Thursday 13 July 2017

Nifty Scaled Another Record High As Bulls On Rampage Tracking Positive Global Cues Amid Dovish Fed, Upbeat China Trade Data & Hopes Of Aug Rate Cut



Indian Market Wrap: 13/07/2017 (17:00)

NSE-NF (July): 9885 (+63; +0.64%) (TTM PE: 25.04; Near 2 SD of 25; Avg PE: 18; TTM EPS: 395; NS: 9892)

NSE-BNF (July): 23866 (+145; +0.61%) (TTM PE: 30.05; Near 3 SD of 30; Avg PE: 20 TTM EPS: 795; BNS: 23889)

For 14/07/2017:

Key support for NF: 9855-9790

Key resistance for NF: 9930-9975

Key support for BNF: 23900-23750

Key resistance for BNF: 24000-24115

Time & Price action suggests that, NF has to sustain over 9930 area for further rally towards 9975-10050 & 10100-10195 in the short term (under bullish case scenario).

On the flip side, sustaining below 9910 area, NF may fall towards 9855-9790 & 9715-9670 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 24000 area for further rally towards 24115-24250 & 24250-24450 area in the near term (under bullish case scenario).

On the flip side, sustaining below 23950-23900 area, BNF may fall towards 23750-23650 & 23450-23300 area in the near term (under bear case scenario).

Nifty Fut (July)/India-50 today closed around 9885, almost 0.64% up after making an opening session low of 9857 and late day high of 9893 and thus it closed at a record closing high for the fourth consecutive session on the back of forced short coverings in P-Notes FNO coupled with hopes of a RBI rate cut, Q1 earning optimism, good monsoon, smooth roll out of GST so far and an apparent dovish Fed coupled with strong DII inflows; really bulls are on the rampage.

Indian market today opened around around 9872, almost 43 points gap up tracking upbeat global cues. Almost all the Asian markets were in deep to moderate green around 2 years high cheering a “Dovish Fed”, advocating for a gradual pace of future rate hikes amid concern of soft US inflation; overall global cues are upbeat as investors celebrate a dovish or rather than a less hawkish Fed (Yellen) and subsequent fall in global bond yields.

Overnight US market (DJ-30/US-30) rallied by almost 0.57% on Midas touch of Yellen as it appears a goldilocks situation for equity in the backdrop of a higher US growth & lower rates!!

Although, Yellen may be sounded less hawkish in her testimony yesterday, on closer scrutiny she has said nothing new, which market does not know already except some dovish outlook on the US inflation; i.e. Yellen suddenly appeared as an “inflation dove” contrary to her earlier stance as an “inflation hawk/owl” terming the subdued US CPI as pure transitory and lower prescription drug & mobile plan charges are primarily responsible for the tepid US inflation.

As par Yellen, the above two line items may be replaced in calculating US CPI basket in the next revision and after that there should be a fair assessment of US inflation. Overall, it seems that Fed is going for gradual QE tapering from Sep’17 onwards for its holding of nearly $3.5 tln QE bonds out of total B/S size of $4.5 tln and depending upon the outcome of it on the overall US economy & market in next 6-12 months, Fed may either increase or decrease the pace of QE tapering and by 2022, it may complete the overall B/S normalization process. 

Regarding further rate hikes in 2017, Fed may closely follow the trajectory of US inflation and if it’s satisfactory, Fed may go for another hike in Dec’17 or otherwise it may defer it to 2018; in that sense, tomorrow’s US CPI may be vital to assess Fed’s QT path going ahead.

Previously, Fed was supposed to hike US rate to around 3% by 2019 assuming US CPI will hit 2% by then leaving the US RRI (real rate of interest) around 1%. Now it seems that Fed is going to change that perception as it may be difficult for US CPI to sustain consistently above 2% in the days ahead. But, QE unwinding itself may pose major threat to the risk-on trade in the days ahead.

Indian market may now focus on RBI rate cut after yesterday’s lower CPI for June @1.54%; but that may be more of a favourable base effect and sudden fall in food inflation and may also be at the lower end of the CPI trajectory and may again shoot up in the months ahead because of GST implementation & 7-CPC HRA (arrears); core CPI came at 3.8% which was previously hovering around 4.5-5% and was quite sticky as par RBI.

Again, considering the overall stance of global central Banks looking for QT and domestic factor of limited transmissions & higher small savings interest rates & India’s attraction of higher bond yields, RBI may not oblige to cut in Aug or at best it may be an one off cut for 2017 (hawkish cut) unless other parameters are resolved.

In India, RRI is historically very high and it may be also due to the factor of high small savings rate, which can’t be cut drastically as it involves public mood (politics) and the nation lacks basic social security system as in the developed country. But legacy of exorbitant RRI may be also responsible for today’s Banking NPA mess.

India is at the opposite end of inflation curve in comparison to the DM or even some other EM (s), while all the other nations are fighting disinflation and are quite struggling to stimulate the economy, India is still fighting the inflation.

For any meaningful monetary stimulus, RBI need to cut deeper around 4-3% to help the Indian business in order to stay competitive with the DM & rest of the EM; but that is nearly impossible despite headline CPI is around 1.50%; as par text book economics, repo rate should be around 3% by RBI, considering RRI/neutral rate of 1.5%. Also, a drastic cut by RBI may invite Indian bond market carnage and Govt’s capex plan may be in problem.

Apart from RBI rate cut, Indian market may now also focus on the ongoing Q1FY18 earning season; despite so many green shoots, overall EPS trajectory for the Indian market (Nifty & Bank Nifty) may be still very tepid. As of now, Nifty is being supported by rate sensitive scrips for RBI rate cut hopes, FMCG and Telecoms.

Looking ahead, Nifty Fut (July) now need to sustain above 9930 area for further rally towards 9975-10050 & 10100-10195 zone; otherwise it may fall and sustaining below 9910-9855 area, may further fall towards 9790-9715 area in the short term. Ongoing LOC tension with China & Pak may turn serious in the days ahead and Q1 earnings may be subdued this time due to various factors and overall valuations may be now quite stretched at around 25 P/E now. TCS report card just out now after market hours may be very subdued and also below estimate at a glance.

Asian-Pacific market update:

Globally, all eyes may be on the ECB now as it’s talking about QT and also on the 2nd day of Yellen’s testimony apart from US PPI & CPI as inflation trajectory is now Fed’s main concern (uncertainty in the path of rate hikes).

Today Nifty was primarily supported by FMCG (ITC-optimistic outlook despite some cut in cigarette rates), Banks (Yes/ICICI/Axis/HDFC duo for rate cut hopes); almost 90% of the Nifty components were in green.

Nifty was dragged by ONGC (Govt’s merger & disinvestment fiasco with HPCL/IOC), Tata Motors, M&M, Eicher Motors and Asian Paint.

Elsewhere, Australia (ASX-200) was closed around 5738, almost up by 1.10% on the strength of Banks & Financials despite strength in AUDUSD; a very slow pace of QT may be good for overall Banking sector as easy money may be still available in plenty.

Japan (Nikkei-225) was closed almost flat at around 20101 (+0.02%) on strength of Yen as USDJPY slumped after dovish scripts from Yellen; but shares of construction machinery and automobiles have supported the market today.

China (SSE) closed around 3210, almost 0.40% in positive supported by Banks & Financials after PBOC injected today 360 bln Yuan through MLF after many weeks, which may have eased the concern of tight interbank liquidity situation ahead of corporate tax payment days.

Also, today’s upbeat China trade balance data (June) may have boosted the risk-on sentiment which came as $42.7 bln against estimate of 42.44 (prior: 40.81); on YOY basis, export grew by 11.3% against estimate of 8.7% (prior: 8.7%); similarly imports also jumped by 17.2% against estimate of 13.1% (prior: 14.8%).

Hong Kong (HKG-33) closed higher at around 26315 (+0.90%) and basically driving the Asian risk-on sentiment.

South Korea (Kospi) was also up by around 1% after its Central Bank hold its policy rate at 1.25% as expected with some cautious tone due to various global factors such as NK geo-political issues, trade protectionism stance from US & China (due to deployment of THHAD missiles) and concern for a quicken pace of US rate normalization. But, it has also indicated no change in its neutral policy stance despite improved domestic growth outlook.

Oil was trading in slight red around 45.45 (-0.11%) on surge in production of Crude in the recent weeks despite surprised drawdown reports from API & EIA yesterday; also cautious tone from OPEC about rebalancing of demand & supply may be affecting the sentiment of Oil bulls today. But reports of better China demand may be also supporting the sentiment to some extent.

EU market update:

European market is now trading almost flat in mild red, reversing completely from the earlier Yellen boost after a WSJ report indicate that Draghi may appear in the forthcoming Jackson Hall meet in Aug’17 to signal the QE tapering in 2018; incidentally, in 2014, Draghi used this platform to signal the QE and ECB will meet in Sep’17. Draghi’s proposed Jackson Hall speech may be intended to give further signal about ECB’s growing confidence on the EZ economy and less dependence of the QQE.

Thus Jackson Hall meet in Aug’17 will be very interesting as Fed (Yellen/Fischer), ECB (Draghi) and even BOJ (Kuroda) may signal some types of co-ordinated QT.
Apart from the support of dovish Yellen and subsequent fall in global bond yields earlier, EU market was also being supported by metals (rally in commodity currencies) and consumption stocks; but was dragged by energy & automobiles to some extent.

FTSE is now trading around 7415, almost flat (-0.04%) amid strength in GBP; DAX is also almost flat at around 12635 (+0.09%) tracking in line but flat CPI at 0.2% for June (MOM).

US market update:

USD Is Getting A Bid As Yellen Sounds Hawkish At The 2nd Day Of Testimony; Mixed PPI Data Also Supporting The Dollar Today

USD is getting stronger across the board and USJPY also recovered from the day low of 112.86 and now trading in positive around 113.40 (+0.03%) tracking mixed US PPI data and ongoing 2nd day of testimony by Yellen.
Today’s US PPI (June) came upbeat as 0.1% against estimate of -0.1% (prior: 0.0%); but core PPI flashed bit disappointed as 0.1% against estimate of 0.2% (prior: 0.3%) on MOM basis.

On YOY basis, headline PPI came as 2% for June against estimate of 1.9% (prior: 2.4%); core PPI flashed as 1.9% against estimate of 2% (prior: 2.1%).

US initial Jobless claims flashed as 247k against estimate of 245k (prior: 250K-R).

Overall, today’s US PPI data may be termed as mixed and all eyes will be on tomorrow’s CPI to assess Yellen’s expressed concern yesterday at her 1st testimony.

But unlike yesterday, USD is getting some support today as Yellen is continuing her Q&A in the 2nd day of Humphrey Hawkins testimony and the comments so far:
·         3% GDP Growth In Next 2-Years Would Be ‘Difficult’
·         Significantly Stronger Q2 Growth Expected From Q1
·         Dollar depressed import prices but that's no longer a factor
·         Reasonable level the expansion will continue
·         Agrees Systematic Risk Remains In Housing, Suggests Reform Move Forward
·         Can Never Be Confident There Won’t Be Another Financial Crisis
·         Wouldn’t Favour Reducing Capital For Most Systemic Banks
·         Import Prices Are Rising At A Modest Rate
·         Premature To Conclude Inflation Trend Below 2%
·         Sees Inflation Risk As Two Sided
·         Fiscal Policy Uncertainty Is Currently Quite High
·         Expects Rise In Long-Term Market Rates During Run-Off
·         Household Debt Not Flashing Red On Financial Stability
·         Appropriate’ Tax Reforms May Help Productivity

Overall, today’s comments by Yellen may not be termed as dovish as it appeared yesterday and Fed is expecting a rise in long term market rates (10YUSD bond yield) during the time of “run-off” (QE tapering) and thus, even if it holds for a few months, it may not matter much as real cost of US economy will rise; subsequently USD bulls may be getting some boost. Also, Yellen’s comments about nature of US inflation may be supporting the USD today.

Apart from that, buzz of QE tapering signal by ECB Draghi at the Aug Jackson Hall meet may be also an indication of a co-ordinated QT move by ECB & Fed and that may be also boosting the USD prospect. Also, talk of an imminent passage of a modified US health care bill may be also boosting the USD; but ongoing US political jitters regarding Trump’s alleged Russian connection may be also a major risk for the currency (USD) and the overall risk-on trade right now.



SGX-NF


BNF


USDJPY

https://www.iforex.in/news/nifty-scaled-another-record-high-tests-9900-tracking-positive-global-cues-amid-dovish-fed-upbeat-china-trade-data-hopes-aug-rate-cut-38633

https://www.iforex.in/news/usd-plunged-after-%E2%80%9Cnot-so-hawkish%E2%80%9D-yellen-38603

https://www.iforex.in/news/usd-getting-bid-yellen-sounds-hawkish-2nd-day-testimony-38641

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