Market Wrap: 09/12/2016
(17:30)
Will there be a “Santa
Rally” for a probable “Dovish Hike” by Fed Next Week?
Technically Nifty Fut (Dec @8275) has
to sustain over 8310-8335 area for further rally towards 8385-8435 & 8485-8545
Zone.
On the other side, sustaining below
8280-8255 zone, NF may further fall towards 8175-8055 & 7980-7900 area by
the next “Fed” week.
Nifty
Fut (Dec) today closed around 8275 (+19 points), almost flat (+0.24%) in a
choppy day of trading after making a day of 8294 and session low of 8255, which
may be a perfect “text book” technical “Doji” or a sign of indecision before a
big event next week (Fed meet).
Today
was basically a consolidation day for the Indian market after over 2% rally for
the week and more over 4% rebound from the recent low of 7915 in Nifty on
21/11/2016 marked by “Trumpism” (surging US bond yields & USD) and surprise
“Demonetization” by the Govt. Along with Fed cues next week, domestic market
was also cautious for the IIP today (after market hours) and CPI, to be
released on coming Monday.
Just
now, IIP for Oct’16 flashed as (-) 1.9% against estimate of (+)1% (MOM: 0.7%),
which may be very tepid itself and may also dip further in Nov-Dec, thanks to
the demonetization led economic disruptions. The unexpected dip in Oct IIP
despite being a festival month may be due to seasonal factors like closure of
factories in the “Diwali” month. But the overall data may be pointing towards
contraction, although IIP data has no major impact on the Indian market, being
in old series (?).
Market
is expecting CPI to be as around 3.85% in Nov’16 against Oct figure of 4.20%
due to demonetization led low demand. Although, core CPI may dip by around
0.20%, food inflation may surge as well for demonetization led disruptions in
the supply chain on the ground level (semi urban & rural area, where cash
is still very rare with little digital economy) and together with that, surging
oil prices & USD in the global front, may keep the “inflation warrior” RBI
Gov in “hawkish or owlish” mode in the months ahead.
Today,
banks gave a good support for the market on the back of withdrawal of excess
CRR on incremental demonetized deposits and also for the news of NSE IPO, where
SBI, IFCI, IDBI, ICICI, Axis has significant stakes. Also, there was news for
SBI Life IPO @460 per share.
“Bold
stance” by RBI this week in withholding the rate may have saved the domestic
market from further fall, despite all round pressure on it to act immediately
due to downside risks of the Indian economy because of demonetization chaos.
As
a prudent step of RBI, USDINR lose some strength and Indian bond yields surged,
which may helped a lot to restore the confidence of the FPI(s) on the Indian
currency, reminding us the “Rajan era”. The strengthening of the INR may be one
of the reasons for some FII buying in the market after the recent steep
correction apart from their year ending portfolio adjustments.
Also,
as there is not any fresh significant panic on the ground due to demonetization
and some normalcy is gradually returning after slow pace of remonetization,
market may also be in an “wait & watch” mode for the high frequency Dec’16
data and preferring for “short covering” at every dip.
Indian
market may be relieved to some extent for the perception that almost all the
old demonetized “hidden wealth” has been deposited with the banks and going
forward it may act as a “stimulus” for the economy, specially the “unexpected
wealth” in the JDY accounts. Banks will be in a position to start lending again
in a big way and the so called “black money” will be turned “white”, helping
the Indian consumption story again, even after paying 50-85% tax on it.
But
it may be a complete wrong perception as banks can’t rely on its “temporary”
deposits and start lending in a big way, even if there is no incremental demand
for the credit in the economy. As of now, there is enough normal liquidity with
the banks except some fragile PSBS and banks are now very cautious in extending
loans for their previous “bad experience” of the NPA(s) and issues of “twin
balance sheets”. Some PSBS has to be also well recapitalized by the Govt to stand
on its own feet, before staring lending in a big way again.
Even
before the demonetization and “surgical strike on the black money”, private
investments were tepid amid poor capacity utilization. As there was no
significant demand as expected, corporates & SMES were also not very keen
to take fresh loans to expand amid stressed balance sheets for most of them.
But there was also some slow recovery signs in the economy of late.
But,
the sudden demonetization has destroyed the “animal spirit” of the economy and
overall GDP can dip by around 0.40% pm till full remonetization. Going by the
present trend of currency replacements, full ATM recalibrations and printing
capacity, it may take at least March-May’16 for normal remonetization of the
economy, which may translate a loss of GDP growth of around 2% by FY-17 (short
term effect).
For the vast Indian rural economy, even 50 days may be extremely painful
and if it’s another 150-200 days, then there may be significant social unrest
also, beside permanent destruction of the rural and semi-urban economy.
Also,
apart from the short term effect, the great story of Indian consumption may
also be seriously affected even after full remonetization due to Govt’s stance
of “war on black/unaccounted money”. As par some reality check, 30-40% of
overall consumer demands, especially for high value items may be suffered for
this “surgical strike on the black money” as most of it it may be already
converted into other classes of financial assets or moved out of the country or
simply destroyed. The so called “big bang” consumers may not also feel much
confident for a “buying spree”, even after some of the “previous wealth” will
return to their hand with or without IT scrutiny.
After
failing to see any significant “gain” for the “pain” of the general public
after demonetization, Govt is slowly now changing its narrative from the “war
on black money & counterfeit notes” to the theme of “digital cashless
economy” and has “offered” various “rebates” for it.
Although,
“digital economy” was already there in India much before the demonetization,
most of the people were not enthusiastic about it except using debit/credit
cards. Even, concept of “online or mobile” banking was seen as “very risky” and for the recent unusual surge in usage of card swipe machines (POS), there is frequent "network disruption" also.
Now,
after demonetization led banking chaos, those people are being “forced” to take
up the “digital banking” route. But the fact is that this is being limited to
urban or some semi urban people and that too with the relative young people.
There is huge problem of the concept of “digital banking & economy” for the
innumerable middle aged people, senior citizens, pensioners and also for the
vast rural people, who don’t have any such digital concepts and are not tech
savvy either. Also, there is severe lack of affordable digital infrastructure in
India, especially in the semi-urban & rural areas.
Digital
economy is certainly a good concept for a clean economy, but proper
implementation of the same will also require some modest time; it can’t be
possible to digitize a vast economy like India overnight or even in fifty days. It
will take at least 2-3 years to have all the required digital infra in place
and for the digital knowledge of the common people. Govt should have ensured
such digital infra in the last two years before going for a sudden
demonetization.
Now,
this demonetization can’t be rolled back (reversible) also, despite SC pressure & some questions raised on the whole "secret exercise" on the Govt and in that
scenario, one can expect more “pain” in the coming months despite changing
narrative of the Govt to “digital economy”. As par some reports, Govt may be
thinking of introduction of “plastic currency” notes instead of “paper currency”.
All these may cause more confusions and loss of confidence on the currency of
the country and on the banking system. For the vast common people of India, the
“digital economy” may also be meaningless. All these may translate into loss of
consumer confidence and subsequent consumption in the months ahead despite
remonetization.
Govt
may be also relying too much for incremental surge in direct tax collections
from the demonetized banking deposits for its political agenda of “fight
against corruption & black money” and any possible redistribution of the
same to the “poor” people from the so called “rich”. But the fact is that IT department
is short of manpower itself to detect each & every black money bank account
and then chase it to recover the taxes. Even if all is okay, then it will take
significant time to extract the “wealth” from the “rich” to the “poor”.
One
of the option for the Govt to conclude this “war on black money” to a logical conclusion
before series of state elections and 2019 general election may be by putting
some types of BTT (banking transaction tax at source) in the forthcoming
budget.
“Fight
against corruption & black money” “minimum governance”, and “unemployment”
& “development” were one of the few election rhetoric of NAMO in 2014
election. Though, there was no incident of any major corruption scandal at the
top Govt level for the last two years and the Govt has also spent a lot (capex)
for development (infra/rural etc), “too much governance” and “unemployment” may
be the major problem for NAMO in the 2019 general election.
Thus
the present demonetization & “war on black money” and even “surgical strike
at LOC” may be a political narrative for the Govt/BJP facing the series of
state elections and 2019 general election. For the vast un/under employed electorates,
the tag of “World’s fastest growing economy” is useless, until he/she got a
decent job, earning enough to meet the minimum monthly expenses for a small
family and spends some in the weekend. Only then Indian consumption story will
get the consistent boost of “clean money” and a Govt will also enjoy enough
political support.
But,
in this “experience” of demonetization, NAMO may have already made a political
blunder without much thinking of consequences and lack of proper
implementation. The biggest issue of unemployment may even get a boost for the immediate
effect of the demonetization, which wracks havoc for the unorganized sector in
the semi-urban & rural areas beside significant effect on the SMES. Big
corporates and companies don’t have any major problems as they are already
digitalized, but one can also expect temporary slide of sales, which may also
persist longer affecting their earnings. Indian corporate earnings (Nifty EPS)
may dip by at least 5-10% in the coming months on an average.
Globally,
all eyes are on OPEC meet this weekend and despite some doubts about an effective
implementation of the OPEC cut agreement amid present supply glut, Oil has
rallied today as some “trusted” analysts has predicted for $70 oil in the
coming months on the back of an OPEC cut optimism.
After
the “dovish” ECB yesterday, all eyes will be on the Fed & Yellen next week.
Its almost 100% certain that Fed will raise interest 0.25% in an annual exercise
and thus the event may have been already discounted by the market also. But,
the real action will come after Fed/Yellen statement/comments for any forward
guidance about 2017 rate hikes. Market is also expecting at least two rate
hikes in 2017 (June-Dec) for the perception of “Trumpflation” and fiscal
spending by the new Trump administration.
Going
by the past history of Fed and the “uncertain” nature of Trump this time,
Yellen may opt for a “dovish hike” instead for a specific hints for any future
2017 hikes and market may take it as “long pause” before any further Fed action
till June or Dec’17. In that scenario of “dovish hike”, US bond yields &
USD may also fall significantly, which may cause a “Santa Rally” for not only
the US/EU market, but for the EM market also, including India.
If
Fed opts for a “hawkish hike” with a “promise” for “every meeting being live”,
specially April-June’17, then US bond yields & USD will surge more causing
extensive damage to the EM currencies and the market including India, despite
having relatively stable macro (before demonetization).
As
the entire concept of “Trumponomics” may be still rhetoric now, Fed may prefer
to wait for the new Trump administration to take charge of the Oval office in
Jan’17 for an actual plan of fiscal spending package, source of funding etc and
depending upon that, Yellen may offer some definitive forward guidance to the
market only in March-April17 for a possible hike in June’17.
Thus,
probability of a “dovish hike” may be more than the “hawkish hike” at this
point of time, but the big question may be also that, how long the US stock
market can withstand the strength of dollar, despite perception of lower
corporate taxes, higher Govt spending, higher inflation & GDP, higher
employment and incrementally higher corporate earnings (core EBITDA). Eventually,
an excessive strong USD may be bad for both US and the rest of the worlds, especially
EM.
For SPX-500 (LTP: 2254), a major
technical hurdle should be around 2260-2265 zone in the days ahead.
SGX-NF
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