Thursday, 12 April 2018

Nifty closed almost flat on subdued global cues amid Syrian geopolitical tensions and higher oil

Market Wrap: 11/04/2018

NSE-NF (April):10417 (-5; -0.05%)

NSE-BNF (April):25092 (-111; -0.44%)

SPX-500: 2642 (-15; -0.55%)

Market Mantra: 12/04/2018

Updated: 07:45

SGX-NF: 10435 (+18; +0.17%)

Expected BNF opening: 25150 (+0.20%)

SPX-500: 2646 (+5; +0.20%)

(Almost flat opening on hawkish FOMC minutes and mixed global cues as market is waiting for Trump’s decision on Syria after he taunts Russia to get ready for “nice, new and smart” missiles coming to Syria as Russia vowed to shoot them down; risk-on trade is off the table as the market focus shifted from trade war to missile war).

March-Fut (Key Technical Levels)

Support for NF:


Resistance to NF:


Support for BNF:


Resistance to BNF:


Support for SPX-500:


Resistance to SPX-500:


Technical View (Positional-Nifty, Bank Nifty, SPX-500):

Technically, Nifty Fut-March (NF) has to sustain over 10500 for a further rally towards 10525/10575-10630/10665-10725/10765 in the short term (under bullish case scenario). 

On the flip side, sustaining below 10480-10465 NF may fall towards 10400/10350-10300/10230-10190/10140 in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 25325 for a further rally towards 25450/24650-25775/25850-26150/26300 in the near term (under bullish case scenario).

On the flip side, sustaining below 25275, BNF may fall towards 25150/25050-24950/24800-24600/24400 in the near term (under bear case scenario).

Technically, SPX-500 now has to sustain over 2665 for a further rally towards 2685/2705-2730/2750-2765/2785 in the near term (under bullish case scenario).

On the flip side, sustaining below 2650, SPX-500 may fall towards 2620/2605-2575/2545-2525/2490 in the near term (under bear case scenario).
Valuation metrics:

Nifty-50: 10417; Q2FY18 EPS: 410; Q2FY18 PE: 25.41; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360

Bank Nifty: 25098; Q3FY18 EPS: 820; Q2FY18 PE: 30.61; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220

The Indian market (Nifty Fut/India-50) closed around 10417 on Wednesday, almost flat (-0.05%) on subdued global cues amid concern of Syrian geopolitical tensions, higher oil.

RBI may not oblige for relief on CDR/NPA provisions:

There was also report that RBI may not oblige with the IBA request to scrap/modify its 12th Feb circular regarding scrapping of various loan restructuring schemes under CDR (corporate debt restructuring). Thus the new NPA norms may hit the bank’s earnings significantly in Q4 and banking stocks dragged the market along with higher bond yields, all negative for their earnings.

ICICI saga continues:

Apart from surging oil, another report that a banking consortium, leading by the ICICI Bank has given loan for Rs.5.280 billion loans to the Mehul Choksi’s Gitanjali group has also affected the overall banking sentiment and the market. In addition, there was another report of 24 years business relationship with the ICICI Bank’s CEO family with the Videocon group, under the allegation of nepotism and favoritism. ICICI Bank is also under pressure from an influential political and investor activist Kirti Somaiya on overall issues of corporate governance.

A higher oil (Crude) hovering above $65 and eyeing the $80 level as par Saudi jawboning and ongoing geopolitical tensions in the middle east (Syria) is not only bad for the Indian economy and the market, but is also bad for the health of the oil marketing companies (OMC), especially in the election year as the government is not allowing them to raise prices and they have to absorb around Rs.1 per liter of petrol and diesel ahead of the Karnataka state election.

Subsequently, OMCs were in pressure, dragging the whole market along with Banks and Nifty-I made an opening session low of 10363 and mid-day high of 10440 in a day of moderate volatility ahead of some key Q4 earnings report and macro data (CPI/IIP) on Thursday.

As India almost imports 80% of its crude oil requirement, the country and the economy is vulnerable to any sustainable oil price shock. Also, a very high tax component of over 75% on petrol and diesel may be a dilemma for fiscal deficit, revenue collection and overall inflation in the economy. India is a very reliable acid test since the economy and expensive oil don't mix. The oil minister has already chimed in and said prices are too high and urged for inclusion in the GST, with hopes of a reasonable taxes, but the government declined.

The ADB also flagged higher oil as a risk to watch for India. As par reports, the government has also asked the oil retailers (OMC) to not to increase prices and consequently, shares of OMC with downstream presence plunged on Wednesday, as with sovereign bonds with yields backing up significantly to almost 7.55% on higher oil after falling to around 7.12% on some policy measures from RBI and the government.

When Brent pushed through $60 late last year, there was widespread concern that prices at or above the $65 to $70 range will start to hurt the Indian economy, all being equal and the government also promised at that time to reduce the additional excise duty imposed on it for an easy revenue to fund its capex. But the government is now on the back foot and will not cut any tax component on oil as overall revenue is subdued on lack of full GST compliances and other issues as the economy is still suffering from lingering DeMo and GST shocks.

Indian GST, in its present format, is perhaps the most complex and costly in the world right now. Abnormal high compliance costs are making MSME or small informal business models unviable to do the business itself and consequently, there is a risk of mass unemployment in the economy.

All of the above is an indication that oil at these levels represents a turning point for India and extreme cases like India are already in hot soup. Any incremental move higher in prices, Indian rating may be reviewed also.

On Wednesday, Nifty was helped by RIL (launch of fixed line broadband by R-Jio), TCS (earnings optimism ahead of result), VEDL (surge in aluminum prices, thanks to Trump’s sanction on one major Russian producer), Infy (earnings optimism), Kotak Bank, Sun Pharma, HUL, M&M, HCL Tech, Eicher motors and others by around 65 points, while it was dragged by IOL, BPCL, HPCL (government instruction to absorb higher crude oil prices), ICICI Bank, Axis Bank (leadership crisis), SBI (RBI denial to scrap CDR relief), ITC, Yes Bank, HDFC, Adani Ports and others by 55 points cumulatively.

Overall on Wednesday, Indian market was helped by mixed FMCG, techs (higher USD and earnings optimism), media, metals, pharma (higher USD and US FDA optimism), consumption, MNC (higher USD), while dragged by banks and financials (higher bond yields) reality, energies/OMC.

Global cues were subdued during Indian market hours on Wednesday:

US stock future (SPX-500) was down by 0.94% and European stocks were down by 0.43% on concern about US military escalation in Syria.  President Trump spoke with UK Prime Minister May and French President Macron and canceled a planned trip to South America as he intensifies preparations for a US response to an alleged chemical weapons attack by the Syrian government on its own people.  Russia warned that any US missiles fired at Syria over a suspected chemicals weapons attack will be shot down and the launch sites targeted, raising the possibility of a direct US-Russian confrontation. 

Also, Eurocontrol, an air traffic agency in Europe, asked airlines to apply caution on flights to the eastern Mediterranean region because of possible air strikes in Syria over the next 72 hours. Asian stocks closed mixed: Japan -0.49%, Hong Kong +0.55%, China +0.56%, Taiwan +0.43%, Australia -0.48%, Singapore +0.39%, South Korea -0.32%, India +0.18%.

Asian equity markets traded mixed as sentiment settled down from the bullishness seen from President Xi’s and Trump & Co’s conciliatory tone on Tuesday which resulted to a solid performance on Wall St, while attention turned to the geopolitical climate with a possible announcement on Syria said to be imminent.

Earlier, trade in Asia was mixed with indexes in China and Hong Kong posting the biggest gains in that region as PBOC Governor offered more details on pledges to open the world’s second-biggest economy, and vowed China would not devalue the Yuan in response to a trade war.

Australia's ASX 200 failed to sustain mild opening gains as softer Australian consumer sentiment data and weaker than expected Chinese inflation figures clouded the upside seen in commodity-related sectors. Nikkei 225 was also lackluster with J Front the worst off amongst the retailers on expectations of weaker profits this year, while SoftBank outperformed on M&A hopes after reports its unit Sprint and T-Mobile renewed merger talks.

Hang Seng and Shanghai were initially choppy as markets digested the miss on Chinese CPI and PPI data, although stocks gradually found some comfort from efforts by PBOC Governor to build upon the momentum from President Xi at the Boao forum in which the PBOC Governor talked about opening up and announced to increase stock connect quotas.

In Europe, equities began the day trading slightly lower with the risk-on sentiment seen in yesterday’s trade not being echoed early on. This comes to fruition despite the revelations from Chinese president Xi mentioning a preference to implement auto tariff cuts as soon as possible (this relating to a possible reduction on import taxes on autos by half from 25% currently).

Market sentiment was largely being guided by increased tensions in Syria amid potentially imminent military action by the US. This follows on from overnight news of increased air traffic over Syrian airspace and condemnation from the international community. EU equity sector performance has largely been driven by company-specific news with M&A activities in the telecom sector.




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