Nifty “Snapped” 5 Days Rally; But Closed Almost Flat Amid Tepid Mfg PMI & Rate Cut Transmission Pressure On Banks And Mixed Auto Sales Data

Market Wrap: 02/01/2017 (17:30)

Technically Nifty Fut (Jan @8191) has to sustain over 8260-8295 area for further rally towards 8335-8400 & 8455-8495 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 8191, almost flat after a moderate day of volatility amid thin volume. NF made a late day session high of around 8219 and opening session day low of 8151.

As almost all the major global markets were closed today, Indian market was driven mainly by local cues. PM’s speech (“Mini Budget”) on New Year’s Eve day calling for transmission of rate cuts by the banks and working for the interests & the benefits of “poor & middle class people” was negative for banks, but positive for real estate (affordable housing). 

Also significant lowering of MCLR by various banks may be also good for automobiles (affordable auto loans) and combined with that mixed auto sales data for Dec’16 was also helped the overall market sentiment including automobiles today.

Banks were under pressure as transmission of rate cuts may be negative for overall NIM to the extent of around 0.60%, if credit demand does not pick up as expected in the coming days; on the other side, operating costs may have also increased after demonetization and NPA may also surge further.

Apart from the consumption sector, banks may be the biggest loser after demonetization, despite surge in CASA/demonetized bank deposits having lower cost of funds (?).

Also, these demonetized deposits may not be permanent for the banks and around 60% may be withdrawn eventually. Thus, one can’t rely on this “temporary” liquidity for long term “low cost of funds” either.

Although, auto sales for Dec as well as Nov’16 is “quite impressive”, even after demonetization and may be also above analyst’s estimates, the “real picture” may come in Jan’17 or months ahead, after banks stop accepting the old demonetized notes in any manner from 30^th Dec’16. 

Apart from short term effect of demonetization, auto sales, especially expensive models may be affected quite significantly in the long term for Govt’s stance of “war on black money”. It may not be surprising that even some “auto dealers” may come into Govt agency scanner after reporting “unusual” sales figure for Nov-Dec’16 period for “suspected money laundering activities”.

Indian market sentiment today affected to some extent by the tepid Markit Mfg PMI Data, which came below “boom/bust” line of 50 at 49.6 in Dec against 52.3 in Nov’16. Though, it may be on the expected line, the sudden contraction came 1^st time in 2016 and this is the largest MOM decline since 2008, after global financial crisis; the adverse effect of direct impact of demonetization may be clearly visible from this MFG PMI data.

Looking ahead, global factor, such as US NFP job data on Friday (6^th Jan) and any official announcement of Trump’s actual fiscal plan after taking charge of the Oval office on 20^th Jan may be keenly watched, apart from any immediate impact of OPEC & Non-OPEC production cut agreement implementation, scheduled to be from yesterday itself (1^st Jan’17). Oil above 60$ in 2017 may not be good for overall Indian economy & macros as Govt will not withdraw the incremental increase in ED previously imposed, when oil was significantly lower (an easy way for the Govt to collect revenue and use it for infra capex).

Also, potential EU geo-political risks & banking crisis (Italy) may keep the market in edge in the coming days.

After market hours, India’s core sector output growth came as 4.9% for Nov’16 against Oct’16 figure of 6.6% on the back of decline on crude oil & natural gas production; but surge in electricity generation (+10.2% against MOM 2.8%) may have limited the adverse impact. Although, the infrastructure/core sector output may not be affected significantly unlike consumer durables goods as a result of demonetization, the overall trend may be tepid as well.

NAMO’s speech may also disappoint the market today as there was no indication of any “stimulus” there as highly expected. Overall, poll schedule for UP may be shortly announced and going by the present political scenario and SP’s family feud, a probability of Akhilesh’s SP, Ajit Singh & RAGA (Cong) combination looks greater. In that scenario, BJP may not gain significantly from UP poll despite “surgical strike on the black money/corruption” and NAMO’s own popularity. 

As demonetization led “short term pain” so far failed to yield any “long term gain” for the “Aam Admi”, regional political importance may be growing for India rapidly, as there is no “leader” in the opposition parties, who can challenge NAMO nationally as of now and a growing regional politics may be another “political risks” for the country in the days ahead.

Technically, for 2017, consecutive closing below 7900, Nifty may fall towards 6830 and consistent closing above 8300, it may rally towards 9350 as of now.

Apart from global cues, Indian corporate earnings and future guidance, GDP trend, pace of remonetization, progress of GST on the ground, political scenario and forthcoming budget may decide the next course of volatility for the market.

There may be lots of volatility for the Indian market in 2017 and that may be an opportunity for both short term investor and a trader, who can act without any emotion and have professional knowledge, what & when to buy & sell (book profit).   

 NF