Nifty Surged By 129 Points On Short Covering Amid Hopes Of A “Santa Rally” By ECB/Draghi And Strong INR As A Result Of Falling US Bond Yields Coupled With Yesterday’s “Bold” Steps Of Rate Hold Taken By The RBI; What's Next ?

Market Wrap: 08/12/2016 (17:30)

Technically Nifty Fut (Dec @8253) has to sustain over 8285-8335 area for further rally towards 8385-8425 & 8485-8545 Zone.

On the other side, sustaining below 8225-8155 zone, NF may further fall towards 8090-8040 & 7980-7900 area in the near term.

Nifty Fut (Dec) today closed around 8253 (+1.59%) after making an opening day low of 8176 and post lunch session high of 8268.

The rally may be primarily fuelled by short covering after gap up opening today following positive global cues and hopes of extension of ECB stimulus beyond March’17 till March’18 without any tapering. Also, strong INR as a result of falling US bond yields and yesterday’s RBI stance of holding rate may have helped the domestic market quite significantly today. Indian bond market was expecting at least 0.25% rate cut by RBI yesterday.

The Indian market sentiment was also supported by the withdrawal of incremental CRR hike on the excess demonetized banking liquidity from 10^th Dec as announced by the RBI yesterday (although it was highly expected after MSS limit was hiked last week to absorb the excess liquidity and may be also negative for the banks in the long term, considering probable capital loss in their bond portfolio).

The domestic market sentiment may be further boosted today by a Finance ministry statement that the actual FY-17 Govt capex may be more than the budgeted for the year. After demonetization led economic disruptions, Indian economy now badly need incremental Govt capex for infra and other spending amid tepid private investments going on for the last few years.

Also, some reports suggesting that going forward RBI may maintain a dovish outlook and may also cut by 0.50% by Feb’17 & Jine’17, depending upon the actual inflation trajectory, disruptions in GDP after demonetization and Fed stance for 2017, may help the market sentiment today.

Also, data showing that FII(s) are net buyers of stocks in spot segment for the last few days after the recent spree of market corrections may have helped the market by some extent. But, this may be also a financial year end portfolio rebalancing by the FII(s) and once the key technical level of 7900 NF is broken, they may turn aggressive sellers also.

After all, one day rally on hopes of ECB stimulus may also be another “dead cat bounce”, which is being utilized for “trapped” long unwinding by the market participants as the real concerns of economic slowdown in India is still very much alive after demonetization and Govt’s stance of “war on black money”. Indian GDP, consumption and also corporate earnings are likely to suffer significantly in the short term as well as the long term for this surprise “surgical strike” on the “formal/informal economy”.

Just now, ECB flashed its much awaited monetary policy announcement and instead of a “ Santa Gift” in the form of extension of its bond buying programme @80 bln EUR/pm till Dec’17 or March’18 as expected by the market, it actually throw a “bomb shell” in the form of a partial tapering.

ECB will continue to purchase bonds at reduced rate of 60 bln EUR/pm till Dec’17. Although, Draghi may reveal more in the presser Q&A, the present “Taper Tantrum” may be an indication of scarcity of eligible bonds and limits of a central banker for an “unlimited” monetary stimulus. Draghi may again call for some “fiscal stimulus” in line of “Trumponomics” in the days ahead and it may be also an indication that era of “easy money” is going to end sooner rather than later. It may be also an acknowledgement by Draghi for rise in core inflation (1.8%) and comparatively better economic data across EU, despite its political & banking risks.

Looking ahead, it’s almost certain that Fed will increase US rate by 0.25% this month and may also further increase by at least twice in 2017 (June-Dec), depending up on the actual fiscal spending plan of Trump.

Thus, by March’17, USDINR may hover around 70-72; depending up on the global cues and RBI’s stance and that may be the biggest challenge for the Indian market & economy. We may see more incremental outflows by the FPI(s) in the coming months.

 SGX-NF