Market
Wrap: 23/01/2017 (19:00)
Looking at the chart, Nifty Fut (Jan @8411)
has to sustain over 8435 area for further rally towards 8485-8515 &
8545-8585 zone in the short term (under bullish case scenario).
On the other side, sustaining below
8395 zone, NF may further fall towards 8330-8260 & 8205-8170 area in the
near term (under bear case scenario).
Apart from Trump, all eyes may be on
the UK SC decision regarding invocation of Article-50 to initiate official
procedure of the Brexit without Parliament approval as being sought by the UK
Govt; SC nod to begin the official “divorce” process of UK from EU/EZ without
need for Parliament approval may remove the ongoing uncertainty, but it may
cause significant volatility in the market as “Real Brexit” concern will start.
Nifty
Fut (Jan) today closed around 8411 (+0.57%) after making a session high of 8418
and opening minutes low of 8333.
Indian
market today opened in a slight negative tone amid mixed Global/Asian cues, but
covered almost instantly on the back of some fall in USDINR and hopes for a “dream
budget” next week (1st Feb). Also, shortened trading days & FNO
expiry on 25th Jan (Wed) this time may have prompted some short covering
ahead of budget; but market may be also taking a cautious stance amid mixed set
of Q3FY17 earnings so far.
Friday’s
much awaited Trump inaugural speech was basically clueless about plan of “Trumponomics”,
but was full of nationalistic rhetoric (America first, Buy America & Hire
Americans, Build America great again etc). Although, being American, it’s
nothing wrong to be “ultra” nationalistic and think about America’s own
interest rather than other countries, market may be shaky about Trump’s
confrontational, unpredictable nature & out of establishment style of
functioning much like of his old reality show.
As
a result of trade protection stance (review/cancellation of TPP, NAFTA trade
agreement) and lack of any specific plan outlays for his “Trumponomics” (incrementally
higher fiscal/infra spending, cut in corporate taxes, ease of doing
business/deregulation) in his maiden day speech by Trump, has caused the USD
some weakness across the G-10 currencies and EM currencies & market
including India has some uplift today.
After
initial blood bath of “Trumpism”, USD/US bond yields and also the US stock
market rallied quite vigorously simply on the huge expectations from “Trumponomics”.
Any disappointment of inordinate delay in that perception may cause also
significant correction in the “Trump Trade” and the perception of “Buy the DM
& sell the EM” may be changed, at least for the time being.
Trump
itself carries a huge political & credibility risk for his unconventional
style of functioning, various compliance issues at the highest executive position
of the world’s most powerful country like US and above all, alleged “back door”
relationships with Russia.
Overall,
the ultra trade protection rhetoric of Trump may be proved as a boomerang in
the coming months and collateral damage of US economy may be more than the
intended benefit. The confrontational way, in which Trump is going now, may
soon leave the US “alone” in the World of super powers and in the coming days,
China, Russia & Japan may take lead in the rebalancing of superpowers
equation and may also form effective trade blocks (economic powerhouse).
All
the other countries, specially China may take counter trade protection
mechanism and in this trade war, US could lose badly as “Make In America” concept
may be simply not feasible on a global scale, considering various aspects like
US minimum labour costs, strength of USD, lack of world class infrastructure
like in China etc. As Jack Maa of Alibaba put it correctly about US: “Don’t
blame other countries; you have wasted more than $14 tln in various wars in the
last 14 years”; US under Trump may also change its policy towards “Global
Policing” and that may cause also significant geo-political imbalances and
undue tensions in the days ahead.
Another
point may be that various foreign Countries, especially China, Japan &
Saudi Arabia have significant holdings of US TSY. As par some estimates,
foreign investors/countries are holding US TSYS worth around $6 tln as of now
and out of that China & Japan is holding more than $1 tln each.
As
of now, US is a huge importer and various exporting countries earning USD
income has kept a significant amount of their FX reserve in US TSY. It’s these
holdings of foreign US TSY, which may be one of the prime factors for extremely
lower funding rate in US (safety of US TSY and bond prices being inverse to its
yield). Now, any undue trade protection & other political narratives may
also force some of the foreign countries to dump its US TSY holdings, especially
China in a retaliatory action, which may also cause the US bond yields &
USD sharply higher, translating higher borrowing costs for the US economy, even
without Fed hike. Thus, US being a significant importer of global goods &
service rather than an exporter, may be equally good for US as well as other
economies (China, India, Japan etc).
Apart
from the trade protection rhetoric, market may be also concerned about some
unconfirmed news that Trump may take as high as 200 executive decisions (?) in
his 1st week of Oval office to denounce various Obama related
policies. Thus, US politics may overshadow economics in the coming days and we
may see significant volatility in the global market.
Technically, USDX (dollar index), which
is now trading around 100.41 has to sustain over 99; otherwise it may fall more
towards 97-94 zone in the coming days.
Apart
from weak USD, some fall in Oil may have also helped the Indian market
sentiment today. Oil has fall due to record addition of oil rigs in US (shale
oil), perception that the current OPEC production cut accord may last until
July’17 (6 months from Jan’17) and in reality it may be only a seasonal cut for
winter related maintenance and production level depletion issues. Thus, even if
there was no official OPEC & Non-OPEC agreement this time, we should have
some production cuts, specially from Russia & Saudi Arabia and also some
other OPEC countries. Also, “energy independence” rhetoric by Trump may be
negative for oil going forward.
Technically, Crude Oil, which is trading
now around 52.45 has to sustain over 55 zone for further rally; otherwise it
may soon fall towards 50-47 & 42 area again.
Back
to home, apart from some fall in USD & Oil, domestic market sentiment was
overall upbeat today ahead of budget presentation on 1st Feb next
week after SC gave its nod.
Market
is expecting a “dream/popular” budget from the Govt now after demonetization pain;
but too much “populist” & “Robin Hood” like approach may also put some
strain on the fiscal math and can make the rating agencies on “high alert”.
As
par some reports, FY-17 fiscal deficit may be announced at the estimated 3.5%
of GDP on the back of higher tax revenues/IDS & some adjustments in Govt
fiscal spending despite missed telecom spectrum & disinvestments targets.
For
FY-18, fiscal deficit may be estimated around 3.5-3.3% against earlier estimate
of 3% of GDP amid hopes of incrementally higher direct tax revenues, thanks to
demonetization led IDS & RBI special dividend. Market is expecting windfall
IDS & RBI special dividend gain out of demonetization for around Rs.1.20
lakh cr. Any significant shot fall from these windfall gain accounts may make
the market highly disappointed and may also make the perception of “helicopter money”
(stimulus) to the slowing Indian economy after demonetization extremely
difficult.
Another
point is that, after demonetization, absolute figure of FY-17 GDP may be much
lower than the original estimate and in that scenario, it may also be very
interesting to see the final fiscal deficit figure and subsequent estimated
FY-18 figure. In any way, irrespective of the fiscal deficit narrative, Govt
need to spend heavily in the coming days (FY-18) in order to rejuvenate the
Indian economy, especially after demonetization & “war on black money”,
private investments continue expected to be tepid.
But,
an incrementally higher Govt fiscal deficit (combined) on account of higher
fiscal spending, 7CPC, UDAY and by various states (likely fall in revenue after
demonetization) may translate eventual higher interest costs for the economy as
Govt will take more borrowings from the market to fund its fiscal deficit and banks
has to set aside more funds for Govt borrowing programme also.
It’s
now almost certain that RBI will cut by 0.25% on 8th Feb; but at the
same time, Banks has to lower the effective borrowing rate (PLR/base lending
rate) to its borrowers beside lowering of MCLR.; otherwise it will serve no
purpose. Again in India, banks may not be in a position to lower PLR below 8%,
even if RBI repo rate drops to 5.5% in FY-18 (from present 6.25%) as small
savings rate in India is still hovering around 8% and its politically very
difficult to cut small savings rate in India drastically as the country lacks
basic social security systems with very GDP/direct tax ratio unlike developed
economies. Thus, it may be a double whammy for the domestic economy in the
coming days and in FY-18, India may face another deficient monsoon (as par Sky Met,
El-Nino may resurface next year).
Today’s
tepid HUL result flashed after market hours may be another indication of
slowing economic activities even at the non-discretionary spending levels and
may be a proxy for rural distress after demonetization.
NF
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