Nifty Snapped Five Days Winning Streak In A Cautious Trade Ahead Of Yellen And Dragged By Higher Trajectory Of WPI & Disappointing Q3 Earnings From Tata Motors

Market Wrap: 14/02/2017 (19:00)

Looking at the chart, Nifty Fut (Feb @8805) has to sustain over 8875 area for further rally towards 8925-8995 & 9035-9075 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8855 zone, NF may fall towards 8775-8725 & 8665-8585 area in the near term (under bear case scenario).

Nifty Fut (Feb) today closed around 8805 (-10 points), almost flat in another day of consolidation after making an opening session high of 8830 and day low of 8786.10. Despite opening in a slight positive tone amid mixed Global/Asian cues, it soon came under some selling pressure and most of the days gyrated in a narrow range with a negative bias in the absence of any major trigger. 

After yesterday’s higher trajectory of core CPI (5.10%), today’s headline WPI flashed as 5.25% for Jan against estimate of 3.89% (prior: 3.39%). Although, the major thrust has came from the fuel & power shock (crude oil & LNG), the unexpected rise in wholesale prices may also translate into higher headline CPI or core CPI in the months ahead. Thus, RBI being neutral and inflation dependent, any rate cut hopes in FY-18 may be further diminished.

The prospect of incrementally lower rates in the Indian economy contrary to earlier expectations may also deter private investments & consumption in the months ahead.

Market may be also concerned about the ongoing political circus in TN, which is one of the best preferred investment destinations of India and also an important manufacturing & IT hub. The political vacuum after Amma’s sad death may be also a symptom of high political risk in the system under “one man show” and a potent future “leadership crisis”.

As par some analysts, after demonetization, any GST implementation from July’17 may be another disruption, at least in the short term. Indian earnings till now continue to be mixed and Q4FY17 numbers may be also tepid as real impact of demonetization and “war on black money” may be visible by then; in Q3FY17, after announcement of demonetization on 8^th Nov’16, there were several available loopholes in the system till last week of Dec’16 to use or launder the unaccounted money in several ways and that may be one of the explanation for sudden surge in auto sales for some of the companies (PV segment) and repayment of defunct bank loans (NPA/Write off).

Nifty was today dragged by Tata Motors (shocker Q3 result after unexplained JLR loss because of cross currency headwinds?); but supported by RIL and telecom stocks (Bharti & Idea) amid increasing optimism about consolidation (between Vodafone & Idea). As things stand today, after merger between Vodafone & Idea (although there may be regulatory challenge), there will be virtually three big player in the telecom space; viz Vodafone & Bharti Airtel (paid service so far with lots of forced freebies) and R-JIO (free service so far). 

The aggression of the new incumbent (R-JIO) in the free data space has virtually made Idea bankrupt and also caused profit of Vodafone & Bharti almost halved. For the time being, the huge free cash flow from RIL (oil & gas business) is helping the R-JIO to provide free services to its demo customers and also covering its huge operating costs for the last few years without any revenue; but the question is how long ?  Consumers of R-JIO may be quite happy, but investors of RIL may not be so going forward as net debt level is increasing for the group.

Globally, USD & risk trade was under pressure after unexpected exit of NSA from the Trump administration, just appointed few days ago in an alleged undisclosed connection with Russian authorities. Although, today’s sudden jump in Chinese PPI may be good for global inflation export, on closer scrutiny, it may be a seasonal effect of Lunar New Year. Moreover, overall EU core CPI came tepid, which also undermines the recent economic recovery or upbeat data. Thus, EU market was also depressed ahead of Yellen’s testimony later today. 

Overall, UK CPI flashed today may be also an indication of lesser consumer spending on the back of huge devaluation in GBP amid Brexit saga. GBPUSD, USDCNY, GBPINR cross currency headwinds (hedging mismatch) may be another reason for today’s shocker result from Tata Motors (JLR-UK), beside significant operation loses in domestic operations as a fall out of demonetization (CV) and unfavorable product mixes.

Although, Nifty closed almost flat, mid-cap index fell 0.65% today in an indication of broader market selling.

Yellen is expected to be dovish/owlish today amid mixed US economic data and uncertain trajectory of “Trumponomics”, which may be negative for USD. But, overall perception of US fiscal spending, tax reform/cut may also give some support to the USD later on. As of now, there is virtually no probability of a March’17 Fed rate hike, but FFR for June is now around 60%. Market is basically discounting 2 rate hikes by Fed this year (June & Dec'17) against 3 dot plots by Fed in its Dec’16 projection. But going by the uncertain trajectory (actual quantum, passage & implementation and its inflationary effect on the US inflation) and Trump’s talk down effort to keep USD down, Fed may be compelled to hike only once this year (Dec’17) with hints of "gradual hike" today as usual.

More than, Fed rate hike projection/timing, market may also focus on the deregulation step taken by Trump, soon after assuming office, which was put after the 2008 US economic crisis to avert similar situation in the future (Dodd Frank rule). Any adverse comments by Yellen on this aspect may also put some pressure on the US banks & financials today (i.e. might be negative for the overall market sentiment).

 SGX-NF