Nifty Rallied By Another 60 Points Amid Positive Global Cues And Hopes Of RBI Cut Coupled With A Good Budget & Upbeat Q3FY17 Earnings; Midcaps Shined To A New Closing High

Market Wrap: 06/02/2017 (19:00)

Looking at the chart, Nifty Fut (Feb @8815) has to sustain over 8855 area for further rally towards 8900-8950 & 8995-9075 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8835 zone, NF may fall towards 8775-8720 & 8635-8520 area in the near term (under bear case scenario).

Ongoing EU political risks, especially in Germany, apart from “Trump Tantrum” may drag the global as well as Indian market despite RBI rate cuts and an upbeat budget & Q3 earnings.

Nifty Fut (Feb) today closed around 8815 (+0.69%) after making a session high of 8834.40 and day low of 8781.80. Indian market today opened gap up by around 50 points itself following overnight positive tone in US stock market and remained in a predictable range ahead of RBI event day after tomorrow.

On Friday, overall US economic data including NFP was mixed and USD has fall to some extent following the falling US bond yields, which was the main driver of recent USD rally after “Trumpism”. But, despite that US & global  market was upbeat as Trump has made a deregulation move in abolishing the “Dood Frank Banking” & “Retirement Advisor” rule favoring the “Wall Street” (financials & banks), which was in force after the 2008 US financial crisis to avert similar types of scenario in future. Although, these rules were not have any significant impact on the overall US financial market/banks, this move by Trump is being seen as a “deregulation” and market rejoiced; although opposition DNC termed it as a “payback” to Wall Street by Trump, who was being seen as “Anti-Wall Street” & “Pro-Real Street” in his election rhetoric.

Overall, recent spate of mixed US economic data & Friday’s tepid NFP job report has diminished any probability of a March’17 rate hike by Fed and now only June’17 is indicating some probability (around 60%) of the 1^st rate hike in 2017 and Fed may only hike by twice/once in this year, depending upon the trajectory of “Trumponomics”.

Apart from US economics, which is more or less stable, investors are quite worries about US politics & “Trumpomania”, whereby Trump is busy with immigration/travel ban, trade protection, border tax, “America First” etc rather than much expected fiscal/infra spending, tax cuts and other aspects of his “Trumponomics”. Going by various recent judicial events and Trump’s Twitter tantrum, US may be heading for a constitutional crisis as divergence between legislature & judiciary is increasing rapidly, thanks to Trump’s immigration/travel ban. 

Thus, Trump Tantrum has created a sense of instability among the investors/global market and we may see a significant global meltdown in the days ahead, if such “Trump Fatigue” goes on. India, being a part & parcel of the same global community may not be an exception despite hopes of so much green shoots in the economy after a good FY-18 budget with no negative shocker.

A falling USD may also help Indian market in the short term as RBI will have some room to cut repo rate by at least 0.25% on 8^th Feb amid favorable inflation trajectory, USDINR bond yields equation, fiscal prudence shown by the Govt in its budget despite increasing spending & lower Govt borrowing. RBI may pause until Oct’17 after 0.25% expected cut in Feb to gauze the actual effect of demonetization on the overall economy, actual FY-17 GDP & Fed’s stance amid “Trumpomania”.

Market may be already discounted for the 0.25% rate cut by RBI, but may rally further towards 9000 level, if Patel surprised the market by cutting 0.50% this time to further reduce the demonetization pain of the public/economy before going into a long hibernation period. RBI may also cut by 0.50% this time just to keep the theme of the Govt “to kick start the economy” at the beginning of a new FY intact (as the Govt presented the budget one month ahead).

As banks has already transmitted almost all the previous rate cuts since Jan’15 by the RBI, thanks to rebuttal year-end speech by NAMO, there may not be any corresponding transmission by the banks this time, at least for the near term. Irrespective of any further RBI repo rate cuts, Indian small savings rate need to go down drastically and only then banks will be able to transmit or lower their effective MCLR/PLR to the borrowers. At this point of time, drastic reduction in small savings rate in India may be politically hard for any Govt and thus one can expect little benefit for any successive RBI rate cuts in the months ahead. In any way, the expected RBI rate cut by 0.25% or 0.50% (?) day after tomorrow may help the NIM of the banks, which has already lowered their respective MCLR significantly since demonetization led surge in low cost CASA deposits.

Looking forward, revival in quality credit demand is vital and unless there is visible revival in demand/consumption, capacity utilization & private capex, we may not see significant uptick in loan demand from the banks, especially from the corporates & SMES. Banks can’t grow in double digits year after year only upon retail loans, which may also turn sour amid “Trumpomania” and domestic disruption of demonetization (war on black money).

Indian market today blipped a bit after news surfaced that German CD surged as approval rating of Merkel is plummeting. Looking ahead, various EU political risks & anti-establishment and nationalistic politics (policies like Trump) may pose significant headwinds for the global as well as Indian market. Apart from Brexit (hard or soft), political risks in Germany, France, Italy may be turning serious and concept of the EU itself may be at stake in future.

As domestic market was too much worried about effect of demonetization on the Q3FY117 earnings, a better than expected show is supporting the present rally in the market; one of the reason may be effect of 7-CPC this year also. Investors were also very cautious about any adverse “capital market tax reform” and some “Robin Hood” type of approaches (populist) in the FY-18 budget, which is also turned wrong. Thus, upbeat Q3 earnings along with a “no negative shocker” budget have helped the market sentiment.

Looking forward, Q4FY17 earnings and other macro data may be vital to gauze the actual impact of demonetization & stance of “war on black/unaccounted money” as there were several loopholes available in the system to convert the “black” money into “white”. Furthermore, IT action on the suspected huge amount of “illegal” or unaccounted demonetized bank deposits may also shape the future path of Indian consumption as “destroyed wealth” may take significant time to be rebuild.

 SGX-NF