Nifty Closed In A Lackluster Tone Amid Tepid Service & Composite PMI, Further Delay In GST And Probable 31st March (?) Presentation Of Budget As EC Announced Series Of State Polls From Feb 1st Week Till March 2nd Week

Market Wrap: 04/01/2017 (17:30)

Time & Price action suggests that, Nifty Fut (Jan @8208) 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).

After a lackluster day of range bound trading, Nifty Fut (Jan) today closed around 8208 (+11 points), just 0.14% higher after making an opening session high of 8223 and late day low of 8187.

Indian market today opened in slight positive following supportive global/Asian cues, but could not sustain the momentum after Service PMI for Dec flashed at 46.8 (Prior: 46.7 for Nov) and composite PMI (Service + MFG) came at 47.6 (Prior: 49.1 for Nov); both are well below the boom/bust line of 50 and pointing towards contraction after demonetization fiasco in Nov.

Moreover, the “New Business” & “Expectation” sub-index also fall to multi month low, despite optimistic tone for the New Year from the service providers, which may be an indication of the ground reality of severe cash crunch and loss of confidence among both consumers & investors after the most unprecedented & surprised event of 2016 (demonetization).

Thus, in Oct-Dec’16 period, Indian PMI may be one of the poorest among the peers, thanks to the demonetization; whereas globally there is unexpected bounce back of the same from China to EU & US and other DM(s) after “Trumpism” led confidence and also aided by local currency devaluation.

Return of normalcy for the Indian economy may largely depend on the pace of remonetization and redistribution/rebuilding of “lost wealth”; but that is uncertain till now and investors, especially FPI(s) may not like such “uncertainty” for too long.

As expected, today’s GST council meeting failed to evolve any consensus for the “Dual Control” mechanism and it now seems that there are various others issues, which need to be sorted out first, before the final GST bill will be presented for Parliament approval and subsequent implementation.

Overall, it looks like the political & administrative “consensus” process of the GST at various stages will be very gradual & slow and as a result of “political & economic disruption” because of demonetization. Also, because of the forthcoming series of state elections, not only April’17 GST roll out is impossible, but Sep’17 implementation date might also be “virtually impossible”. 

Already, Tamil Nadu FM today called for necessary steps by the Govt to amend the “constitutional compulsion” part of the Sep’17 GST roll out to Apr’18. But, the “political compulsion” of the Govt/BJP & also for the other opposition parties might ensure that GST will not be implemented before 2019 general election.

Today, EC also announced series of state election dates for the five states from 4^th Feb-9^th March and result will be announced on 11^th March (Saturday).

As “dream budget” is scheduled to be presented by the Govt this time on 1^st Feb (within election campaign time period), some opposition political parties has raised objection to the EC for presentation of the budget just before the election as it might contain various “sops” (stimulus) for the “Aam Admi” and that may influence their voting pattern. Thus, EC will consider this angle and eventually, Govt may decide to postpone the Feb budget to March (possibly on 31^st), citing another “political/constitutional compulsion”.

In the scenario of FY-18 budget being delayed after state elections, Govt can’t announce any further “stimulus” to reduce the “pain” of the demonetization until election is over and market may also be disappointed by some extent.

Thus, in the absence of any meaningful economic “stimulus” (reforms), Indian market may now concentrate on the outcome of the forthcoming state elections, especially for the UP. 

Although, as of now, BJP may be running ahead as contender of “single largest” party as par the latest survey, thanks to infighting in the Yadav family (SP), it’s too early and situation can change rapidly in the next few days. 

Most probably, fearing the worst, Yadav family can make a truce and may also form a “grand alliance” with Cong & other like minded parties (Bihar model ?), although the time is very short. Even, in case of no truce, Akhiesh part of SP, who are in majority can form the “grand alliance”.

Thus, there will be three major blocks in UP this time; a SP led grand alliance, BJP & BSP. Considering the caste & minority based politics in the UP, it may not be easy for BJP/NAMO to win maximum seats this time like in 2014 general election (NAMO wave). 

Apart from the demonetization led “public pain” without much “gain” issues, the biggest disadvantage for the BJP this time may be lack of any credible CM candidate (name) so far. In 2014, people voted for NAMO as a credible “leader” and not for “BJP”. Despite irreparable damage already done to the SP by its “family feud”, UP voters may ultimately trust their “Netaji” and his son, the existing CM (Akhilesh) after all the drama.

The UP verdict may be important not only for NAMO and his demonetization reform, but may be also for the Govt’s ability to carry on further bold reforms (?) in the years ahead. The forthcoming state elections may be a mini referendum for “Modinomics” and acid tests for the opposition parties as well, which may decide the future course of Indian politics for 2019 & beyond and shape of the economy & market.

Globally, all eyes will be on the FOMC minutes today after upbeat EZ/EU & US PMI data. Also, EZ inflation is above market estimates, thanks to rally in oil and a devalued EUR.

If, FOMC minutes reveal that various members are quite optimistic & confident about the strength of the US economy and it can withstand successive rate hikes (at least three) in 2017, USD will further rally (hawkish FOMC minutes).

Everything being equal, USD is gaining strength as geo-political risks in EU is increasing, despite upbeat economic data (Hard Brexit, forthcoming elections in France & Germany, Italian banking & political crisis etc) and divergent monetary policy between Fed & ECB and other G-10 central bankers & perception of “Trumponomics”.

A combination of strong USD, strong oil & domestic political risks may be lethal for Indian economy, already under severe slowdown as a result of demonetization & “surgical strike on the black money/consumption story”.

 SGX-NF