Nifty Dropped By 80 Points Amid Concern Of Trump’s Policy & Trade Protection And Poor Earnings By Axis Bank & Some Reports About Modified Version Of FPI Taxation (India Fund) In The Forthcoming Budget

Market Wrap: 20/01/2017 (19:00)

Nifty closed the week almost 0.65% down after several days of consolidation marked by mixed Q3FY17 earnings, better poll prospect of BJP in UP & other states amid weak oppositions, hopes of a “dream budget” for FY-18 and concerns about Trump’s “out of box” policies and abeyance of the controversial FPIS taxation circular.

What’s for the next week?

Looking at the chart, Nifty Fut (Jan @8363) has to sustain over 8385-8415 area for further rally towards 8485-8545 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8335-8275 zone, NF may further fall towards 8175-8040 area in the near term (under bear case scenario).

Apart from the ongoing global headwinds & fear that “Trump may cause slump” in the global financial market, all eyes may also be on the stance of EC for any final decision about budget day despite at 1^st Feb is now “almost a done deal”; any postponement of the budget at this stage may also cause huge disappointment and volatility in the domestic market next week.

Nifty Fut (Jan) today closed around 8363 (-0.95%) after making an opening session high of 8434 and late day low of 8352.

Domestic market today opened almost flat on the back of poor earnings by Axis Bank & renewed concern about FPIS taxation issues, despite positive Asian/Global cues after upbeat economic data from China & US and some early morning fall in USD amid “not so dovish” comments by Yellen regarding strength of US economy and trajectory of Fed rate hikes. 

As of now, market is discounting two rate hikes against three dot plots projection by the Fed and from the overall stance taken by Yellen & other FOMC members; it seems that Fed is waiting for actual shape & implementation of “Trumponomics” before jumping on the gun in the days ahead. 

Although Fed is quite satisfied about its dual mandate of maximum employment & reasonable inflation as of now in the US economy, it’s also concerned about effect of a strong USD and incrementally higher inflation as a result of too much fiscal stimulus. As par Yellen, Fed can’t be behind the inflation curve and may not allow the US economy to run “hot” (bubbles). Looking forward, Fed may gradually hikes rates twice/thrice in a year till 2019 to return at normalcy from the present abnormal low rate & convention of one yearly hike. But, as par Yellen, Fed may also reduce the size of its balance sheet by letting the bonds matured and not reinvesting the same (backdoor tapering) to increase the US bond yields (equivalent to borrowing rate hikes for US economy) instead of direct rate hikes.

But, market is concerned that eventually economics may get a back seat and Trump’s politics may be a deciding factor for the USD/US bond yields. Thus the uncertain nature of Trump & his “out of box” ideas may cause significant volatility in the global financial market, which was so far being controlled by the central banks. The same is true for EU political risks also.

Indian market today was under pressure after poor set of Q3 numbers from Axis Bank yesterday and also some other small & mid cap companies today, which may be an early indication of adverse effect of some legacy issues & demonetization on the core sector of the economy. 

Axis bank, being a large lender to the corporate sector, the pain is more visible along with the MSMEMS portfolio. Also, going by the immediate impact of demonetization and long term effect of the “war on black money”, retail loan portfolios may not be safe from being stressed in the coming days. Apart from legacy issues, demonetization & automation may be the biggest threat to the Indian job sector as of now and considering Trump’s “America First” policy, domestic job generation by the Indian IT sector may be a challenge in the coming days. As par some reports, Infy has “axed” (released) around 9000 employees in 2016 due to automation. If such trend continues in future, then retail loan assets may not be safe in the coming days.

Domestic market today came under severe selling pressure suddenly after lunch hour today. Apart from the Trump’s inauguration speech & some probable harsh executive actions related to trade protectionism factor, market may be also concerned about some report that FPIS may be taxed on a prospective basis for their India focused funds above certain limit (>30 cr against present >10 cr) and individual investors holding above 10% may also be taxed. Thus, the story of double/triple taxation on the India focused FPIS may haunt the market again and although the previous circular by CBDT is put on hold, it’s not cancelled. Thus we may see some actions & volatility in the issue in the coming days again.

Globally, all eyes now will be on Trump’s maiden presidential speech and any official announcements regarding shape of “Trumponomics” (modalities of fiscal/infra spending, tax cuts, deregulation, trade protection & China rhetoric etc). If the thrust is more on the trade protection than specific fiscal spending theme, USD as well as US stock market may be sold off and “Trump Trade” may end abruptly.

For EM, there may be no “welcome gift” from Trump & Co in the days ahead apart from solaces of some fall in USD/US bond yields; but too much rhetoric on the trade protection & “biggest” US job creator theme may also hurt the EM including Indian economy & the market. On the other hand, if Trump put maximum stress on “Making America Great Again” by divulging some specifics about his fiscal spending, USD/US bond yields may fly to the sky and in that scenario, EM as well as Indian market may come under renewed pressure; it may be a double whammy for the EM under “Trumpism” in the days ahead.

 SGX-NF