for purchase by ECB and the recent adjustment in bond buying may be seen as beginning of a “back door tapering”, actually, ECB sounds more dovish than expected.

Draghi slashed the monthly bond buying from 80 to 60 bln EUR and extended it for 9 more months (Dec’17) against market expectation of 6 months @80 bln/month.

Thus eventually, ECB ends in slightly higher bond buying at 540 bln EUR against estimate of 480 bln EUR (60 bln EUR more) and the overall stance may be quite accommodative against the backdrop of weak EU inflation, EU political & banking risks.

But overall EU economic data may also be improving gradually for the last few months as EURUSD is significantly depreciated by around 18% in the last two years.

Thus, considering the overall upbeat EU economic conditions, but still tepid inflation & growth, various geo-political risks, banking crisis (specially Italian & Deutsche Bank) and divergent monetary policy between Fed & ECB and also other prominent G-10 economies, ECB may not increase any QE significantly to maintain the status-co and 1.05 may be an ideal equilibrium rate for it and Draghi may not allow it to dip below parity in a significant way.

Going forward, Draghi may employ more verbal intervention to “manage” the EURUSD around this “ideal” rate of 1.05, considering both export and domestic compulsions of EU economy. Draghi may call for more fiscal stimulus, may talk about some “back door tapering”, scarcity of eligible bonds etc to sound more “hawkish” than market is expecting and thus may not allow EURUSD to go below 1.00-0.90 in the coming days.

Thus in 2017, expected EURUSD broad range may be around 0.90/1.00-1.05 & 1.11-1.16, considering both the technicals & fundamentals probability.

 EURUSD

Will GBPUSD further fall around 1.10 in 2017?

LTP: 1.2491

Technically, sustain below 1.25, GBPUSD may be heading towards 1.20-1.18 and consecutive closing below 1.18 may further fall towards 1.13-1.10 in the coming days.

GBPUSD may change its present downtrend by only sustaining above 1.28 and in that scenario may bounce back towards 1.35-1.40 & may even rally for 1.50 (Pre-Brexit levels).

Contrary to earlier “dooms day” scenario perception for UK after “unexpected” Brexit, its overall economic data is quite strong on the back of significant depreciation in its currency (GBPUSD), which acted as a “stimulus” to the economy without much QE (export competitiveness and cheaper UK goods & services and property prices).

But, after falling around 20% from the Pre-Brexit level, GBPUSD is currently in a range, because market may still be assuming that, UK will not exit EU eventually or even it exits after 2019, it will be a “soft Brexit” and Great Britain will enjoy all the trade facilities as of now. So, it may be “business as usual” for UK, even if there will be a “Real Brexit” by 2019.

But, at the same time, UK may be enjoying both sides of the coin, having advantage of a significant weak currency and at the same time enjoying all the EU/EZ trade advantages. As a fall out of weak GBP, Germany may be the biggest loser in terms of export and some of the other EU countries may be also suffering. Thus, EU, especially Germany/France may not allow UK for this “unfair” advantage for an indefinite time and UK has to decide sooner rather than later.

By early next year, SC verdict of the Brexit may come and UK has to invoke Article-50 to formally start the “official divorce” process from the EU. In that scenario, GBPUSD may break the 1.18 level convincingly and depending upon the trade negotiations with EU (hard or soft Brexit), GBPUSD may further fall towards 1.10 level in 2017. Monetary policy divergence with Fed & BOE may also support this level of 1.10 in the coming months.

BOE has to maintain its accommodative dovish stance because of Brexit uncertainty and subsequent risk in growth, despite a weaker currency. If Article-50 is invoked in March’17, then it will accelerate the uncertainty about UK economy and it may also lose the “Financial Capital” of the EU as various Banks & Financial institutions HO/operations may move out of UK to either Germany/France & US. Service sector of the UK economy may also suffer most.

Having said that, the biggest surprise of 2017 may be postponement of Brexit or a 2^nd referendum for reality check and in that scenario, GBPUSD may rally again towards 1.35-1.50 zone.

Real Brexit will not only be bad for UK economy, but may also be worst for the whole EU concept itself. The rise of nationalistic politics, trade protectionism, anti-establishment movement etc are some of the real geo-political risks for the whole EU universe and eventually, politicians & policymakers may be forced to allow UK for significant “sops” to stay in EU and UK may also not take any “unknown risks” & “political gamble” to stay out of EU and may not go for ultimate “divorce” even after “separation”.

Thus in 2017, range of GBPUSD may be quite broad from 1.10-1.25 & 1.35-1.50, depending upon the “Real Brexit” scenarios and flow of events. BOE may also keep its stimulus in “reserve” option to stay pat and may act only in an extreme scenario for “Real Brexit” or “No Brexit” to manage the GBP.

 GBPUSD

Will Dollar Index (USDX) touch 108-110 & 115 in 2017?

LTP: 102.83

Technically, USDX has to sustain over 105-106 zone for 108-110 & 115 area; otherwise it may come down and sustain below 102-99 zone, it may further fall towards 97-94 & 92 area (92-94 is strong positional support for the USDX).

Though USDX has lately lost some of its significance, because it does not include AUD, which may be also a proxy for CNY & commodity currencies; but still it may be handy for EM market, like India (INR). USDX may rally by another 5-7% in 2017 and INR may also depreciate proportionately to around 70-72 level, despite India's relative strong macro and less divergence in real bond yields with USD.

USDX

Will Nifty break down below 7900 conclusively and fall towards 7050-6820 or break above 8600 for new high of around 9240-9655 in 2017?

SGX-NF: 8134 (LTP)

Short Term Technical Range: 7900-8040 & 8345-8395

Technically, immediate support zone for NF may be around 8090-8040 zone and sustain below that, NF may fall towards 7980-7900 zone in the short term; else may bounce back towards 8345-8395 area and sustain above that, may further rally towards 8485-8545 area.

Long term technical range: 7900-7050 & 6800-6550 on the downside and 8600-8995/9185 & 9250-9655 for the upside.

On the broader prospective for next year (2017), consecutive closing below 8900 zone, NF may fall towards 7050-6800 & 6550 area (under bear case scenario).

On the other side, sustaining above 8600 area, NF may change its current down trend and may further rally towards 8995/9185-9250 & 9655 zone in 2017 (under bullish case scenario).

For Indian market, “Hawkish Fed” (strong USD) & “Trump Tantrum” and an end of “easy money” may be some of the biggest challenges in 2017 apart from various others global & domestic geo-political headwinds and demonetization led economic & political crisis.

Indian market rallied significantly by over 30% from budget day low of around 6835 to around 8995 in almost 6 months primarily on the back of huge liquidity support from the FPI(s) and also domestic investors/DII(s) after G-20 Central Banks meeting in China in late Feb’16 and subsequent coordinated monetary stimulus action by the four major Central Banks of the World PBOC/ECB/BOJ/Fed (i.e. the four pillars of the global economy).

Indian FY-17 budget aimed at more fiscal spending for rural economy, Govt Capex for more infra spending adhering to fiscal discipline followed by RBI cut and subsequent good monsoon projection, GST & various other incremental reform probabilities etc were all acted as follow up triggers for a record rally in such a short period of time (huge short covering followed by value buying) despite stretched valuations.

The global market as well as the Indian market corrected first significantly on the surprised Brexit day, but it was also like a one day “black swan event”. Market recovered soon after realizing that the “Real Brexit”, if any may take actual shapes at least after 1-2 years and as usual, central bankers will not let the market for a “dooms day” so easily.

It was not only Indian market, but various global markets were also rallying quite strong on the back of dovish central bankers and huge liquidity support for the EM.

Eventually, Indian market started cautious and began its correction in late Sep’16 after prospect of Trump being the next US President got stronger from almost no where  as he was seeing as an “anarchist” for the global financial market for his anti establishment politics and trade protectionist, specially for the EM.

But, in the pre-election duet of Clinton & Trump, one thing was quite clear that whoever be the next US President, he/she has to be fiscally loose irrespective of Fed stimulus for the benefit of “Real Street” than the “Wall Street”. Thus US bond yields started to recover after hitting record multiyear low and USD was gaining strength. Since then, yield hungry FPI(s) were on the gradual selling spree from the EM portfolio of bonds & equities, which got huge momentum after Trump’s victory speech on 8^th Nov’16 calling for “huge fiscal spending” to “rebuild” America. Thus, “Trumponomics” & “Trumpflation” rhetoric may be the primary reason for Fed to be more hawkish than the market expectation and one of the reasons behind the recent strength in USD & US bond yields as of now.

Yellen’s comments about rate hike and three dot plots in 2017 as “modest adjustments” may be also indicating that, Fed is prepared to hike more rapidly, if such condition warrants in 2017-18 as par actual trajectory of Trump’s fiscal spending plan and US inflation, despite the probability of an adverse effect of stronger USD & borrowing costs for the US as well as global economy.

Against this back drop of strong USD, RBI may be more focused on USDINR management in 2017-18, rather than simple inflation vs growth play and rate cuts, because a stronger USDINR may be more harmful for the domestic economy and also financial market.

The surprise demonetization announced almost on the same day of US election outcome on 8^th Nov may be also a big “political blunder” coinciding with the adverse US election outcome and just ahead of winter session of the Parliament. As a result of political disruptions, GST is now in jeopardy and some question may be asked, if the Govt as well as the “united” opposition political parties are all serious about implementation of the GST ahead of 2019 general election or not.

As a direct result of demonetization in an economy like India, where “cash is king” with little “digital economy” and required infra & awareness among the general public, especially at the bottom of the pyramid, GDP is expected to be down by 0.5% every month till full remonetization. Thus, the present economic disruptions may down the FY-17 Indian GDP by around 2-3% and corporate earnings by around 5-10%.

Apart from the short term (six months) adverse effect on the Indian economy because of demonetization, long term effect may be much more on the domestic consumption story as traditionally it depends significantly on the “black/unaccounted money”.

Govt’s stance of “war on black money” may be beyond any question, but it may cause at least 30% dips for the Indian consumption as par various retail surveys, specially for high value products in the months ahead, even after remonetization.

Demonetization led “Destruction of wealth” and subsequent “rebuilding” or “redistribution” of the same may take significant times, considering various regulatory hurdles and Indian demand may take a significant toll for that in the coming months.

Thus, the strong USD, strong oil, various geo-political events, demonetization pain, political disruptions, delay in GST, tepid private investments, India’s problem of “twin balance sheets” and significant political risks for the NAMO Govt may be some of the headwinds for the Indian market in2017.

Against these headwinds, some of the tailwinds for the Indian market may be a “dream budget for FY-18”, some fiscal stimulus to be announced by the Govt to reduce the “demonetization pains” ahead of series of state elections in 2017 and a “dovish RBI” (??). Still, overall headwinds may be too much against few expected tailwinds.

Thus, considering the overall technical trends and underlying fundamentals and various global geo-political events & domestic news flows, there may be too many headwinds against too little tailwinds in 2017-18 (FY-18) and probability of Nifty to break down below 7900 may be far greater than break up above 8600 as of now and therefore Nifty may fall towards 7050-6550 first rather than rally towards 9200-9655 in 2017.

Valuation wise, at current PE of 21.30, Nifty (8104) TTM EPS may be around 380 and still may be quite expensive in comparison its historical average PE of 18. At the average PE of 18, the current fair value of Nifty may be around 6840 and if we consider even the projected FY-17 Nifty EPS of around 405, then the forward FY-17 mean valuation may be around 7290 (405*18).

Having said that, PE may be a relative term that investors (buyers) are willing to pay the premium for an asset (like premium valuation we pay for buying a Sony television than an ordinary brand, despite there may be little differences in quality).

Generally, PE of a stock/index may be directly proportional to its average CAGR in EPS or EBITDA over the last couple of quarters/years. It’s remain to be seen if investors are willing to pay even 18 times, when average EPS is expected to grow around 5-10% in the coming quarters as a result of demonetization, “surgical strikes on the black money” and subsequent destruction in the “accumulated wealth” & consumption, despite India’s appeal of 3-D (democracy, demography & demand).

Demonetization & its poor implementations and “Govt’s “war on black money” to suppress the huge Indian problem of under/unemployment ahead of the crucial elections may be also a huge “political mistake & risk” instead of a “master stroke” and can destroy all the above “D” (s) in the coming days.

SGX-NF