Market Mantra: 05/12/2017 (09:00)
SGX-NF: 10115 (-51)
For the Day: updated: 13:05
For 05/12/2017: Dec-Fut
Key support for NF:
10110/10090-10070/10050
Key resistance for NF:
10205/10225-10310
Key support for BNF:
25200/25100-24950/24700
Key resistance for BNF:
25600/25750-25875/26050
Trading Idea (Positional):
Technically, Nifty Fut-Dec (NF) has to sustain over 10225 area for further
rally towards 10310-10350 & 10425-10475 zone in the short term (under
bullish case scenario).
On the flip side, sustaining below 10205-10195 area, NF may fall towards
10110/10090-10070/10050 & 10010-9970 zone in the short term (under bear
case scenario).
Technically, Bank Nifty-Fut (BNF/BNS) has to sustain over 25600 area for
further rally towards 25750-25875 & 26050-26200 zone in the near term
(under bullish case scenario).
On the flip side, sustaining below 25550 area, BNF may fall towards
25400-25200/25100 & 24950-24700/24600 area in the near term (under bear
case scenario).
As par early SGX indication, Nifty Fut (Dec) may open around 10115, gap down by almost 51 points
on mixed global/Asian cues and concern about GJ election outcome coupled with
subdued forecast of GDP growth for India by Fitch yesterday; also Indian market
may be on edge ahead of RBI tomorrow as some economist are expecting a surprise
rate cut along with shift in overall stance from neutral to accommodative
again; market may also focus on the Service PMI today.
Overnight US market closed mixed on divergent reaction to the
proposed corp tax cut plan; DJ-30 inched up by 0.24% and closed around 24290,
almost at day low and well off the session high of 24534; S&P-500 edged
down by almost 0.10% and closed around 2639, while NQ-100 slumped by almost
1.1% on perception that the sector will benefit least from US tax reform proposal
and may be also affected for the repatriation tax as most of them are MNC; same
is the case for some pharma cos.
Although, market is quite euphoric about the US Tax reform &
corp tax cut proposals; analysts are cautious as there are various confusions
regarding the timing & duration of corp tax cut (2018 or 2019 and gradual
cut or at a time) and applicability of various tax deductions (like R&D
credit); if the tax cut is implemented from 2019, then any earnings effect in
2018 will be virtually zero.
In brief, after application of various tax deductions at 35%
corp tax rate, net effective rate may be around 32.5-25.5%, depending on various
sectors/big cos. In that scenario, the new corp tax of 20-22% without any tax
deductions and some other expenses like R&D credit may not result much
differences with the old tax system.
At present, materials/healthcare/techs pay the tax at a lowest
effective rate of 27/26/24%; whereas energy/telecom/industrials/banks pay an
effective rate of 35/33/32/30% respectively.
Thus there is a great rotational trade in US market from
techs/healthcare/materials, which will be least benefited to the potential big
beneficiaries like banks/energy/telecom/industrials; also small cos may be
benefited most under new tax rule as earlier they were unable to take full
advantage of various tax deductions because of limited free cash flow (FCF).
But all these euphoria may be premature as the Tax reform bill
is still in early stages of drafting and there are various ambiguities as it is
drawn hurriedly and the tax cut implementation may happen in 2019 as par Senate
version rather than 2018 as par Congress/RNC version. Market will now focus on
the reconciliation of these two tax proposal versions for the final one, which
Trump will sign.
Apart from all these tax cut confusions, market may be also
concerned about ultimate effect of these corp tax cuts & deregulations to
the overall economy, wage growth, additional employment and ultimately on
growth & inflation. Thus USD is subdued to the overall reaction of tax
reform, whereas US bond yields are upbeat about potential of big tax/fiscal
deficits & higher US interest rates.
Overall, yesterday US market was helped by banks &
financials (tax benefit & more deregulation), while dragged by techs (FANG
stocks), healthcare (least tax beneficiaries); analysts are expecting that
S&P-500 will reach 2800 from around 2650 level now by early 2018, if the
final version of US tax reform is favourable and will be implemented from 2018
itself, rather than 2019; almost 50% of tax reform rally is discounted by the
market already.
As par some reports US big cos are now lobbying to repel the AMT
(alternate minimum tax) in the tax reform bill after Senate’s last minute move
to keep it alive; the House Tax bill has also eliminated this AMT.
The corporate AMT is a parallel system with low rates and fewer
breaks that kicks in if a variety of tax breaks bring a firm's regular tax bill
too low. Currently, the corporate AMT of 20% rarely applies, since most
corporations face a higher 35% tax rate and benefit from breaks/deductions
eligible under both systems.
With a proposed 20% corporate rate, many companies could end up
in the AMT-and lose some of their tax breaks in the process. Tech companies are
saying that keeping the AMT would make it harder for them to claim tax credits
for R&D spending. Meanwhile, banks are arguing the case that it would be
difficult to claim credits for investing in troubled US assets.
As par some estimates, S&P500 companies has reported $3.1
billion in tax benefits from the credit in 2016; 85% went to 20 corporates,
mostly in the tech, pharmaceutical, and defense sectors.
Some analysts are also expecting that if US tax reform is
implemented before 2017, then it may get retroactive effect; i.e. it will be
implemented from Jan’17 itself; but it may not be the case at all.
Apart from all these tax reform squabbling; market may also
focus on US political jitters like Muller’s investigation & Flynn’s
official testimony for any damaging disclosures regarding Trump & Co for
his alleged Russian connections during election time.
US index future (SPX-500) is now trading around 2642, edged up
by almost 0.18% tracking mixed Asian cues. Technically, SPX-500 now need to
stay over 2632-2623 area; otherwise it may fall towards 2615-2605/2595 zone in
the coming days.
USDJPY is now trading around 112.60; edged up by almost 0.18% on
US tax reform squabbling, political jitters and muted core factory orders
released yesterday along with some usual dovish jawboning by BOJ’s Kuroda
today, commenting that 2% inflation goal is still at a distance.
Asian markets are largely down on tech sell off (US spillover)
and overnight drops in USD from 113 level; a lower USD is not good for export
heavy Asian market.
EU market is also set to open almost flat on stable EUR and some
progress on German coalition Govt formation talks by SPD; but it’s still far
away. FTSE-100 may edge higher on lower GBP after Irish border & DUP jitters
in the Brexit process; yesterday there was no official agreement between UK
& EU for this Irish issue.
Back to home, Indian
market is now trading around 10120, down by almost 0.40% and so far made a
session low of 10091; trading activities may be muted today because of heavy
rains in Mumbai as a result of severe cyclone.
But market sentiment may be jittery today after a terrible
Service PMI for Nov, which came as 48.5 vs 51.7 prior; much below the boom/bust
line of 50; Composite PMI came as 50.3 vs 51.3 in Oct’17. After upbeat Mfg PMI
& GDP, the sudden crash in service PMI may be surprising; DeMo & GST
blues may be still there.
Market will also focus on RBI statement tomorrow as rate cut
probability is virtually nil; considering all the pros & cons like recovery
in GDP, higher core inflation around 4.50-5%, recent surge in oil & food
inflation, hawkish Fed and global tunes of QT, RBI may not afford to be not
only neutral, but it may consider rate hikes in H2FY19, if Fed goes on for its
3-4 rate hike cycles in 2018 amid higher fiscal/tax deficits in US.
Thus RBI may take a stance of “hawkish hold” tomorrow irrespective
of some Govt pressure to cut rates to global levels; it’s absolutely true that
India need a much lower interest rate regime for private capex. But India also
need higher interest for higher bond yields to finance Govt fiscal deficit
which is more important for the Govt/RBI at this point of time.
Various structural reforms are necessary for India before
putting the economy into a lower rate regime like China, which is now at 4.35%
against India’s 6% and 1.5-0.25% of the world of DMs and the onus of those structural
reforms now lies on the Govt rather than the central bank (RBI); India also
needs price stability over longer term like in the DM or even in China and headline CPI need to be below 2% as par global standard now.
SGX-NF
SPX-500
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