Tuesday 20 December 2016

Nifty Dropped In Another Day Of Low Volume Trade Amid Strong USD And Dragged By Banks & Financials Due To Earning Concerns After Ongoing Demonetization Fiasco



Market Wrap: 20/12/2016 (17:30)

Technically Nifty Fut (Dec @8102) has to sustain over 8145-8205 area for further rally towards 8250-8300 & 8355-8395 zone in the near term.

On the other side, sustaining below 8070-8000 zone, NF may further fall towards 7950-7900 & 7840-7645 area in the short term.

Looking at the chart, 8200 zone may be now a big technical challenge for the NF and consecutive closing below that, it may fall towards 7525-7425 area by next few weeks, when volume (FII) return to the market.

Nifty Fut (Dec) today closed around 8102 (-16 points), almost flat (-0.20%) after an opening session high of 8134 and late day session low of 8072.

Domestic market today opened in a flat note amid tepid global cues marked by overnight attacks & shooting incident in Berlin, Ankara & Zurich. But soon after opening, Indian market drifted lower and there was visible selling pressure in the latter half of the market combined with strong USD and dragging by banks & financials and some midcap scrips.

USD got further boost after Yellen’s student speech yesterday, where she expressed good optimism about US job prospects; although its noting new, US bond yields &  USD got some boost in a thin volume global market and along with that, month end demand from the oil importers in India caused USDINR-I to cross the barrier of 68 in the domestic market.

The apparent terrorist incident at Berlin Christmas market by a driving Truck may be an act of an immigrant Pak citizen and this may cause some headwinds for Merkel in the forthcoming elections as nationalistic & anti-immigrant politics may got thrust (like Brexit).

The shooting incident of the Russian Ambassador in Turkey (Ankara) yesterday and to an American embassy today may also be linked with the Syria conflict and it may also cause some serious geo-political tension in the coming days.

Today, BOJ stayed pat as expected with an upbeat assessment of the Japanese economy and the whole event may be neutral or less dovish. Basically, Kuroda is now looking at Fed & US bond yields and does not require any fresh QQE to weaken Yen and spur inflation & growth. 

In 2017, BOJ may also think for some steps to steepen the JGY bond yields and some gradual tapering/rate hike to normal (zero) to repair its own balance sheet and to keep parity with the increasing US bond & interest rate differentials for an overall balance of USDJPY (domestic economy & export competitiveness).

In EU, Italian Govt may be preparing itself for a $20 bln rescue package of the fragile Italian banks, including Monte Paschi; although some analysts are quite skeptical about the real problem of NPA/NPL in the Italian banking system and use of tax payer’s money for such bail out. EU may provide some special credit line for such huge bail out and Italy’s sovereign debt may also increase significantly for such Govt bail out.  

Back to home, Indian market was today under pressure more for the banks & some financials (MFI), but supported to some extent by IT.

For, IT companies, strong USD and expected thrust in US economy under Trump apart from “Digital India” theme may be beneficial; but Trump’s rhetoric about America First” may be a headache for IT outsourcing companies, apart from lack of adaptation of latest techs, such as AI etc.

Banks may be the biggest looser of the present demonetization fiasco as they are in a typical situation, where they are flooded with short term deposits, giving interests on it but earning practically nothing on it, either by way of lending & from the bond markets or from the reverse repo window. At the same time, operational costs of the banks may have already increased multifold after demonetization led chaos and various banking rules. Thus Q3 & Q4FY16 earnings & NIM of the banks may be under great pressure. 

As there are practically no incremental demands for fresh loans, either personal or business after demonetization led economic disruptions and virtually all bank personnel, including sales/loan staffs are busy with cash distribution and other regulatory compliances, which is also changing practically every other day, it seems that both top & bottom lines of the banks may also suffer good in Q3 & Q4FY16.

This may be contrary to the earlier market perceptions that banks will be flushed with demonetization funds at lower costs and will be able to lend multifold with a better NIM. But, eventually it now seems that there is practically no taker of loans as economic slowdown hits almost all over the Indian economy after demonetization and there are already pains of “twin balance sheets” in the system (balance sheet of both the corporates/business and banks are stressed as a result of huge NPA/NPL).

Although there was huge surge of sudden loan repayments after demonetization for the banks and even some reputed defaulters has paid the loans in old currency to the tune of around Rs.66000 cr, there are now visible delinquencies and lack of fresh loan demands. 

Also, as par some reports, various investigative agencies & IT dept may also be looking into the issues of loan repayments with “black money” and it may be eventually treated as “demonetization deposits” out of “unexplained source of funds” and one has to be paid income tax on it (either 50% or 85%) and rest of the proceeds may go to the banks for loan repayment accounts.

Also, as par some “confidential” reports, Govt may be planning to increase the existing income tax slabs for a “Santa Gift” to the “Aam Admi” shortly (by 2nd Jan’17) to reduce the “short term pain” for the “long term gain”. Govt has also announced some more “Santa Gifts” by its “digital transaction lottery” recently.

Clearly, with eyes on the forthcoming state elections, Govt may announce the Income Tax slab change “stimulus” shortly before EC will announce the date for the elections; probably in the 1st Week of Jan’17 (state elections may likely take place in early March, in advance to get the “political benefit” of the “war on black money & corruption”).

Also, a “dream budget” consisting of too much economic stimulus and tax cuts may be bad for India’s fiscal deficit, which may be already under huge pressure, if we consider the combined state & centre fiscal deficits; states are already reporting huge revenue downfall to the tune of almost 40-50% in Nov alone after the demonetization. Going forward, it may increase significantly as manufacturing slowdown will come in Dec-Jan after depletion of the existing inventories. We may have significant downgrades in FY-17 GDP & corporate earnings.

Today market recovered from the low of the day after some short covering may be for the reason that in Chandigarh corporation/municipal election, BJP has got most of the seats (“demonetization verdict” win for BJP). 

But, state elections are not a municipal elections and looking ahead, demonetization led “political & economical risks” may be proved to be a “great blunder” for NAMO instead of a “master stroke” in a country, where “digital cashless economy” concept is very unfamiliar for most of the “Aam Admi”. The overall collateral damage to the economy and also to the national politics may be much more than the intended benefit. 

Intention of the Govt/NAMO to fight against “black money & corruptions” may not be questionable, but the method & implementation may be quite debatable with endless “pains” of the “Aam Admi”; it’s not only the issue of standing in banking or ATM queues, but also subsequent economic disruptions, especially at the bottom of the pyramid, which may be a great “political risk” for NAMO/India in 2019 general election.

In 2014 general election, people had not voted for BJP, but they had actually voted for the leadership of NAMO and market/investors have also great faith on NAMO. But, this demonetization fiasco has brought the “united oppositions” again to the “lime light” from virtually “nowhere” just a few weeks ago and rise of regional politics may be the bigger risk for the Indian market, where GST and other similar reforms, like Land & Labour may be the actual victims of India’s “political compulsion”.



 SGX-NF

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