Technical & Macro Analysis Of Indian & Global Market----: Nifty Jumped By 0.75% Amid Fall In USD After Fed’s “Dovish Hike” & Yellen Sounds Less Hawkish Than Expected; What’s Next?

Market Wrap: 16/03/2017 (18:00)

NSE-NF: 9178 (+68 points; +0.75%)

NSE-BNF: 21325 (+102 points; +0.48%)

Time & Price action suggests that, Nifty Fut (March) has to sustain over 9235 area for further rally towards 9275-9350 & 9425-9550 for tomorrow/ in the short term (under bullish case scenario).

On the other side, sustaining below 9215-9195 zone, NF may fall towards 9145-9075 & 9035-8975 area for tomorrow/ in the short term (under bear case scenario).

Similarly, BNF has to sustain over 21400 area for further rally towards 21500-21675 & 21855-21950 area for tomorrow/ in the near term (under bullish case scenario).

On the other side, sustaining below 21350 area, BNF may fall towards 21200-21100 & 21000-20900 zone for tomorrow/ in the near term (under bear case scenario).

Nifty Fut (March) today closed around 9178, almost up by 0.75% after making a session high of 9181 & low of 9152 in a range bound day of trading. Indian market today opened in positive tone (+51 points) following upbeat global cues after the highly expected Fed rate hike 0f 0.25%; but Fed dot-plots showed another probability of 2 more hikes in 2017, which was less than market/USD bull’s expectation of 3 more hikes and subsequently USD doomed as a classic example of “buy the rumour & sell the fact”; it was also a crowded trade. A falling USD/US bond yields is positive for EM market inflow and together with that Fed’s upbeat view or confidence on US economy has ignited some “risk on” rally, in which everything from bonds to gold & EQ is green today, except USD.

For India, a combination of a dovish Fed hike & NAMO’s big win in UP election has made the INR stronger and together with that, weaker oil has made the Indian macro more attractive. Also, yesterday’s positive trade balance (+8.90B against expectation of -8.84B; prior: 9.84B) & export figure for Feb (+17.4% YOY) may have boosted the INR & Indian market sentiment; although sudden surge in exports may be more of seasonal & country specific (Japan) in nature.

Although, overall Indian market sentiment is quite euphoric and FPIS are now on a buying spree, especially after NAMO’s emphatic victory in the recent state elections & UP, valuations are quite stretched at this stage (at 9200, Nifty PE might be around 23.90 at Q3FY17 TTM EPS of around 385). Market is expecting an earnings recovery in FY-18 & 19 by around 20% from the present state of (-) 0.97% between FY: 15-16 & 5.23% between FY: 14-15 with an average CAGR of around 6.87% in the last five years.

The recovery in earnings is expected on the back of ongoing de-leveraging of cooperate balance sheets, recovery in consumption/demand as a result of incremental policy reforms by the Govt and transmission of lower lending rates to the borrowers/economy. As there are now virtually no political oppositions, it may be very easy for the Govt to implement various reforms which will be conductive for India’s job creation and better earnings; hopes are very high and thus this may be termed as another “hope rally”.

Actually, after NDA/UPA Govt came to power in 2014, Nifty average EPS is around 372 (FY: 15-16); whereas before that it was around 336 under “policy paralysis” age of the UPA/INC Govt (FY: 13-14); thus on an average it was around 11% improvement as a result of “Modinomics”. At the same time Nifty PE has expended from 18.38 to 21.80 on an average; i.e. a growth of around 19%. Thus PE expansion may be happening at a much greater rate than the actual earnings, which may be a cause of worry.

As par projected FY-17 EPS of around 395, actual EPS growth between FY:16-17 may be around 7%, whereas assuming Nifty at 9200, projected FY-17 PE may be around 23.29, against actual FY-16 PE of 20.89 and in that scenario, PE will expand by around 12% against an EPS growth of 7% (not bad at all, but may be expensive).

Indian market sentiment was further boosted by the brightening reality of GST from July-Sep’17 after the thumping win of BJP in the state elections as there may be no “political oppositions” now. As expected, GST council meet has passed the final GST bill today after market hours and the cabinet will also pass it shortly before presentation to the Parliament. The way, whole GST planning is now going on in an incremental way (step by step), it may take at least April-May’17 to be final in true sense with all the tax slabs & regulations in place. Thus although, July-Sep’17 roll out may be theoretically possible, but practically it may be quite tough considering time & administrative and business preparedness factor.

Also, Govt need to clearly define the cut-off date for GST input tax credit; otherwise, there may be confusion and manufacturers may resort to less production and storage in Q1FY18, which may in turn affect both top & bottom line.

After “dovish hike” by Fed yesterday, today BOJ/SNB/BOE all came pat as expected and together with that, favourable exit pool (outcome) of Denmark election has also boosted the global “risk on” sentiment. But USD is bound to recover simply because divergence of Fed’s monetary policy (hawkish) and that of other major G-20 central bankers (dovish to neutral stance by BOJ/ECB); while Fed is thinking & actually implementing multiple rate hikes, ECB/BOJ are still on QQE mode.

Technically, USDJPY (LTP: 113.50) need to sustain above 112.50-111 zone for any rebound from here towards 116 area; otherwise it may fall further towards 107 area in the coming days.

Although, Yellen sounded less hawkish yesterday than market expected, on closer look she may have done a great job in containing the strength of USD after so much hawkish scripts since last one month raising the market expectations amazingly and at the same time satisfied her political boss’s (Trump) weak USD rhetoric. Yellen has effectively delivered the same as par Fed’s Dec’16 dot-plots of 3 hikes in 2017, but thanks to the 24/7 hawkish rhetoric by various FOMC members, market was expecting perhaps 4 hikes with some balance sheet sizing by Fed, which may be over expectation.

Fed never made a commitment for any rate action and thus it’s not expected from Yellen either to make a firm (yes or no) commitment for future hikes in some specific months. Market is expected another two hikes in Sep & Dec’17, considering core US CPI of around 2% or headline CPI of 2.7% as of now.

For Fed, normal rate means, at least 1% above CPI (real rate of interest) and in that scenario, one can expect Fed fund rate of around 3-4% by FY: 17-19 from present 1%; i.e. Fed has to hike by almost 8 times @0.25% in 2017-18 to reach the goal of 3%. In that sense, Fed may be termed as very gradual and accommodative. Irrespective of any rhetoric by Trump for a weaker USD and his actual trajectory of fiscal/infra spending & tax cuts, if US inflation will stabilize around 2-3% in the coming days, Fed is bound to act; otherwise it may fall behind the inflation curve and has to hike more rapidly later than gradually. As par Fed, gradual also means one notch above or below dot-plots; thus the Fed suspense will be an ongoing phenomenon for the global financial market. For the time being (2017), Fed may take 2% rate as “normal”, being equal to core inflation of around 2%.

Fed may not tinker with its huge balance sheet of $4.5 tln in foreseeable future as it’s not confident enough for the strength of US & global economy to withstand such shock. In fact, Fed may never try to sell those QE bonds/toxic assets back to the market and it may simply allow it to mature and clean/deleverage its balance sheet.

But, a US Fed rate of 3-4% or even 5% by 2020 may not be good for US as well as global economy, especially EM. Even, a confirmation of 2 more hikes in 2017 may act as huge outflow for the EM, including Indian market despite its current stability. For US economy, an incrementally higher CPI combined with a lower GDP growth may also invite some types of stagflation rather than Trumpflation or reflation.

Overall, market was habituated for only a symbolic 0.25% annual Fed rate hike for the last two years (2015-16). In that sense, Fed is now successful in believing the market that it can hike 3-4 times from 2017 as par evolving economic & geo-political scenario and in the process, it has recovered some its lost credibility also; market will take Fed jawboning more seriously now than before.