Nifty Closed In A Cautious Tone Ahead Of Q3FY17 Earning Season And Strength In USD Despite FM’s Upbeat Comments That “Demonetization Has Helped Buoyancy In Tax Collections”

Market Wrap: 09/01/2017 (17:30)

Looking at the chart, Nifty Fut (Jan @8253) has to sustain over 8295-8335 area for further rally towards 8375-8425 & 8485-8545 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8265-8225 zone, NF may further fall towards 8140-8080 & 8040-7940 area in the near term (under bear case scenario).

Nifty Fut (Jan) today closed around 8253 (-14 points), almost flat after a tepid day of trading ahead of Q3FY17 earning season and some macro data (CPI/IIP) later this week.

Market may be also cautious about EC’s stance tomorrow about any postponement of budget presentation day as it now seems that Govt is in no mood for any change in that, being scheduled on 1^st Feb’17, despite the fact that even CBSE/ICSE exams are being rescheduled across the states. Govt may be in no mood for “vote on account” either on 1^st Feb and presentation of the full budget, including railway budget after the state poll process ends on 8^th March.

Domestic market today opened in a negative note amid gloomy GDP projections by the CSO till Oct’16, even before the demonetization period despite overnight positive global cues and supportive morning Asian market on the back of upbeat US NFP report on Friday. NF made an opening session high of around 8272 and late day low of 8241 in an extremely low volume market; Japan was closed today.

Markets may be somehow skeptical about Q3FY17 earnings, which will kick start from tomorrow with Indusind Bank and Infy/TCS later this week. Although, there may not be any significant adverse effect of the demonetization on the IT companies and on the contrary, it may help them for the “digital economy” theme, especially some small IT companies, Banks may be the biggest loser apart from the other consumption sector. 

In Q3, due to direct impact of demonetization, banks may be too much concentrated on cash/currency management, which may adversely affect their other sales operations (loans, cross sales, direct fee income etc) and consumer sentiment was also not good for any direct sales or cross-sales.

On the other side, operating costs of the banks may be increased multifold after demonetization and despite low cost CASA/ demonetized bank deposits; there is no incremental demands of loans. Treasury profits because of favourable movements in bonds and some unexpected spurts in repayment of loans/NPAS/NPLS with old demonetized notes may save some of the banks also. But, going forward acute cash flow mismatch in the system, “destruction of wealth” (war on black money), and economic disruption after demonetization may hamper the credit portfolios of the banks as well; specially SMES & retails. 

As banks has to provide some interests on the demonetized deposits (savings portion) and at the same time, its earning nothing out of it due to lack of deployment or RBI CRR issue, NIM may be in pressure for Q3 as well as for Q4FY17 also. Banks has also reduced MCLR significantly after rebuke from the PM in his 31^st Dec address to the nation and if RBI does not cut in Feb’17, NIM of the banks may be under severe pressure further. Also, new Ind-AS accounting norms may be negative for banks.

Although, traditionally Q3 is a lean season for IT companies, their guidance will matter, especially after Trump related “America First” rhetoric & H1B visa issues. Also, lack of timely adaption of latest tech (AI/Cloud etc) by the big Indian IT companies may be a negative factor despite advantage of a strong USDINR.

As par some reports, Govt in its stance of collecting more “contribution” (taxes) from the capital market, may change the very definition of LTCGT and may define it as minimum holding of 3 years against 1 year as of now. 

This mean that investors/short term traders, who booked “profit” before 3 years has to pay short term capital gain taxes. This may be negative for the Indian market, even if STT is scrapped in the budget. 

Govt may also tinker some DTTA rules and GARR is also scheduled to commence from April’17. Thus, capital market taxation issues may be a near term headwind for the Indian market apart from the pain of demonetization. 

Apart from the FII(s), there may be adverse impact on the DII(s) portfolio return also, if such definition of the LTCGT is changed from one to three years.

Although, the incremental tax revenue growth of 12.01% in the first nine months of FY-17 is quite encouraging as reported by the FM today, part of it may also be related to the scrapping & some exception of the old demonetized notes for various Govt tax purpose (either by direct deposit or by digital banking). 

Actual “buoyancy” of the tax collection after demonetization may be more clear in Q4FY17 and subsequent quarters as Q3FY16 tax figure may be related to economic activities prior to demonetized period. Tepid PMI figure, well below 50 may be one of the available high frequency data, which is pointing towards real slowdown (contraction) in the domestic economy after demonetization. 

Globally, USD is gaining strength today after upbeat NFP report (higher wages) on Friday. Also a “Hard Brexit” comment by the UK PM on Sunday has helped the GBPUSD to go down significantly, causing some strength in the dollar index.

Despite robust set of recent UK economic data as a result of depreciated currency (GBP), market is concerned about “Hard” Brexit and UK’s stance on the key immigration issues along with EU’s insistence for free access of the EZ trade related on it (immigration). Thus, any “Hard” Brexit in lieu of “Soft” Brexit may not be good for the UK/global market as well as Indian market. For UK, all focus may be on the SC’s verdict there about taking approval from the UK Parliament before invocation of the Article-50.

Another source of potential headwind may be China this year. Apart from the rhetoric of US-China trade war, Chinese Yuan devaluation and significant depletion of its FX reserve may be a cause of some real worry. As par some reports, USDCNY may be rallied towards 7.30 in FY-18 due to perception of “Trumponomics” and higher capital outflow from China. PBOC is basically now going all out to regain control of the Yuan before Trump take charges of the Oval office on 20^th Jan’17. 

And lastly, don’t’ forget Greece also; renewed concern about banks there and sudden surge in the credit risks is also dampening EU market sentiment today.

SGX-NF