Market Wrap: 05/12/2016
(17:30)
Hopes Of RBI Rate Cut & Probable “GST
Delay” Might Also Helped The Indian Market Today As Economy May Not Be “Prepared”
To Take The “Double Whammy” Of Demonetization & GST Almost At The Same Time
Technically Nifty Fut (Dec) now (LTP:
8173) has to sustain over 8195-8215 area for further rally towards 8285-8330
Zone.
On the other side, sustaining below 8155-8135
zone, NF may further fall towards 8100-8040 & 7995-7900 area in the near
term.
Nifty
Fut (Dec) today closed around 8173 (+0.79%) after an wild intraday gyration of around
100 points, which saw a session low of 8076 and late day swing high of 8175,
supported by positive global cues after EU markets open and recovered from
initial losses, supported by short covering as “NO” Italian referendum, was also
on the expected line and the market was almost discounted.
There
may be significant political risk now in Italy, as its PM offered his resignation
and even a new election may be called shortly as the present constitutional
referendum is widely seen as a “Brexit” like referendum for Italy, reflecting
the same nationalistic & popular politics (out of establishment), that the
large part of the EU and even US (Trumpism) is undergoing now. The next target
of this “Exit EU” policy may be France and if such trend is going on, then the
concept of the whole European Union (EU) may be itself in a serious question.
But,
the market recovered as some section of the analysts and EU officials were
quick to point it that this constitutional referendum is Italy’s internal
matter and nothing to do with the splintering from the EU/EZ and more over,
today’s Austria voting also showed that people may not want more disruptions
like “Brexit”. In Austria, right wing party favoring the Anti-EU sentiment was
defeated in the Presidential poll today in an unexpected result.
Thus, the EURUSD was unable to break
the key technical level of 1.05 (actually 1.04603) despite the Italian
political and probable banking crisis and some short covering helped the market
(risk on sentiment). Technically, one may watch 1.04-1.07 level on both sides
for a break up or break down.
Apart
from the EU political risks, monetary policy divergence between the ECB &
Fed may also drag the EURUSD in the coming days as Draghi may choose to be
remained accommodative with a dovish bias as a fall out of these risks. As it
is almost confirmed that ECB may extend the present LTRO by another EUR 500 bln
up to March’17 and as core CPI is nowhere around the targeted 2%, ECB may not
officially indicate any tapering on its forthcoming meeting (8th
Dec) on the cover of the growing EU political risks.
Also,
the upbeat service PMI in UK and probable judicial delay for the Brexit case in
their SC may help the “risk on” sentiment today.
Oil
was also under bid for “backwardation” despite some real concern about
implementation of the recent OPEC deal and more “offline” supplies are coming “online”
and a probable squeeze in demand from India as a result of economic slowdown for
demonetization. OPEC is also planning for another meeting on 10th
Dec with non-OPEC countries for the production cuts, but the current rally may
be overdone.
Indian
market was also opened and stayed most part of the day in a tepid/negative note
amid the global headwinds and domestic concerns of demonetization & delay
in GST, high oil prices and poor service PMI, but covered smartly in the last hour of trade
along with the global peers and hopes of RBI rate cut on 7th Dec.
Indian
service PMI for Nov came at 46.7 against 54.5 for Oct, which is the steepest
one month fall in since 2008 Lehman Brothers led global financial crisis and it’s
also the lowest since June’15 as an immediate fall out of severe economic slowdown
and consequent job losses due to demonetization (may be more than expected).
As
par Markit, the cash-driven economy of India saw significant cut in
discretionary spending in financial services, hotels & restaurants, renting
and other business activities post demonetization.
Incidentally,
India’s 60% GDP is dependent on the service sector and the contraction of the
same well below “boom/bust” line of 50 may not be good for the overall growth
of the country. Overall, the composite PMI (service + Mfg) for Nov now stands
at 49.1 against Oct figure of 55.4, also below the “growth/contraction” mark of
50 after demonetization.
But,
one of the immediate positive sides of the demonetization may be fall in prices
of some consumer durables items, autos. Real estate etc where sellers (firms)
have discounted their prices steeply to cope with the limited demands out of
cash crunch and may be also due to the Govt’s stance of “war on black money”.
Thus,
the falling inflation along with downside risks in growth for demonetization
may influence the RBI to cut rates in the day after tomorrow by at least 0.25%
along with some required liquidity management steps and thus the domestic
market rallied a bit today.
But,
looking ahead a drastic rate cut by RBI may be another risk for the INR and a
weak Rupee may also accelerate FII outflow (monetary policy divergence between
Fed & RBI and bond yield & real rate of interest differentials).
Although, core inflation may be down for demonetization, but food inflation may
be up due to disruptions in rural economy and mismatch in demand/supply
dynamics. Thus, headline CPI may not reflect a steep decline in the coming days
and RBI may also wait for the Fed’s guidance on future course of rate hikes in
2017 along with the actual domestic inflation trajectory to stay pat in Dec’16.
As
par latest report, an amount of around Rs.12.6 lakh cr may be already deposited
with the banks in HDCN amounting to almost 82% of the official HDCN figure of
Rs.15.3 lakh cr after various Govt approved “facilities” to use the old
500/1000 notes and the latest IDS Amnesty scheme with 50% tax. If this trend
continues, then the gross bank deposits may also exceed the official HDCN
figures and thus put a serious question mark on the whole demonetization
exercise by the Govt and earlier estimate of windfall gain of Rs.5 lakh cr by
the RBI / Govt & subsequent fiscal stimulus, that will not return to the
system.
Although,
the Govt may now try to confiscate the excess bank deposits especially in the
JDY bank accounts by introducing any “legal way” and even may redistribute the
same to these JDY accounts as a political tool, it may be back fired amid continuous
hardships being faced by the common people for this demonetization, which is
now being turned in to another VDS scheme and “digital economy” theme.
The
present demonetization may be the hardest step in the series of earlier steps
taken by the Govt in the last few years against “black money” and the Govt may
also take some future actions with Gold, real estates and other financial assets
to curb the “unaccounted black money”. This “war” against the “black money” and
“rich/poor” division may be the ultimate political tool for the Govt/BJP eying
for the series of state elections and also the 2019 general election amid unemployment
crisis in India.
But,
in reality lack of adequate consumer spending, private investments etc may also
accelerate the economy towards a contraction resulting in more unemployment and
hardships for the people, which may be another political risk for the Govt.
Rather
than the short term effect of demonetization & remonetization for a few
quarters, the long term effect of the “surgical strike” on the “black
money/informal unaccounted economy” may prolong the tepid Indian consumption by
at least 30%. Thus, real effect of this “war on black money” may be seen after
FY-18 onwards and there may be significant downside risks for the earnings of
Indian corporates.
Indian
market may not be “too worried” at this moment, because of the perception that
eventually almost all the “so called black money” may have returned to the
banking system and ultimately may also return to the “consumers”. But, it may
also depend upon the Govt/IT action in reality and after paying taxes of 50%
with another 25% lock in for four years; Indian “big consumers” may be left
with only 25% of their previous “wealth” in the foreseeable future. The sheer
lack of confidence on the currency and on the banking system and evaporation of
earlier “wealth” may also deteriorate their “animal spirit” of “big buying
spree” and for the next five years, we have tepid demands in the economy as
well.
Thus,
in such scenario, where gains of demonetization are not visible, people may
closely analyze their pains, which may be also a “political suicide” for the
Govt/BJP and also a “political risk” for the country rather than a “master
stroke”.
Moreover,
a slump in consumption may also hurt the business & private earnings,
direct & indirect tax collections of the Govt, thus jeopardizing the fiscal
math & budget deficit. All these may also weak the Indian economy and
currency in the months ahead.
Although,
market may be relieved by some extent for likely delay in passage &
implementation of GST from April’17 as the Indian economy may not withstand the
“double whammy” of Demonetization & GST almost at the same time, roll out
of GST from Sep’17 may not be also sanguine given the fact that there will be
series of state elections and political battles in the months ahead.
In
that scenario, GST may be implemented only after 2019 general election as Govt
may not risk another “political suicide” and disruptions in 2018 too, just one
year before general election.
Indian
market and FPI(s) sentiment may not be discounted yet for a likely delay in GST
after 2019 general election or even beyond Sep’17 and also for growing “political
risks”, where regional parties/leaders may try to fill up the vacuum for another
effective national party except BJP.
SGX-NF
EURUSD
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