Market Wrap: 22/09/2017 (17:00)

NSE-NF (Sep):9975 (-164; -1.61%)

(TTM PE: 25.95; Abv 2-SD of 25; TTM Q1FY18 EPS: 384; NS: 9964; Avg PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)

NSE-BNF (Sep):24417 (-423; -1.70%)

(TTM PE: 27.47; Abv 2-SD of 25; TTM Q1FY18 EPS: 887; BNS: 24369; Avg PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)

For 22/09/2017:

Key support for NF: 9960-9910

Key resistance for NF: 10005-10050

Key support for BNF: 24300-24050

Key resistance for BNF: 24575-24675

Hints for positional trading:

Technicals indicate that, NF has to sustain over 10050 area for further rally towards 10105- 10160 & 10205-10250 area in the short term (under bullish case scenario).

On the flip side, sustaining below 10030-10000 area, NF may fall towards 9960-9910 & 9870-9800 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 24575 area for further rally towards 24675-24775 & 24900-25100 area in the near term (under bullish case scenario).

On the flip side, sustaining below 24525 area, BNF may fall towards 24300-24050 & 23850-12700 area in the near term (under bear case scenario).

Indian market (Nifty Fut/India-50) today closed around 9975, tumbled by almost 164 points (-1.61%) after making an opening minute high of 10099 and closing ticks low of 9974.; it’s the biggest one day fall after Nov’16 DeMo led plunge.

It was basically a black Friday today, beginning with NK Nuke scare & China/HK downgrade, but more than that domestic issues of fiscal slippages because of a huge fiscal stimulus package talks by the Govt to arrest the falling economic growth coupled with concern of another muted quarter of earnings for GST implementation disruptions may have spooked the market today. It’s may be an example of old proverb that in a bull market, “prices often goes up by an elevator but comes down in an escalator”.

As valuations are already stretched with a muted Q1FY18 earnings for Pre-GST disruptions, market may be concerned that Q2 will be also subdued for Post-GST implementation disruptions with a dysfunctional GSTN network, lots of regulations and subsequent block of huge working capital in the form of Input Tax Credit (ITC). Thus market is correcting and the ongoing geo-political tensions may be just an excuse to sell.

Nifty was today supported by HCLTECH, Bharti Infratel, Wipro by around +4 points collectively, while it was dragged by RIL, L&T, ICICI Bank, Yes Bank, HDFC Bank, SBI, IOC, Tata Steel & Infy by around -91 points altogether.

Overall, metals, real estates, banks & financials and infra stocks dragged the market, while, IT & Pharma tried their best to provide some support today; but those export savvy cos also came in to late pressure today after USDINR slumped from day high of 65.21 to 64.84 on consistent selling by exporters; RBI may have also intervened in the FX market today, looking at the USDINR price action & sudden fall. Metals were under pressure today after China downgrade by S&P yesterday for excessive credit leverages.

PSBS were under severe pressure today and Nifty closed the Fed week almost 1.20% down, marked by a surprised hawkish Yellen and renewed NK geo-political tensions coupled with domestic concerns of slowing growth, earnings & fiscal slippages.

IMD today reported that up to 20^th Sep, total countrywide rainfall is 5% below average (LPA); overall monsoon in the Southern & Central India this year may be far below LPA and some of the areas are under severe drought, while there were widespread floods in different parts of the country affecting overall food (vegetables, pulses) cultivation & inflation. The July-Sep Southwest monsoon for India is critical because significant part of the country is still dependent on this rainfall for lack of proper irrigations. This is affecting the rural economy.

Indian Market today opened around 10085, almost 52 points gap-down on latest NK provocations coupled with domestic concern of a slowing economy, Govt’s fiscal stimulus talks of around $7.7 bln and subsequent fiscal slippages on account of subdued revenue collections (both direct & indirect taxes) & GSTN network disruptions.

As par some reports, Govt may have miscalculated the GST input tax credit (ITC) aspects vis-à-vis old duty draw-back mechanisms and thus it’s now facing a huge bill of exporter’s ITC, which may seriously choke the liquidity not only for the exporters, but Govt may also find it quite difficult to cope with such huge ITC claims by the exporters every month. This may be a serious blow for the Indian economy, unless properly resolved.

As par latest fiscal stimulus trial balloon, Govt may provide additional recap fund of Rs.20000-30000 cr for the PSBS and Govt may also consider issuing of PSB Recap bonds. Govt is considering very seriously to recapitalize PSBS which are under tremendous stress for the NPA start lending again to the corporates to revive private investments. Govt may also provide some interest subvention (subsidy) to the PSBS for lending to MSMES.

Indian FM also signalled that Govt is very much concerned for the slowing economic activities and is prepared to do “whatever need to do” for the sake of recovery and recap of PSBS may be the best way to stimulate the economy.

But the problem may be that not of liquidity in the banking system right now, if Govt will not go for substantially higher borrowings in H2FY18, but that of eligible quality borrowers as both Indian corporates, MSMES and also household BS are quite stressed right now.

Meanwhile, USDINR-I jumped above 65 to almost 65.21 on concern of Indian fiscal math mismatch, slowing economy coupled with a hawkish Fed, eager to hike in Dec’17 again along with BS tapering. A higher USD may be good for export savvy Pharma, IT cos and may be also good for overall Nifty earnings as almost 60% of earnings are in USD, but may not be good for the overall Indian economy, its CAD & also fiscal deficit.

Technically, USDINR-I now has to sustain above 65.15-65.25 zone for 65.45-65.68 & 66.50 area in the coming days; otherwise it may come down again towards 64.40-64.20 area in the coming days amid RBI intervention; India has a long history of huge appreciation for USDINR ahead of any general elections, perhaps to fund the huge cost of political campaign from source of so called “black money”.

Globally, almost all the major Asia-Pacific markets, barring AU were in red today tracking renewed Korean geo-political headlines after a morning report quoting SK foreign minister that NK may soon test an “unprecedented” strength of H-Bomb in the Pacific ocean in response to US sanctions & Trump’s “dog barking” threat at UN to Kim terming him as a “rocket man, ready for his own suicide mission”.

After yesterday’s string of latest US sanctions on NK banks, individuals, financial institutions & 180-day ban on NK shipping which may disrupt NK economy, Kim responded by terming Trump a “mentally deranged US dotard” and said his UN speech “demonstrated US insanity & inhumanity”.

As par Kim, Trump’s UN address confirm that the NK nuke mission is on the right path and it will continue until the final success of a nuke enabled ICBM; NK views Trump’s UN comments as “war declaration” and will consider “corresponding highest level of hard-line measures in history” against US. Kim further warned that “I will surely & definitely take the mentally deranged US dotard with fire”.

Although, the world may have no idea about how NK is able to test a H-Bomb in the Pacific over JP, but these “war of words” between Kim & Trump has again ignited the geo-political risk-aversion move in the financial market in this weekend after some Fed related pauses; coupled with that, rating downgrade of China & HK, although may be “toothless” in real terms has made the overall market mood as “risk-off”.

USD is getting sold across the board ignoring an “unusually hawkish” Fed; USDJPY is now trading around 111.85, at pre-Fed level and so far made a NK panic low of 111.66 in the Asian session; also market may be concerned of “dot-plots” credibility & policy continuity by Fed in 2018 under new Fed leadership & FOMC team.

Looking at the scale of present “war of words” between NK & US, market may be concerned that any miscalculation by any of them may convert it into an “war of bullets if not nukes”; the ultimate solution lies in diplomacy, but it may be tough for US to accept NK as a “nuke nation” and invite it to the negotiation table. For NK, this “nuke & bomb” rhetoric is an insurance for decades after decades against any pre-empted US strike and thus they may also not abandon this nuke program for any Iran style diplomatic deal with US.

In any way, this legacy NK tensions may be a “blessings in disguise” for US economy as it’s helping its defence industry immensely and also helping the overall US export competitiveness by forcing USD lower despite a “hawkish Fed” and some visibility of US tax reform. NK may be also helping JP & SK for stimulating their economy as both the countries are now on huge defence spending spree to “combat” NK threat.

Thus, US have no real issue with NK except some rhetoric unless NK really launches an ICBM towards Guam/US or attack JP & SK, which is very unlikely at this stage. Now, NK may be also an element of “great volatility” for the global financial market just like Trump’s tweeter handle and central banks and this “game of chickens” between NK & US will go on, proving the market an “opportunity” for the “volatility”.

Overnight US market closed in negative on concern of higher USD on earnings after hawkish Fed, stretched valuations coupled with latest US sanctions on NK & renewed Iran-US tensions; DJ-30 closed down by almost 0.24%, S&P-500 lost 0.30% and NASDAQ dragged by around 0.52%. Overall techs, telecoms, consumer & healthcare stocks dragged the US market yesterday.

US stock future (SPX-500) is now trading around 2496, down by further 0.24% ahead of EU market openings on NK’s latest threat report of H-Bomb. Technically expect more serious corrections, if it now sustains below 2485 zone.

Elsewhere, Australia (ASX-200) closed around 5682, up by almost 0.50% on sharp overnight fall in AUDUSD after China downgrade by S&P coupled with a dovish RBA, not willing to “follow the Fed” principle of an imminent rate hike, although it may be delayed to accommodate specific AU slack in the economy. AU stocks were supported by consumer discretionary, financials & telecoms, miners despite slump in iron ores; it was dragged by mixed gold miners & falling energies and some media shares.

AUDUSD is now trading around 0.79489, up by almost 0.25% on broader decline in USD after NK panic and realization that yesterday’s S&P downgrade of China may be a “routine affair” & in expected line after similar action by Moody’s few weeks ago on excessive economic leverage (credit boom) and may be also “toothless”. The downgrade may be good for the stimulus addicted market as China Gov may resume stimulus action again to revive the economy ahead of the Party Congress next month.

AUDUSD made a low of 0.7908 yesterday and looking ahead the area of 0.78700-0.780858 may be a good technical support for the FX-pair.

Japan (Nikkei-225) closed around 20296, dropped by almost 0.25% on higher Yen as USDJPY slumps to pre-Fed level of almost 111.50 from overnight high of 112.72 tracking renewed NK tensions & doubt of Fed’s 2018 rate hikes projection including that of Dec’17 also on concern of subdued US inflation coupled with a high probable change in Fed leadership.

JP stocks were dragged today by exporters, metals & energies, while helped by automakers, banks & financials on higher bond yields as usual. Also, some construction machinery & railways stocks has helped the market today.

China (SSE) closed around 3353, slipped by almost 0.16% and well off the low of 3335 on “toothless” rating downgrade by S&P as it may induce more “prudent” stimulus by PBOC to “stabilize” the economy ahead of the Party Congress; now the economy is deleveraged significantly after the credit fuelled boom; rating agencies action always came late and market may have already anticipated the great downgrade by S&P, in line with Moody’s & Fitch; thus market is “always supreme”.

Real estate & resource/metals were in pressure today, while China banks helped it despite US sanctions on NK entities as it was already discounted by the market because US TSY Sec has already alerted the PBOC day before yesterday’s announcement by Trump.

PBOC today fixed the mid-point of USDCNY at 6.5861 vs 6.5867 yesterday, little lower in line with overnight drops in USD and injected 120 bln Yuan for the day. Meanwhile, China’s FM has termed the latest S&P downgrade as a “wrong decision” on China’s current effort of financial market reform, sound economic fundamentals & development potentials.

Hong-Kong (HKG-33) Fut is now trading around 27840, down by almost 0.90% on dual downgrade of China & HK by S&P; it was also dragged by China based banks after latest US sanctions unlike the mainland market; also resources, metals has dragged the market today.

Meanwhile, Crude Oil (WTI) is trading around 50.50 (-0.10%), almost flat ahead of much awaited OPEC-NOPEC meet later the day today; technically it need to sustain over 50.95-51.25 zone now for fresh leg of rally, otherwise sustaining below 50.40, expect some correction.

Overall, apart from weekend NK-US thriller, market may be also looking for NZ & German election related volatility along with any US tax reform specific trial balloons and Theresa May’s “historic Brexit speech”. A clean election sweep by Merkel as expected may also boost EUR to some extent, although it has been largely discounted; on the other side, any surprise may also invite a “dooms day” like scenario on Monday.

EU Stocks Almost Flat Amid Escalated War Of Words Between Kim & Trump Coupled With German Election Optimism:

Elsewhere, EU stocks are almost flat & recovered from the initial NK nuke shock today on optimism about favourable outcome of German election, where Merkel is expected to win with a comfortable majority for the 4^th term. Stoxx-600 is almost unchanged at +0.07%, while DAX-30 is now almost flat at -0.02%, CAC-40 has gained by0.30% and FTSE-100 is up by 0.08%.

Today, EU market was helped by cross stake sales news between L’Oreal, Nestle & Sanofi, while it was dragged by miners and German based auto exporters to China on concern of a slowdown. Also, a higher EUR because of upbeat PMI data and German election optimism coupled with some optimistic comments about EZ economy by Draghi today may have contained any widespread gain for the market.

Banks are also helping the UK market today but overall UK market may be cautious ahead of the much awaited “historic Brexit” speech by May later in the day; but more than May’s “known” divorce offer of 20 bln EUR, market may be interested to know EU’s official reaction for the offer which is almost 1/3^rd of their demand of 60 bln EUR in this suspense of “soft or hard” Brexit. A strong GBP is negative for export heavy FTSE and thus a “soft Brexit” may be good for the country & currency, but not for the stock market.