Monday, 26 February 2018

Nifty surged on fall in bond yields amid reports of FPIS limit hike and government jawboning

Market Wrap: 23/02/2018 (17:00)

NSE-NF (March):10507 (+118; +1.13%)

(NS: 10491; Q2FY18 EPS: 407; Q2FY18 PE: 25.78; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)

NSE-BNF (Jan):25410 (+424; +1.70%)

(BNS: 25302; Q3FY18 EPS: 821; Q2FY18 PE: 30.82; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)

For 26/02/2018: March-Fut (Key Technical Levels)

Updated: 07:25

SGX-NF: 10540; (+33 points)

(Gap up on positive global/US cues amid fall in bond yields & lower USD)

Expected BNF opening: 25500

March-Fut (Key Technical Levels)

Support for NF: 10510/10470-10415*/10340

Resistance for NF: 10555/10595-10615/10655*

Support for BNF: 25445/25375-25150/25000

Resistance for BNF: 25500/25650-25775/25975

Trading Idea (Positional):

Technically, Nifty Fut-Jan (NF) has to sustain over 10615 area for a further rally towards 10655-10725 and 10790-10825 zone in the short term (under bullish case scenario). 

On the flip side, sustaining below 10595-10555 area, NF may fall towards 10510-10470 and 10415-10340 zone in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 25650 area for a further rally towards 25775-25975 and 26100-26200 zone in the near term (under bullish case scenario).

On the flip side, sustaining below 25600-25550 area, BNF may fall towards 25445-25375 and 25150-25000 area in the near term (under bear case scenario).

The Indian market (Nifty Fut-March/India-50) closed around 10507 on Friday (23rd Feb), soared by almost 1.13% on fall in bond yields. Benchmark 10Y Indian bond yield fell to around 7.68% from earlier panic high of 7.78% mapped on 22nd Feb, Thursday. The fall in Indian bond yield was in line with similar global/US trend after US treasury secretary downplayed the impact of wage growth on inflation.

The Indian government also tried to talk down the bond (GSEC) yield by commenting that they are watching the bond market closely and may take appropriate action to keep bond yield lower. Government to take an appropriate policy decision on high bond yields as the same is putting pressure on government finances.

There were also some reports that the government may hike the FPIS limit on the Indian bond market, which is currently offering biggest yield among its EM peers in Asia. As par Finance ministry sources, FII cap in government bonds under review and a final decision may be taken at March meeting with the RBI.

On Friday, Indian market made an opening session low of 10386 and late day high of 10516 and was also supported by positive global cues coupled with reports that government is taking several steps to plug various loopholes in the lending & borrowing mechanism of the banks, especially for the PSBS (public sector banks). All PSBS has been asked to ensure linking of SWIFT with their CBS (core banking system) without any manual intervention by government/RBI after the great PNB saga.

But the market may be also worried about huge NPA hit with the Nirav Modi & Choksi group of companies involving in the alleged PNB fraud, which may be around Rs.25 bln for the PNB alone. There are also reports of similar NPA/fraud related to Gems & Jewellery business with other big companies as well.

FICCI (Federation of Indian Chamber of Commerce and Industry) has also called for an immediate privatization of most of the PSBS as only 3 big PSBS is sufficient for the Indian economy. There is an urgent need for improvement of corporate governance in the PSBS.

Apart from banking worries, the market is also concerned about US tightening of H1-B visa rules, which may affect tech/IT companies adversely. There is also another report of a big fraud involving Fortis healthcare accounting and alleged siphoning of funds by the promoter Singh brothers, akin to the infamous Satyam scam.

The Indian government is aiming to be among the top 50 positions in ease of doing business as it’s undertaking system of cleaning political funding procedure in India. The improvement of IBC process and its transparency may also help.

Government is also very aware that unethical practices are significant in India and are growing quite well. Indian model of creating shell cos, round-tripping has continued for decades. The huge banking NPAs are due to business failures, diversion of funds, willful defaults, and bank frauds.

As par the government, no employee raising a red flag is worrisome. Multiple auditors looked the other way or were casual in approach. Inadequate supervision from regulators was responsible for fraud. Regulators need to constantly watch banking sector and unfortunately, regulators are not held accountable in India. But the delinquent person will have to face consequences, like the closure of their company and law will be tightened to find the location of the delinquent person.

Thus, the government is trying to shift all the blame to the banking regulator (RBI) for this PNB “loot” (theft), but at the same time, it’s also true that unholy links between borrowers/corporates, banks, and politicians are also responsible for the present saga of Indian NPA/NPL.

Most of the big corporate celebrity borrowers and likely defaulters’ may have already relocated their base outside India. Their seized assets in India or even abroad will help little in actual recovery because of various legal hurdles and lack of buyers.

On Friday, Nifty was supported mostly by HDFC Bank, RIL, VEDL, Tata Steel, ICICI Bank, Sun Pharma, IOC, Bajaj Finance, Yes Bank and ITC (65 points altogether).

Nifty was dragged by Infy (H1-B visa issues), Asian Paints (higher oil/RM cost), Gail, Eicher Motors and M&M (7 points cumulatively).

Overall on Friday, Indian market was helped by almost all the sectors like banks & financials (fall in bond yield, positive for their MTM in bond portfolio), automakers, FMCG, mixed techs (higher USD and H1-B visa issues), media, metal (encouraging bids for stressed assets under NCLT/IBC auction), Pharma (reports of US FDA relief and higher USD, positive for their export earnings), reality, consumption, energy (higher oil) and infra stocks.

All eyes may be now on India’s Q3FY18 GDP, which is slated to come as 6.9% vs 6.3% prior (Y/Y) and other macro data (PMI/auto sales) apart from the surging oil & the fiscal dilemma.




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