Nifty Snapped Nine Day Winning Streak And Closed 20 Points Dow; But Finished The Week Almost 0.7% Higher Ahead Of US NFP & Q3FY16 Earnings; What’s Next ?

Market Wrap: 06/01/2017 (17:30)

Looking at the chart, Nifty Fut (Jan @8268) has to sustain over 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 8295 zone, NF may further fall towards 8210-8125 & 8040-7915 area in the near term (under bear case scenario).

Nifty Fut (Jan) today closed around 8268 (-0.24%) in a day of consolidation after around none days of successive positive closing and closed the 1^st week of 2017 almost 0.7% higher amid some weakness in USD and Govt’s reassurances about higher tax revenue collection than budgeted estimates for FY-17.

The domestic market was also under pressure after PMI data for Dec’16 showed severe economic contraction; but some upbeat auto sales figure may have also helped the market. Banks were under pressure for rate cut transmission thrusts from the Govt/NAMO; but affordable housing schemes and lower interest rates have also helped the real estate & auto sector.

IT counters were under immense pressure this week after some fall in USD as a result of “not so hawkish” FOMC minutes and reintroduction of a H1B visa bill in the US congress aimed at Trump’s election rhetoric of “Jobs for America” first. Although, there may be severe lack of required skills in the US work force for the IT sector as of now, the bill calling for higher minimum salary for an immigrant worker by almost 67% (from $60k to $100k/pa) may put significant higher operating costs for the Indian IT companies.

Apart from H1B visa issues, investors may also be worried about technological obsolesce for the Indian IT companies (lack of adoption of latest technologies like AI, automation, digital etc) and its future. Market may be also worried about Q3FY16 earnings & Q4 guidance from Infy, TCS next week and its lack of inorganic growth, especially in the AI/Automation field, despite having huge cash balances. In brief, the days of traditional “code writing” & software services types of business model may be over and for incremental growth, Indian IT companies must peruse beyond that in order to keep itself as relevant for the rapidly changing need of the global/US requirements. 

As state elections has been announced by EC from 4^th Feb to 8^th March, it may clash with the scheduled budget presentation date of 1^st Feb. Thus, opposition political parties are seeking postponement of the budget presentation to a later day after election. There may be distinct lack of co-ordination (?) between Govt & EC, whereby despite the budget presentation date (1^st Feb) this year was well known, state elections has been scheduled from 4^th Feb, which may invite violation of poll conducts from the opposition parties. Thus, “dream budget” day may be deferred this time and Govt may also not in a position to announce any “stimulus” or “helicopter money” intended for the “Aam Admi” to reduce the “demonetization pain”.

Govt today flashed the estimated GDP for FY-17 as 7.1% for FY-17 from actual 7.6% last year (FY-16). This estimates has been done up to Oct’16 without considering the demonetization impact from Nov’16. As par various reports, GDP may be affected by 0.50% per month, until adequate remonetization and restoration of broken supply chain. Thus, eventually, FY-17 GDP may be around 5-5.50% by FY-17 and consequently, there may be NIL or negligible earnings growths for Nifty in FY-17 as a direct fall out of demonetization.

Apart from immediate economic & political disruptions, demonetization may also cause significant surge in un/under employment in the days ahead. Also, trend of private investments is very poor after the surprised demonetization, which was already in tepid condition for the last few years.

As a direct or indirect fall out of demonetization, Indian consumption may be taking a big slump and also implementation of GST may be in jeopardy.

Just now, the much awaited US NFP data flashed and although the headline job numbers is well below the street estimates & came at 156k (against 178k estimates; prior 178k) and unemployment number came at 4.7% as estimated; the hourly wage growth came good at +0.4% against estimate of 0.3% (prior: -0.1%) and participation rate also flashed slightly higher.

Market was looking for growth in hourly wage as it may be vital for the much awaited wage inflation for the US economy and thus, today’s NFP data may be USD positive; if there is adequate wage inflation, US consumer may not hesitate to spend more and economy will grow to withstand successive Fed rate hikes in 2017-18 apart from the perception of “Trumponomics”.

Crude Oil is trading now around 55, thanks to favourable API inventory data & confirmation of Saudi cut yesterday; if there will be across the board cut by various OPEC & Non-OPEC producers in the coming days as par letter & spirit of the recent agreement, oil can further rally towards 62-70 level. 

Technically, Oil has to sustain over 55-58 zone for further rally towards 62-70.

For India, a combination of stronger USDINR (70-72) & Oil (62-70) may be fatal apart from the headwinds of demonetization related economic & political disruptions.

In the event of a stronger USD, RBI may not be in a position to cut rate in Feb despite favourable inflation/growth matrix just to keep the USDINR bond & interest differential at reasonable level to prevent out flows.

Despite positive inflows by the DII(s) & MF (domestic SIP), almost 25% of the Indian market capitalization (equivalent to the RBI FX reserve) is dependent on FPI(s). As such, advocation of any tax policy against the interest of the FPI(s) in the forthcoming budget may be counterproductive and may be proved as also another disruption for the domestic market.      

 SGX-NF