Friday, 6 April 2018

Nifty Soared on RBI’s “Goldilocks” economic optimism and Ind-AS accounting relief for the banks coupled with positive global cues

Market Wrap: 05/04/2018

NSE-NF (April):10357 (+210; +2.07%)

NSE-BNF (April):24842 (+694; +2.87%)

Market Mantra: 06/04/2018

Updated: 07:45

SGX-NF: 10340 (-17; +0.16%)

Expected BNF opening: 24900 (+0.20%)

(Flat opening on RBI optimism and subdued global cues amid renewed tensions of a trade war after Trump doubles down his rhetoric late Thursday and plans for another $100 bln tariff on Chinese imports)

March-Fut (Key Technical Levels)

Support for NF:


Resistance to NF:


Support for BNF:


Resistance to BNF:


Technical View (Positional):

Technically, Nifty Fut-March (NF) has to sustain over 10395 for a further rally towards 10425/10465-10500/10545-10600/10650 in the short term (under bullish case scenario). 

On the flip side, sustaining below 10375 NF may fall towards 10295/10270-10230/10190-10150/10100 in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 25000 for a further rally towards 25100/25300-25500/25850-26075/26255 in the near term (under bullish case scenario).

On the flip side, sustaining below 24950, BNF may fall towards 24750/24600-24450/24300-24200/24100 in the near term (under bear case scenario).

Valuation metrics:

NS: 10325; Q2FY18 EPS: 410; Q2FY18 PE: 25.18; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360

BNS: 24760; Q3FY18 EPS: 820; Q2FY18 PE: 30.20; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220

The Indian market (Nifty Fut/India-50) closed around 10357 on Thursday, soared by almost 2.07% on RBI’s Goldilocks economic optimism, a dovish hold, Ind-AS accounting (NPA provision) relief for another year and positive global cues amid ease of trade war tensions.

There was another speculation in the market that due to his critical illness, finance minister Jaitley may resign and the current railway minister Piyush Goyal may be appointed as the next finance minister. Being a technocrat person with a finance background, Goyal may be viewed as more market-friendly and the market further surged.

Nifty Fut-I made an opening minute low of 10253 and a closing minute high of around 10359 after RBI lowered its inflation projection and raised the GDP forecast for FY-19 and paints a Goldilocks scenario for the Indian economy, sounding less hawkish than earlier expected. Also, the forecast of normal monsoon in 2018 helped the market along with an uptick in India’s service PMI, which back above the boom/bust line of 50 marginally (50.3) from prior 47.8.

RBI was dovish (cautious) on inflation, while hawkish on growth:

On Thursday India's central bank (RBI) left its benchmark repo rate unchanged at 6% and reverse repo rate at 5.75% as highly expected. The RBI left its benchmark rate unchanged despite mildly higher inflation of +4.4% (above the RBI's 4.0% target) since the economy is expected to slow to a 4-year low of 6.6% in FY-18. 

However, the market was pricing in at least one rate hike for later this year since inflation is expected to pick up over the next few months. India's stock market rallied on Thursday as sentiment was buoyed by a less hawkish tone from the RBI and its move to reduce its inflation forecast and raise its GDP growth estimate for the new fiscal year that began in April (FY-19).

Banks and the market further surged after RBI gave with one-year relief for the Ind-AS (Indian Accounting Standard) shift for the Indian banks, which may save an additional NPA provision of almost Rs.0.85 tln. This is in addition to the recent regulatory step of another accounting window dressing to spread the bond loses provisions (MTM) for Q4FY2018 up to next four quarters.

On Thursday, RBI lowered its H1FY19 headline inflation (CPI) projection to 4.7-5.1% from earlier 5.1-5.6% and 4.4% for H2FY19 from earlier 4.5-4.6% after considering the base effect of HRA/7CPC pay hike impact for central government employees with upside risk. On the other side, RBI projected GDP growth as 6.6% for FY-18 and 7.4% for FY-19 on an average (7.3-7.4% in H1FY19 and 7.3-7.6% in H2FY19 with balanced risks).

Overall, although RBI continued to be cautious on upside risk to inflation, as it revised its inflation projections lower to around 4.9% for H1FY19 from earlier 5.35%, the market is assuming that RBI may not go for a hike at least in 2018 and will be on the sideline. Thus the RBI stance on Thursday may be termed as dovish hold or less hawkish than expected and Indian 10Y bond yield slumped to 7.123% after RBI from prior 7.306%, helping the banks and the market.

RBI policy highlights:

Retains neutral monetary policy stance; 5/6 MPC members voted for no change and Patra voted for a hike of 0.25%. Inflation faces various upside risks and headline projected a range of 4.7-5.1% and GDP projected 7.3-7.4% for H1FY19.  

RBI MPC head Patel: volatility of oil price among uncertainties to near-term inflation and there could be some risk of fiscal slippage. Impact of India's farm pricing plan (MSP) will be clear in a few months on inflation.

On Thursday, Nifty was helped mostly by ICICI Bank, Kotak Bank, HDFC Bank, SBI, L&T, RIL, Infy, HDFC, VEDL and TCS and others by almost 201 points cumulatively, while it was dragged by Cipla and Bharti Airtel by only 2 points.

Global cues were supportive on Thursday during Indian market hours:

On Thursday, global cues were positive during Indian market hours. US stock future (SPX-500) was trading higher by 0.4% on reduced trade-war anxiety.  The Euro Stoxx-50 index was up 1.8%.  The Chinese and Hong-Kong stock markets were closed for a national holiday. However, other Asian stock markets closed sharply higher:  Japan Nikkei +1.53%, Australia S&P 200 +0.48%, Singapore Str. Times +1.97%, South Korea KOSPI 200 +1.46%, India BSE Sensex 30 +1.75%.

Global markets were calmer on the US-Chinese trade war front as hopes rise for a negotiated solution rather than further retaliation. US Commerce Secretary Ross and White House Economic Advisor Kudlow spent most of Wednesday frantically, trying to calm market nerves by saying that the two sides will negotiate and that the tariffs are only a proposal so far, while backchannel talks with China are continuing.  For its part, China on Wednesday only announced the tariffs and said they would only become effective if and when US tariffs become effective.

Asian stocks traded mostly higher as the region sustained the momentum from Wall St where all major indices recovered from the initial losses seen after US and China’s tit-for-tat tariff announcements, with fears later soothed as the US hinted at a willingness for negotiations. Furthermore, the White House noted there will be a couple of months before China tariffs are implemented with the review period ongoing, and markets also viewed the impact of proposed tariffs to be manageable. 

As such, ASX 200 and Nikkei 225 were higher with strength in Australia’s largest weighted financials sector leading the local index, and the Japanese benchmark was among the outperformers as exporters cheered a weaker JPY amid risk-on sentiment.

European markets opened higher with 88% of the Stoxx-600 in the green as it sustained the momentum and risk appetite from Wall St. and Asia apart from the support of a weaker EUR. All sectors were firmly in the green with material, miners, auto and technology names top-performers. Banks and financials were also higher amid higher bond yields as the US 10Y yield rising back above 2.80%. 






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