Nifty Jumped By 40 Points In A Late Session Rally Amid Positive Global/EU Cues Supported By Italian Banks Restructuring Plan And FM’s Assurances About Faster Remonetization & Hints Of A “Dream” Budget

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

Technically Nifty Fut (Dec @8214) has to sustain over 8250-8325 area for further rally towards 8375-8415 & 8485-8545 zone in the near term.

On the other side, sustaining below 8195-8125 zone, NF may further fall towards 8060-7980 & 7915-7860 area in the short term.

Nifty Fut (Dec) today closed around 8214 after a late session rally fuelled primarily by short covering amid positive global/European cues supported by restructuring & bail out news for some of the crisis ridden Italian banks (Unicredit/Monte Paschi).

Indian market today opened in a negative note following tepid Asian cues despite better than expected China IIP & Retail Sales data. Recent upbeat Chinese economic data may force PBOC to abandon the easy monetary policy there and may even hike rates in the coming months in order to keep parity with the surging USD. Also the recent clampdown by the Chinese regulator on some Insurance companies (Institutional investors) has also dampened the overall Asian market sentiment ahead of Fed.

But, Indian market recovered soon after EU open on the back of Italian banking restructuring news and FM’s assurances about faster pace of remonetization and some probable tax incentives (both personal & corporate) in the forthcoming FY-18 budget to fight the demonetization led economic disruptions.

After the demonetization led “pains” of common people, which so far failed to yield any meaningful “gain” for the overall economy, the narrative is now slowly changing towards “cash less digital economy” from the “war on black money”. Govt is now planning for a “dream budget” for the “Aam Admi”, who has so far adjusting by and large the “short term pain” in the hope for “better future” in the long term.

Thus, keeping in view the political compulsion of the Govt/BJP and forthcoming series of state elections & also 2019 general election, Govt may be preparing a “Dream” budget to announce some major concessions to be presented on 1^st Feb’17 by giving some cuts in income tax intended both for middle class & the corporates. As par some reports, there may be 5% reduction in both personal & corporate/business tax on an average with adjustments/withdrawals of various exemptions available now to make it simple and also broad based.

Govt may also unleash a major fiscal stimulus by way of social spending either through existing schemes or by way of new ones. In short the FM may do like a ECB Draghi or BOJ Kuroda and unleash a “bazooka” (“helicopter money”) for the Indian economy, struggling under the demonetization chaos with an expected “windfall gain” of around Rs.1.30 lakh cr out of IDS and ongoing “war on black money” by various agencies.

As par some reports, Govt may eventually put some types of direct banking transaction tax (BTT) above certain threshold limit, which may be offset later by filling actual income tax return in order to keep the present “surgery on the black money” to its logical conclusion in the coming days.

At the same time Govt may continue its “war” against unaccounted wealth in India by widen the scope of recently implemented ‘Benami Transactions (Prohibition) Act’16” by some more “surgical strikes” on Gold, Real Estate, other forms of financial assets including MF & EQ and even PE-Notes, which may be the most convenient way for routing overseas “black money” in & out of India. If this PE-Note restriction happens, it may be a bigger risk for the Indian market in the coming days.

India just now flashed the much awaited Nov CPI as 3.63% against market expectations of 3.90% (MOM: 4.20%; YOY: 5.41%). Although the headline CPI may again call for a bigger rate cut of 0.50% by RBI in Feb’17, the rapid fall in inflation may also be termed as an early indication for “deflation” as a direct result of lack of adequate demands in the economy because of demonetization fiasco.

Notably, food inflation fall by 2.11%, which may be both on account of cash crunch and seasonal effect (MOM: 3.3%; YOY: 6.7%).

Also, inflation data for discretionary spending may be pointing towards a tepid demand, reflecting poor consumer sentiment after demonetization and Govt’s stance of “war on black money”.

Contrary to the earlier perception, overall housing inflation grew at 5.04% in Nov compared to 5.15% in Oct and core inflation may also be steady around 4.90% in Nov’16.

Overall, the CPI & other high frequency data may be indicating a sharp dip in India’s consumption & economic slowdown and subsequent tepid corporate earnings much more than the market pricing it as of now.

Indian banks may suffer an overall dip in lending for around Rs.66000 cr, but at the same time a “major beneficiary” of the demonetization also as it saw a sudden surge in “pay backs” by around Rs.61000 cr, presumably in the old 500 & 1000 notes, even from some of the defaulters or NPA accounts. It remains to be seen, what the Govt or various enforcing agencies will do for those borrowers, who repay loans by “black money” of their own of fronting for others.

All eyes will be on the WPI and Fed’s statement (forward guidance) after the 0.25% rate hike tomorrow, which is almost 100% certain now.

There may be three scenarios for Fed tomorrow:

1.    Dovish Hike: Fed hike by 025% and provide no clear cut guidance about 2017 rate hikes. Market may take it as long pause until June’17 at least and USD may fall to some extent. In this scenario, EM currency may give some relief rally.

2.    Hawkish Hike: Fed hike by 0.25% and give a clear indication about 3-4 hikes in 2017 dot plots. In this scenario, USD & US bond yields will rally more and EM may suffer.

3.    Owlish Hike: Fed hike by 0.25% and emphasize on various incoming US economic data and Trump’s actual plan & implementation for the fiscal spending rhetoric (data dependent). USD & US bond yields may drop modestly as there may not be any rate hike talks until Jun’17. EM currency may rally for some days.

At this point of time, considering various scenarios, probability of a “Dovish/Owlish” hike is much more than a “Hawkish” hike as both USD & US bond yields has rallied quite significantly for the last few months, especially after the “Trumpism”. A strong currency is itself a proxy for higher rates in an economy and in that scenario; Fed may not take any additional risks by being an “unusual hawk” for the time being.

Some analysts are also expecting an overall 6 rate hikes in 2017-18 as “Real US bond Yields” may have not peaked as of now unlike previous occasions. But, considering all the scenarios of USD strength, its effect on the US & global economy and Trump’s actual fiscal spending plan & its implementation time period may argue for an overall 4 rate hikes in 2017-18 (2 rate hikes in each year @0.25% instead of current 1 rate hike in a year). 

After 2018, Fed may reconsider its pace of normalization of the monetary policy more rapidly under a new Fed chair or even with Yellen’s second term, depending upon the actual result of the “Trumponomics”.

For Indian market, a strong USD as a result of surging US bond yields and divergent monetary policy between Fed and other G-10 central bankers including RBI, may be one of the significant headwinds in the coming months apart from the risks of further economic & political disruptions for the demonetization fiasco, despite prospect a “dream budget”.

SGX-NF