Nifty Slumped By 94 Points Amid Rally In Oil, US Bond Yield And Probability Of GST Delay As A Result Of Demonetization Led Economic & Political Disruptions

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

Technically Nifty Fut (Dec @8183) has to sustain over 8225-8250 area for further rally towards 8325-8375 & 8415-8585 Zone.

On the other side, sustaining below 8150-8125 zone, NF may further fall towards 8080-8040 & 7980-7900 area by next few days.

Nifty Fut (Dec) today closed around 8183 (-1.14%) after making an opening minutes high of 8250 and late day session low of 8164 in another day of broad based selling marked by rally in oil (around $55), fear of a “Hawkish Fed”, probable delay in GST and tepid IIP data released on last Friday after market hours.

Indian market sentiment today may be most affected by stupendous rally in Crude Oil, which made a high of around $55 after unexpected production cut announcement by OPEC & various Non-OPEC countries, specially Saudi Arabia & Russia. Although, Russia hinted that the actual production cut from their part may depend largely upon the “private” individual producers there, commitments of Saudi for more cuts than previously agreed surprised the market along with participation of various other Non-OPEC small producer countries.  

For oil, focus will now shift from agreement to actual implementation as history of OPEC agreement implementation was always fragile in many past occasions. Also, USA’s stand on its own production/shale oil and less import using the reserve may be vital going forward.

Technically, Crude (LTP: 53.67) now need to sustain above 55 for further rally towards 62-70 area; otherwise it may again fall towards 52 and sustain below that may further drift to 48-45 zone in the near term.

India was a major infra beneficiary of the huge fall in oil since 2014, just after the NAMO Govt took charge, which saw oil crashed from almost $85 to $25 (almost 70% fall) due to supply glut. But, the fall in oil was not passed to the ultimate Indian consumers and most of it was captured by the Govt as increase in indirect taxes for various social & infra spending. Now, oil at $55-50 may be some headwinds for the Govt for its fiscal math, CAD and inflation management, which may also turn into a major headwind, if oil further accelerates towards $62-70 in the near future.

Rally in oil has also caused some surge in US & EU bond yields as costly oil can also trigger much awaited inflation there. Subsequently, US 10YTSY bond yield has broken the psychological 2.50% mark and may further rally towards 2.85-3% if Fed opt for a “Hawkish Hike” on 15^th Dec. 

Also, EU bond yield surged as bailout concerns for Italian bank Monte Paschi ebbed after Govt assured to stand behind the bank in case of any “emergency”. All these have strengthened the USD & EUR, which may further weaken INR. A weak INR may not be good for the Indian economy & the market.

Indian market sentiment was further dragged today by the high probable delay in GST due to lack of consensus for the most contentious issue of dual control mechanism. Both states & central bureaucracy and administration are not ready for any compromise and to lose “active tax payers”. 

But, lack of political consensus may be now the single most important issue behind the stalemate in GST progress as demonetization has actually vitiated the overall political atmosphere ahead of a series of state elections. 

Although, it may not be a major surprise for the market for postponement of the GST implementation from April’17 to Sep’17 as time is running out amid demonetization led economic & administrative disruptions, eventually it’s may not be possible for Sep’17 dead line of “constitutional compulsion” as there will be series of state elections and Govt may not try for another “master stroke experiment” like demonetization in the same year, which is now proving as a “political blunder or suicide”.

Also, most of the corporates & business community and states are not prepared for GST roll out amid various confusions and revenue loss due to cash crunch. Thus, ultimately GST may be implemented after 2019 general election as Govt may not risk their poll prospects by implementing in a hurry with lots of consequences like the “sudden surgical strike on black money”. Another point may be that, GST being inflationary at least initially; Govt may not risk their political prospect by implementing it just before 2019 general election. 

Although, market may show some relief by official postponement of GST from April’17 to Sep’17 as it may be seen as a double whammy along with the pain of demonetization, FII(s) may not be amused at all for successive failure to implement a vital reform like GST. Today, there was broad based selling in consumption sectors, may be because of combination for demonetization & delay in GST.

Indian market sentiment may be also affected today after some speculation of cancellation of banking licenses of Axis bank as a fall out of demonetization led money laundering allegations against some of the branch officials; although this was later denied by the bank as also the RBI.

The ongoing seizure of huge new currency notes may also undermine the Govt’s stance of “war against black money”, as it’s not possible to have such huge amounts in new currency notes without “active co-operation” by some dishonest bank officials and concerned people, involved in currency logistics, when entire India is standing in banking queues and still not receiving 2000/- par day on most of the occasions.   

Globally, China market was weak today after some regulatory clamp down on some institutional investors (certain insurance companies) for excessive dealing in Chinese shares. Also, there was some market buzz that BOJ may soon go for some types of tapering in order to protect the JGB bond yields around zero and to prevent excessive devaluation of Yen due to divergent monetary policy with Fed.

In Italy, new PM is in the process of “sworn in” to for a new Govt and Monte Paschi may get official Govt bailout, if they failed to raise $5 bln immediately from a clutch of private investors. Total fund requirement for the bank may be around $8.75 bln at this point of time (EUR 14 bln life line).

Now, it’s almost 100% certain that Fed will hike rate by 0.25% on 15^th Dec in an “annual exercise” for 2016. Some sections of the market may believe that Fed will not only hike this time, but may also go for a rapid shift in its easy monetary policy stance, thus paving the way for further normalization of US rates in 2017. Thus, the US bond yield & also the USD are surging right now.

But, considering the current strength in USD and actual implementation of the “Trumponomics”, Fed may hike rates twice @0.25% in 2017 and also in 2018 instead of some market perception of 3-4 hikes in 2017. Thus Fed may take the script of a “dovish hike” rather than a “hawkish hike” this time and USD may correct by some extent after the Fed meet on 15^th Dec.

But, eventually, Fed may again sounds like a “hawk” around Feb’17 for an expected 0.25% hike in June’17, depending upon the actual plan of fiscal spending by Trump and US inflation, GDP & job trajectory.

For Indian market, all focus may be on this USD & oil strength, forthcoming budget on 1^st Feb’17, RBI stance and remonetization & GST progress on the ground apart from H2FY17 GDP & corporate earnings to have an idea about overall co-lateral damage done to the economy for the demonetization, where benefit may be miniscule.

Although, for the FY-18 budget, there is some market buzz of windfall gain for around Rs.1.20 lakh cr out of demonetization led surge in direct tax collections, that may be used as a “helicopter money” next year by the FM, in reality it’s may not be so easy, considering the severe manpower shortage of the IT dept and probable huge number of litigations.

Technically, NF need to sustain above 8325-8485 zone for any major trend reversal; otherwise it may again fall towards 7900 and consecutive closing below that, 7650 zone may be on the card in the coming days. 

 SGX-NF

Crude Oil