Nifty Dropped By 23 Points In A Cautious Trade Ahead Of Fed Coupled With Tepid Domestic Macros & Demonetization Led Political Battle & Economic Disruptions

Market Wrap: 14/12/2016 (17:30)

Technically Nifty Fut (Dec @8204) has to sustain over 8260-8325 area for further rally towards 8365-8435 & 8485-8545 zone in the near term.

On the other side, sustaining below 8230-8165 zone, NF may further fall towards 8125-8040 & 7980-7900 area in the short term.

A high probable “Dovish Hike” by Fed today may ignite some relief rally for EM currencies & Indian market also; but stronger USD in 2017 may be one of the headwinds for the EM & Indian market along with increasing domestic political risks.

Nifty Fut (Dec) today closed around 8204 (-0.29%), almost flat after a moderate day of volatility, which saw an opening minutes high of 8229 and subsequent session low of 8172.

Indian market opened and stayed most of the day in a negative note following tepid global cues ahead of Fed and domestic headwinds of economic slowdown and political disruptions (Parliament logjam) due to ongoing demonetization fiasco. It’s now almost certain that April’17 roll out of GST is not possible due to ongoing political & economic chaos after sudden decision of demonetization by the Govt on 8^th Nov, just ahead of winter Parliament session in an apparent act of “political suicide”.

Also, in one of his speech, PM mentioned about “possible 2017” roll out of the GST, virtually ruled out any immediate possibility for “April’17”. Certainly, Govt will try to reassure the market that it’s their “constitutional compulsion” to implement the GST from Sep’17, but going by the present political scenario and series of state elections in 2017, preparedness of the stake holders to accept & implement GST after the demonetization disruptions and also 2019 general election, GST may be implemented only after 2019. 

In short, apart from overall economic slowdown, this demonetization may be proving as a costly “political blunder” instead of a “political master stroke” by NAMO, whereby nearly all the opposition political parties which were seen as a mere “signboard political party” at the national level till a few weeks ago, has got a “new life line” for their political battle of "rich & poor" and it may turn out to be a “major political risks” for the BJP as well for the whole country in the months ahead.

Going forward, if remonetization do not happen quickly, then one can expect a major political turmoil for India, which was so far “politically stable” for the last decade. As ordinary people from the grass root levels and also the middle class section has suffered mostly in this poorly planned demonetization and “war on black money” theme, even hard core BJP/RSS cadres are not convinced enough for the political or economical “gain”, which is so far elusive against the “pain” and it’s going tougher day by day to “sell” the changed narrative of “cashless digital economy” from the initial theme of “fight against corruption & black money” to the public.

All eyes will be on the public meeting of NAMO on 19^th Dec and 2^nd Jan for any major announcements of social scheme for the “Aam Admi” to reduce the “short term pain” and a probable “address to the nation” on 2^nd Jan’17 for any major change in policy. 

Market may also watch RG’s "explosive" jibe of exposing a “personal corruption” by NAMO and hacker group “Ligeon’s” claim of “Wiki Leaks” types of confidential documents/mails, both of which promised a “major earthquake” for the Indian politics. 

After the current winter session of Parliament ends day after tomorrow, “united opposition of 17 political parties” is planning to launch a nationwide "political battle" against the Govt/BJP for the demonetization “pain” suffered by the ordinary people of the country and in response, BJP may also unleash some more “economic bazookas” with a promise for a “dream budget” this time with some tax incentives and push for “digital cashless society” theme. 

All these may translate into a major political battle for the forthcoming state elections involving "patience" of ordinary people and ultimately GST & other vital economic reforms like “Land & Labour” may be in jeopardy. Investors, especially FII(s) may not be amused for such political & reform risks for India even in the long term.

After yesterday’s tepid CPI, today WPI came at 3.15% against market expectation of 3.10% (MOM: 3.39%; YOY: -2.05%). Although, the rapid fall in headline inflation may be good for the economy at a glance, the reason behind it may not be good. Overall WPI data may also reinforced the sharp slowdown in the economy due to sudden cash crunch in the ground level after yesterday’s surprise fall in the CPI. 

In a country, where “cash is king” for almost 98% of the economy and digital infra & required concept is also at very nascent stage for vast populations of the nation, it may take significant time of at least 2-3 years for a complete “digital economy”.

At the present trend, complete remonetization may take at least another 4-6 months (March-June’17) for normalization and that may be too long for the vast populations of the country. As par some reports, Govt may be planning to release new currency note of 1000/- by Jan’17 and may also withdraw the just released new 2000/- note again in a bid to attack the “accumulated black money” again. This time, people will not be allowed to deposit or exchange more than 50k per ID. Govt may be also mulling for plastic currency note instead of paper currency and planning various other measures against illegal gold, real estate, DEMAT accounts, P-Notes etc in a bid to carry forward its stance of “surgical strike on black money” for a logical conclusion ahead of series of state elections and also 2019 general election.

All these speculations (?) may cause public loss of confidence on the currency & banking system of the country. Also, the stance of “war on unaccounted money” and push for “digital economy” may cause significant erosion in the traditional support base of the BJP (small traders) as too much governance may also invite more corruptions.

NAMO may be the most trusted popular political leader after Indira Gandhi, but both of them may be autocratic also. This autocracy may be the single most "political blunder" for NAMO as there is no one to say even "no" for this hurriedly conceived demonetization plan without thinking much about "after shock".  India may now miss Rajan as this demonetization would have been "impossible" under him as RBI Gov. As par various reports, NAMO or even previous UPA Govt sough suggestion for this types of demonetization from Rajan earlier and he stressed for the "surgical strike" on the "source" (tax reforms & corruptions) rather than the "symptoms" first (demonetization).

Globally, all eyes will be on the Fed dot plots & economic projections and Yellen’s presser today for any definitive hints about 2017 rate hike cycles as 0.25% rate hike is now almost certain.

A “no hike” may also be seen as loss of confidence of Fed on both US & global economy and may also cause turmoil. On the other hand, a 0.50% rate hike may also be seen as an extremely “hawkish” Fed, which may also cause significant meltdown for the EM currencies as USD & US bond yields to soar. In both the above scenario, US EQ market may also fall; but no hike or 0.50% hike may be the most distant possibility today (most unlikely).

Fed will most likely to go for the “Dovish Hike” script today and its dot plots may indicate two rate hikes in 2017, instead of four as in the last Dec’2015 rate hike. 

As market is also discounting the same for 2017 (June-Dec), going by the present FFR indication, USD may fall as a knee-jerk reaction as it may be seen as a long pause by the Fed before the next rate hike (at least six months). 

Again, divergent monetary policy between Fed & other G-10 central bankers may limit the USD fall along with the perception of “Trumponomics” (incrementally higher fiscal spending, higher borrowing costs-US bond yields, higher inflation and stronger USD).

Apart from the Fed statement, Yellen’s comments at the presser may be more important for the market to get a clear picture about US growth prospects and the rate trajectory for 2017. 

All in all, Yellen may be “non-committal” and sounds more “data dependent” at this point of time in her comments amid lack of “wage inflation” in the US economy and clear plan for the much talked fiscal spending plan of Trump, who is due to take charge of the Oval office on 20^th Jan’17. Thus it may be a “Dovish Hike with Owlish outlook” by Fed this time and USD may be in a range instead of free fall.

On the other side, if Yellen sounds like a “Hawk”, very optimistic about US economy outlook in 2017 and not concerned too much about recent dips in wage growth, USD may soar further causing significant pains for the EM currencies and the market. 

Also, US EQ market may correct as a result of stronger USD/Bond yields coupled with “Trump Trade Fade” theme.

For Indian market, a “Dovish Hike” by Fed this time may be positive for some days (relief rally), but unless & until NF sustained over 8325-8485 zone consistently, all rallies may be proved as “dead cat” amid theme of stronger USD & demonetization nightmare and political risks.

Apart from the short term impact of economic slowdown & corporate earning dips for this demonetization, there may be much more adverse effect on the overall consumption story of Indian economy because of Govt’s stance of “war on black money”. 

The long term effect of “destruction of accumulated wealth” and “rebuilding” or “redistribution” of the same may be much more painful and will take more time for the Indian economy as traditionally, India’s story of consumption may be too much dependent on this “unaccounted wealth”. It may sound odd, but it’s a hard reality as of now.

 SGX-NF