Nifty Closed Almost Flat Amid Strong USD & Oil Coupled With Tepid Domestic Macros Despite Positive Global Cues Supported By Strong China & EU PMI Data

Market Wrap: 03/01/2017 (17:30)

Time & Price action suggests that, Nifty Fut (Jan @8190) has to sustain over 8265-8310 area for further rally towards 8365-8410 & 8485-8545 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8150-8100 zone, NF may further fall towards 8040-7940 & 7890-7840 area in the near term (under bear case scenario).

Nifty Fut (Jan) today closed around 8190 (-3 points), almost flat after a moderate day of volatility amid positive global cues & tepid domestic sentiments. NF made a day high of around 8228 and made an opening session low of 8159.

Indian market today opened in slight positive tone following upbeat Asian market supported by better than expected China MFG PMI data. In EU, overall economic data in UK & Germany was also upbeat (PMI, unemployment, inflation) and market there was also trading higher. But, domestic market has failed to capitalize the global momentum today may be because of stronger USD & Oil, apart from poor MFG PMI & Core sector output data released yesterday.

On the 1^st day of full trading session on 2017, USD made a roaring bounce back after some yearend profit booking on the back of surging USD bond yields. The rally in USD & US bond yields are being basically driven by the huge expectations of “Trumponomics” (higher US growth supported by higher fiscal spending, tax incentives, deregulation etc). 

Although, Trump’s policy may take at least few quarters to shape up, approval by congress & implementation, it’s the simple jawboning of President-elect that is supporting the recent huge USD rally in such a short span of time.

Looking ahead, ISM MFG & Non-MFG and NFP report may shape the actual path of USD before Trump officially take over charge for the White House on 20^th Jan’17. Any disappointment may trigger huge USD sell off; but better than expected ISM & NFP data may also result in further strength of USD also.

Technically, dollar index (USDX), which is now trading around 103, may further rally towards 108-110 area, if sustained over 104 and will be weak only consistent closing below 101-99 zone. A stronger USDINR around 70-72 may not be good for overall Indian economy & the market.

Crude Oil was also strong today and trading around $55 after Kuwait first delivered its agreement promise of production cut by 133000 bpd. Although, more US shale oil productions are coming online on the back of better price and there is still significant over supply, market is now clearly discounting itself for an overall OPEC & Non-OPEC production cut implementation in Jan’17. If the actual implementation is successful, then depending upon its durability, Crude may further rally towards 62-70 and in that scenario; India may be in double whammy along with a strong USD & Oil and coupled with economic disruptions for the demonetization saga.

After tepid sets of MFG PMI & Oct Core sector output data, all eyes will be on the service PMI figure to be released tomorrow, which is already well under boom/bust line of 50 (Prior: 46.7 for Nov).

As still only 40% of the ATM(s) are functional, all eyes will be on the pace of remonetization, especially in the rural & semi-urban areas, where problem of cash-crunch is still acute.

RBI/Govt today instructed the banks to allocate more small denomination notes to the rural & semi-urban areas. But, keeping in mind the forthcoming elections in five states, we may see greater cash-flow towards poll bound states as supply of new currency notes is still limited.

Apart from this demonetization & remonetization politics, market may also keenly watch political developments in UP and progress of GST.

Although, internal family feud in SP may be apparently helpful for the BJP, on closer scrutiny, Akhilesh led fraction is far greater in numbers than his father Mulayam and even, in case of no truce between the warring father & son, the later may forge a “grand alliance” with Cong & other parties in this election. 

In case of any such “grand alliance”, prospect of BJP in the UP election may also looks tough despite “war on black money/corruption” or even another “surgical strike at LOC” (As par latest statement by new Army General, India is ready for war with Pak).

After the slow progress of various GST council meeting and political & economical disruptions as a result of demonetization, it’s now virtually impossible to pass the final GST bill in the forthcoming budget or any special session and implement it from April’17. 

Tomorrow, EC may officially announce dates of poll schedules for the five states and in that scenario, keeping in mind various political “war of words”, implementation of GST even from July-Sep’17 may also look very remote.

Eventually, apart from the prospect of a “dream budget” and Feb rate cut by RBI, there may not be any “stimulus” for the Indian market in the coming days as hopes for earning recovery is also in peril after sudden decision of demonetization. GDP may also fall by around 2% in FY-17.

Moreover, considering the surge in US bond yields, strong USD and a hawkish Fed ready for three hikes in 2017, it may be very difficult for the RBI also to cut more than 0.25% in Feb, despite favourable inflation & lower growth matrix. As par some reports, food inflation may also spike after Jan’17 on the back of lower productions in Nov-Dec period after demonetization.

SGX-NF