Nifty Dropped By 20 Points In A Volatile Day Of Trading After “Hawkish Hike” By Fed & Strength In USD

Market Wrap: 15/12/2016 (17:30)

Technically Nifty Fut (Dec @8178) has to sustain over 8275-8325 area for further rally towards 8365-8435 & 8485-8545 zone in the near term.

On the other side, sustaining below 8250-8200 zone, NF may further fall towards 8090-8040 & 7980-7900 area in the short term.

An “unexpected” hawkish Fed in 2017 may force RBI to recalibrate its current accommodative stance for more neutral to save the INR & G-SEC bond yields rather than aggressive rate cuts in the months ahead.

Nifty Fut (Dec) today closed around 8178 (-0.24%) after a volatile day of trading following overnight US Fed action of 0.25% rate hike with a hawkish dot plots, projecting 3 more hikes in 2017 against expectation of 2 hikes.

Indian market today opened gap down around day low of 8124 and soon after that recovered quite smartly within a few minutes to session high of 8264, presumably by huge short covering/intra longs of Nifty Futs by institutional investors (?) for their trapped long unwinding at higher level. But, soon after that selling pressure creeps in amid sell off in the China market and NF closed below crucial 8200 level with a negative tone and tepid global cues on the back of surging USD & US bond yields as a result of hawkish Fed.

China market today corrected on the back of strong USD & probable PBOC tightening and some regulatory action on institutional investors & shadow-banking activity.

An unusual hawkish Fed, stronger USD & US bond yields may also force RBI for a slow rate cuts in 2017 in order to balance USDINR interest rate & bond yields differential as a weaker INR may also cause significant FPI (s) outflow from both bond as well as EQ market. 

Although, real rate of interest rate bond yield differential between US & India is decreasing and supporting the INR at this point of time, thanks to demonetization led slump in CPI, going forward the equation may change. If US bond yields surge further towards 3% from the present level of 2.60% courtesy Trump’s actual plan & size of the fiscal stimulus, USDINR may further rally towards 70-72 level in 2017 and that may be a major headwinds for the Indian economy & the market, coupled with costly oil, FCNR & FCCB redemption pressure etc. In that scenario, Indian inflation may also spike as it’s an import oriented economy with theme of domestic consumption and little export, which may also force RBI to abandon its rate cut cycle.

Yesterday, after hiking 0.25%, Yellen’s reaction was surprisingly hawkish and despite looming threat of a strong USD & surging bond yields on the US economy, Yellen has supported the 3 dot plots in 2017 (11 out of 17 FOMC members has supported 3 rate hikes). 

Although, headline US job numbers may be above Fed’s comfort zone, but it also came on the back of a comparatively less participation rate and lower wage growth. There is no “wage inflation” in the US economy as of now despite decades of “easy money policy” (QE). 

Thus, Trump’s rhetoric about more fiscal spending & structural reform with a gradual reduction in monetary stimulus (QE) may be the theme for the “Real Street” in 2017 and years ahead and Fed’s role may be limited for the “Wall Street”.

As of now, Trump’s fiscal spending plan is uncertain amid various divisions in the US Congress, but tax cut plan may see the day of light quite early after Trump take charge on 20^th Jan’17 for consensus. Again, depending upon the pace & size of “Trumponomics” & “Trumpflation” and strength of oil, Fed may find it behind the curve in the months ahead as it already waited too long for the 2^nd hike in the last one year.

Thus, it may not be unusual at all, if Fed decides to go for its 2017-18 dot plots to hike 6 times (3 times a year) in order to make the Fed rate as 2.00-2.25% (2.125%) by Dec’2018.

A hawkish Fed in 2017-18 may also force other G-10 central bankers, including India to go for less dovish stance or even some rate hikes in order to keep their respective currencies in balance with the USD.

After last year’s rate hike by Fed in Dec’2015, market capitulated in Jan-Feb’16 on the back of China & oil melt down as a result of strong USD (Yuan devaluation). Capitulation in oil was also partly for strong USD apart from the supply glut, which was followed by SWF selling.

China Yuan (USDCNY) is now trading around 6.92, already devalued by around 6% in the last few months for “Trumpism” and “Brexit” without much global panic/attention, which also helped China market a lot as an export oriented economy. The same theme is applicable for Japan also (devalued Yen).

But, further Chinese Yuan depreciation towards 7.15-7.25; i.e. around 5% from the present level may cause another eave of capitulation in the global financial market (risk assets), which is applicable for India also.

Technically, consecutive closing above 6.97-7.00 level, USDCNY may rally towards 7.15-7.25 zone in the near term.

US market may also correct significantly from the record near Dow 20k level as a strong USD & borrowing costs (US bond yields) may not be good also for the US economy itself, despite perception of “Trumponomics”. 

“Trump trade” may also fade after record rally as market might focus on the reality rather than an election rhetoric.

Technically, SPX-500 Fut, which is now trading around 2252, has to sustain over 2265-2275 zone for further rally; otherwise it will come down again.

Indian market is already under pressure for various domestic headwinds like demonetization led economic & political disruptions coupled with high probability of "No" GST roll out in April’17 or even in Sep’17 and actually underperformed the global markets in the last few months.

Domestic market may be further under pressure, if US & global market start to correct in the coming days, especially after Jan’17, when Trump take charge.

Technically, unless & until Nifty sustained above 8325-8485 zone for a few days, any “Santa” or “Pre-Budget” Rally in the absence of FII (s) in this month of Dec may be utilized for long profit booking to prepare for a probable Jan-March selling spree, despite a hope for a “dream budget”.

Time & price action may be suggesting that consecutive closing below 7900 zone, Nifty may head towards 7200-6800 level in the coming months on the back of various global headwinds, high probable end of “easy money era”, US & EU political risks, strong USD and domestic pains of demonetization & “war on black money” (slow earnings recovery cycle & slump in GDP growth and Indian political risks). There are too many headwinds in comparison with too few tailwinds for the domestic market as of now.

Eight years of liquidity driven global bull market after 2008 economic crisis may be over supported primarily by the central bankers (QQE) as easy monetary stimulus policy (“24/7 money printing”) may be gradually replaced by fiscal & structural stimulus in the coming months as a result of political compulsion & nationalistic trend (“America First, Great Britain First” etc). 

We may see significant capitulation for the EM in the coming days and India may not be an exception despite a “bright spot” in the global economy.

 SGX-NF