Technical & Macro Analysis Of Indian & Global Market----: Nifty Lost 0.65% Amid Mixed Global Cues & Market Perception That Govt’s New NPA Policy May Not Change The Reality On The Ground Significantly; It May Be A “Old Wine In A New Bottle”

Market Wrap: 05/05/2017 (16:00)

NSE-NF (May): 9316 (-61 points; -0.65%)

NSE-BNF (May): 22647 (-83 points;-0.37%)

For 05/05/2017:

Key support for NF: 9295-9255

Key resistance for NF: 9400-9475

Key support for BNF: 22525-22425

Key resistance for BNF: 22800-22950

Time & Price action suggests that, Nifty Fut (May) has to sustain over 9425 area for further rally towards 9475-9510 & 9550-9600 in the short term (under bullish case scenario).

On flip side, sustaining below 9405-9385 area, NF may fall towards 9335-9295 & 9255-9170 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 22850 area for further rally towards 22950-23075 & 23200-23475 area in the near term (under bullish case scenario).

On the flip side, sustaining below 22800-750 area, BNF may fall towards 22675-22525 & 22425-22200 area in the near term (under bear case scenario).

Nifty Fut (May) today closed around 9316, down by almost 61 points after making an opening minutes high of 9360 and day low of 9297. Indian market today opened in a negative tone following mixed global cues amid slump in oil & metals. China market was also under pressure for near capitulation in iron ore and increasing regulatory tightening and Govt’s was on debt & shadow banking.

Amid all these ongoing global jitters, Indian market was initially trading in upbeat mood on the hopes for something different in the Govt’s new NPA policy & war on stressed assets. But, as the underlying policy was already known & also largely discounted yesterday itself, today’s fall after official RBI publication of the same may be described as another example of “buy the rumour & sell the facts”, specially for the PSBS/Bank Nifty, which fall nearly 263 points from its day high of 22818 to post policy day low of 22555.

As par Govt’s new NPA Policy, RBI will be more empowered to deal with the bad loans like suspected fraud, willful default and banks may also take action for invoking insolvency in specific cases. RBI will frame detailed guidelines within next 2 weeks, will meet the top bankers to discuss NPA issues, will take list for top ten NPA accounts from each PSBS, will frame an OTS/Haircut policy for large NPA cases and may also ask the banks to resolve all the NPA issues by Dec’17.

Overall, at a glance various experts are of the opinion that these measures are nothing new and RBI is always empowered to make any directives to the banks as par evolving situation. Thus, today’s NPA Policy may be just an advisory, but any specific policy by the RBI for large OTS & hair cut may also give the banks to take decision of their own in a fearless manner without apprehending for any future investigative actions by any Govt agencies. Thus, we may see more waive off of NPA from the bank’s book, which are presently in the write off mode.

Also, banks are not much enthusiastic about going for the corporate insolvency proceedings as it will eventually dragged into various legal challenges and kill time and also the value of the underlying asset thereby. At the end of the day, even if banks has acquired some large stressed assets, will there be enough buyers with decent price tag to buy out the assets/projects?

There was some disappointment in the NPA policy today in the sense that it did not make willful default a criminal offence as was expected by some section of the market. Also, it did not address the structural reasons for the legacy issues of NPA and lack of that may also create the same NPA in the future. Overall, around 16.5% of the total loans with Indian banking system may be now turned into stressed assets, which may be among the highest among the BRICS nation, just below Russia. Indian PSBS has almost 17% NPL, while it’s around 7-6% for private & foreign banks. The NPL of Indian banking system along with stressed balance sheets of some of the corporates may be one of the primary reasons for India’s rating just above junk.

Market may be also concerned that as a result of this NPA policy, more skeletons of stressed assets may also come to the light out of the bank’s hidden NPL and corporate balance sheets may also come under renewed stress. Also, market was expecting a “big bad bank” (super ARC) from the Govt for the last few weeks and in that sense it’s a great disappointment too as Govt has no such immediate intention to put the tax payer’s money into the banks to bail out some big corporate defaulters; instead that fund may be deployed in other social development works & infra capex keeping in mind the 2019 general election.

Apart from the NPA policy related long unwinding, market may be also concerned for the ongoing tension at PAK LOC to some extent. Also mixed Q4FY17 earnings so far may have kept the market rally to some defined limit as valuations may be also stretched at TTM PE of around 23.55 at 9350 Nifty against historical average of around 18 (TTM EPS now around 397); unless earnings catch up with double digit growth of around 15-20% from present average CAGR of 7% for the last few years, it may be difficult for Nifty to trade at such high valuation multiple.

Globally, USDJPY came under renewed pressure today in the morning after some hawkish comments from BOJ Kuroda. All eyes may now be on the US NFP job data, especially the hourly earnings growth and a scheduled speech from Yellen & Co to gauze the Fed’s appetite for a June rate hike. Any disappointment may result in “risk off” trade & vice versa. Apart from Fed & NFP, market will also watch Sunday’s French election keenly for any surprise or not (like Brexit or Trumpism).

Meanwhile, US NFP data for April just flashed as:

NFP: 211k (estimate: 185k; prior: 79k)

Unemployment rate: 4.4% (estimate: 4.6%; prior: 4.5%)

Participation rate: 62.9% (prior: 63%)

Avg. Hourly Earnings (MOM): 0.3% (estimate 0.3%; prior: 0.1%)

Avg. Hourly Earnings (YOY): 2.5% (estimate: 2.7%; prior: 2.6%)

Overall, today’s NFP headline is simply blockbuster except the tepid trend of average hourly earnings (YOY) at 2.5%, which signifies that despite US is officially reaching around full employment as par Fed, wage inflation may not be sufficient for Fed’s target of core CPI around 2%; Fed may be on the sideline for June too considering overall soft Q1 US economic data. In any case, USDJPY need to sustain over 113.50-114.50 & SPX-500 also need to stay above 2400-2410 zone for any meaningful “risk on” trade from here ahead of French election & Yellen.