Nifty Slumped By More Than 100 Points Amid EU Political Risks & Fear Of Hawkish Fed; But Closed The Volatile Week Almost Flat (-0.33%) Marked By Demonetization Hang Over & Likely GST Delay; What’s Next?

Market Wrap: 02/12/2016 (17:30)

Technically Nifty Fut (Dec) now (LTP: 8110) has to sustain over 8195-8275 area for further rally towards 8335-8375 & 8445-8485 zone.

On the other side, sustaining below 8165-8090 zone, NF may further fall towards 8040-8000 & 7940-7900 And 7840-7675 area in the near term.

Nifty Fut (Dec) today closed around 8110 (-1.24%) after making a post lunch-session high of 8190 and closing hour low of 8092 amid tepid global cues and ongoing domestic concerns about demonetization led business & political disruptions.

Indian market today opened lower following tepid Asian cues, weak domestic PMI and mixed auto sales data and further dragged after opening. 

The overall market sentiment may be also affected by the reports that demonetization led bank deposits may be almost near 80% of the banned notes and as par the latest trend, it may “exceeds” the official figure of the erstwhile banned currency circulations.

Thus, the Govt may not get any so called “wind fall gain” of around Rs.4.5 lakh cr as was heavily speculated since the announcement of the demonetization. On the other side, Govt/RBI may have already incurred an expense of around Rs.1.50 lakh cr for this demonetization exercise. Thus the whole idea of demonetization and “black money” may be in peril now and Govt is now focusing more on the “digital economy” theme, keeping the whole nation standing in the banking queues now for a month.

Domestic market sentiment was further dragged as a fall out of continuous political battle in the Parliament because of this demonetization. As a direct result, passage of final GST bill in this winter session of the Parliament and implementation of the same looks very difficult for April’17 and even from Sep’17. The FM has also raised some questions (doubts) about Sep’17 GST roll out, terming it as “constitutional responsibility” and presumably attacks the “united opposition”, led by TMC supremo (Mamta Banerjee) for all the “responsibility”. 

Incidentally, TMC supremo may be fighting this “demonetization battle” to the “teeth & nail” eyeing for the 2019 general election as there is a serious “political vacuum” in the opposition for an “acceptable” (consensus) leadership.

Thus, GST and other vital reform process, such as Land & Labour bill may be continue under the political game of “ping-pong” amid the chaos of demonetization and there is little hope that the GST will be implemented before 2019 election.

The market sentiment may be also affected after FM hinted that complete printing of new currency notes to replace the 86% of currency need may take time for 1-2 quarters; i.e. 6 more months against earlier perception of 2 months (50 days). 

Market recovered to some extent for a while in the after lunch session, when RBI/Govt announced the MSS limit enhancement from Rs.30000 cr to Rs.600000 cr to suck out the excess banking liquidity as a result of demonetization. 

But this was also on the expected line after RBI imposed 100% CRR for this incremental banking liquidity. Moreover, this MSS facility is now for 28 days (Rs.2 lakh cr) and the Govt will pay the interests to the banks for this facility in a staggered manner over FY: 17-18 periods. As par the MSS mechanism, it’s only a temporary adjustment facility for liquidity in the systems and Govt can’t use it for fiscal spending purpose. 

Overall, the gradual nature of the MSS and elevated costs for the banks for the demonetization may keep the earnings of the banks under pressure in the coming months.

Also, RBI may remove the 100% CRR imposition on the excess banking liquidity shortly or on 7-th Dec (policy date) and may even cut repo rate by 0.25% without any corresponding cut in reverse repo rate to facilitate the banks for their notional loss as a result of demonetization led surge in the banking deposits. 

Banks are literally paying around 4% on its savings accounts deposits, whereas earning practically nothing on it by way of incremental lending, because there was no demand at all. At the same time, parking of this excess fund in the CRR window also does not yield anything. 

On the other side, such huge amount of excess liquidity is forcing the banks to buy G-SEC bonds in an incremental manner almost on daily basis to keep the norm of 21% SLR, which is also causing drastic falls in Indian bond yields, thus paving the way for an easy exits for the FPI(s) and softening of the INR. 

Thus, the RBI is sucking this excess liquidity from the banking system to prevent falling bond yields, FPI (s) led outflow, weakening of INR and eventual capital loss for the banks from this bond market over heating, when excess deposits ultimately withdrawn in the next 3-6 months, once the situation will be normal.

This MSS action may be slightly positive for the banks in comparison to the CRR action, where it will get nothing, but may be also negative for the Govt (fiscal deficit), which has to pay some interests on it without utilizing the same. 

As there is practically no takers of loan, considering the stressed balance sheets of Indian corporates & SMES, banks can’t use this incremental deposits and RBI may also not very inclined for any “irresponsible” lending by the banks either as in the past because of excessive NPA in the system. 

Govt may focus on the priority lending sector (agri), keeping in view the series of state elections and 2019 general election. The forthcoming FY-18 general budget may also be more focused on this agri/rural & social security schemes for the political compulsion.

Though, market is expecting at least 0.25% rate cut by the RBI on 7-th Dec, keeping in view the probable sub 7% GDP in the coming days, this may not be a usual growth-inflation dynamics for RBI this time. 

As INR is already weak against USD due to monetary policy divergence between Fed & RBI, “Trumponomics” and this demonetization led fall in bond yields, “Owlish” Patel may prefer to wait & watch this time for an actual Fed stance on 16^th Dec and subsequent Fed guidance about 2017 rate hikes (2-3). Depending on the Fed stance, domestic inflation trajectory and economic fallout as a result of this demonetization, RBI may act only in Feb-Apr’17 to help the banks (NIM). 

Eventually, until & unless, FD & other small savings rate in India are not lowered drastically, it may not be feasible for the banks to transmit the repo rate cuts by the RBI in an incremental manner and any drastic fall in small savings rate may also be politically sensitive and may not be possible.

Also, any drastic repo rate cuts by the RBI in the days ahead may depreciate INR against USD more rapidly and in that scenario, FPI(s) may also exit more vigorously.

Thus, demonetization may be proved as a double whammy for the Indian economy as well as the market. It may also be termed as a “political suicide” instead of a smart “master stroke”.

Digital economy & cash less society sounds good, but before sudden demonetization, Govt should have ensured digital infra & required knowledge in a country like India, where cash is king.

Globally, all eyes will be on the Italy constitutional referendum on Sunday and also on presidential election in Austria. The Italy referendum may be of prime importance, because of a high probable “NO” vote, which may eventually force Italy for an exit from the EU and resignation of its current PM. Thus the political risks may increase significantly with Brexit and other forthcoming elections in France, Germany etc as “nationalism” & “trade protection” theme is on the rise, especially after “Trumpism”. Ultimately, the whole EU/EZ concept may collapse.

At the time of this writing, US NFP flashed as 178k, unemployment rate 4.6%, both in line/above expectations. But, wage growth came at (-) 0.1% against consensus of 0.2% (MOM), which undermines the US economic recovery by some extent. As a result, USD is falling; but it may not affect the Fed for its Dec’16 rate hike at this point of time. 

All eyes will be on the Fed commentary about probable rate hike plans for 2017 and market is expecting at least 2 rate hikes (June-Dec’17), if not 3 under new Trump administration. Having said that, US wage growth may be now much more important than the NFP & unemployment headline, because for consumption, one needs to have some surplus income for discretionary spending as well. On the YOY basis, NFP earnings growth today flashed at 2.5% against consensus of 2.8%.

On the other hand, if Yellen choose to stay pat for the forward guidance and does not comment too much without the real fiscal spending plan of the “Trumponomics”, USD may be weakened more in the coming days, which may also be beneficial for the EM currencies including India, at least for the short term. 

Yellen may not comment too much about future rate hikes on 16-th Dec, until Fed is confident about consistent wage growth in the US economy, despite market perception that Trump’s fiscal spending plan may create for more jobs and eventual solid wage growth.

 SGX-NF

Nifty May Open & Stay Lower Amid Tepid Global Cues And Report Of Mixed Auto Sales Data & Demonetization Led Bank Deposits Almost Near 80% With A Month In Hand

Market Mantra: 02/12/2016 (08:30)

Is Demonetization A Total Failure, Where More Than Official Circulation Of Old Currency Can Enter The System?

Watch 8195-8275 & 8130-8040 Zone In Nifty Fut (Dec), Which May Open Around 8155'

As par early SGX indication, Nifty Fut (Dec) may open around 8155 (-55 points) following tepid global cues in the Asian session. Overnight, US market was mixed with selling in techs (Nasdaq) and some visible stress in the “Trump Rally” with mixed economic data yesterday, where except, ISM Mfg PMI, all the other economic data came slightly lower than market estimate (auto sales, construction spending, initial jobless claims).

Despite surging US bond yields, USD dropped yesterday may be because of mixed economic data and some market talk that going forward, ECB may indicate some bond buying tapering after extension of the current LTRO programme up to March’17 (EUR 500 bln). Also, current French president may not be a potential candidate for the next election may be influencing the EUR as he was very dovish along with impending Italy referendum on Sunday and other imminent EU political risks on the negative side.

Globally, all eyes will be on the US NFP job data today in order to assess the core strength of US economy to withstand Dec’16 and further rate hikes in 2017. NFP estimate is around 175-180k; 4.9% unemployment rate; 0.2% hourly wage hike (MOM); but we may not be surprised, if NFP will come around 200k + as now there is no risk of market capitulation because of Dec’16 Fed rate hike (already discounted) and to “make up” the past few months of tepid job data; yesterday’s ADP blockbuster job data may help.

Back to home, Indian market may be continuing under pressure for the Demonetization fiasco and economic disruptions. Market will keenly watch auto sales & other high frequency data to gauze the extent of real impact after Demonetization led business disruptions, which may continue for a least 3-6 months. Yesterday’s auto sales data was mixed as surge in PV & 4-W may come in on the back of “trashed black money on old currency” and 7-CPC induced liquidity.

Also, as par reports almost 11.5 lakh cr of bank deposits has been made in old currency notes out of total official circulation of around Rs.14.5 lakh cr; i.e. almost 80% and already made the Govt target. But, from the ongoing trend, the gross deposits may exceed even the official circulation of Rs.14.5 lakh cr, especially after the announcement of VDS Amnesty scheme, which means that fake/counterfeit currency may be entering the system for making it “white” undermining the Govt effort of “war against black money”.

Technically, NF has to sustain above 8195-8225* area for further rebound towards 8275*-8295 & 8335*-8375 zone for the day (under bullish case scenario).

On the other side, sustaining below 8130-8100* zone, NF may further fall towards 8060-8040* & 8000*-7950 and 7900-7880 area for the day (under bear case scenario).

Similarly, BNF (LTP: 18478) has to sustain above 18300* area; otherwise it may further fall towards 18200*-18100 & 17950-17750* zone for the day (under bear case scenario).

For any strength, BNF needs to trade above 18500* area for further rebound towards 18650-18800* & 18900-19050* zone for the day (under bear case scenario).

 SGX-NF

 BNF

Nifty Snapped 4 Days Rally Amid Tepid Global Cues And Disappointing Domestic Mfg PMI, Q2 GDP & Slump In LCV/UV/Tractor Sales Despite Surge In PV/2-W Sales In Nov After Announcement Of Demonetization; Telecom Drags After Another R-JIO Induced Disruptions

Technically Nifty Fut (Dec) now (LTP: 8210) has to sustain over 8255-8275 area for further rally towards 8335-8375 & 8445-8485 zone.

On the other side, sustaining below 8175-8145 zone, NF may further fall towards 8065-8000 & 7955-7900 area in the near term.

Market Wrap: 01/12/2016 (17:30)

Nifty Fut (Dec) today closed around 8210 (-50 points) in a subdued day of trading after making an opening session high of 8272 and closing minutes low of 8205. 

Indian market today opened almost flat following tepid global cues after yesterday’s block buster rally in oil, helped by the historic OPEC deal. But, costly oil may not be good also for an oil importing economy such as India and also for China & US. Overnight US market closed almost flat despite rally in energy shares.

Today, China PMI data came above expectation, but that may be also a seasonal factor in Nov, when Govt supported real estate market there. Now, with increasing regulations and tighter monetary policy by PBOC, this may not be repeated in Dec. Metals were under pressure as a result of this China tightening and tepid AU data, despite “Trumpflation” & more infra spending.

Another global headwind for the Indian market may be consistent strength in USD as a result of upbeat US economic data and surging bond yields for the “Trumponomics”. 

FPI(s) are consistent sellers in the Indian market for the last few months even before the US election, when there was no “Trumpism” probability, because the recent trend in nationalistic politics (Brexit) may have induced an urge to look into the “Real Streets” rather than “Wall Streets” for the policymakers/politicians and thus, whoever be the next US President, be it Clinton or Trump, is bound to spend, more or less. 

Now, with Trump, market is assuming that he is fiscally loose and monetary tight; i.e. there may be some structural shift in US/Fed monetary policy and fiscal stimulus will be the main theme along with gradual reduction in monetary stimulus. 

The same trend may also be followed by other major economics like Japan & EU, where despite years of QQE, growth & inflation is nowhere and the recent geo-political events like Brexit, Trumpism has proved that such “black swan” can influence the world of currencies in a matter of days, which QQE has failed to do over the years. GBP slumped overnight as a fallout of Brexit and Yen also depreciated significantly against USD after “Trumpism” much to the delight of BOJ, which has failed to do so despite months of various “experiments” under Abenomics/Kuroda.

Thus the days of global flow of “easy money” may be at their end and the present “Trump Tantrum” may also cause more EM currency carnage. INR may be more affected for the demonetization led disruptions despite RBI’s best effort to stabilize the G-SEC bond yields in the coming days and that may accelerate FII (s) outflow. 

Till now, DII(s) are absorbing a large part of the FII(s) selling, but it may be very tough even for the DII in the days ahead as the demonetization & “war on black money” approach by the Govt may even affect the investing capacity & sentiment of the Indian retail clients. FII & ETF and DII liquidity may be one of the main factors for the stupendous rally for Indian market since March’16 despite stretched valuations.

Domestic market sentiment may be also affected today after Markit Mfg PMI data came at 52.30 for Nov against prior figure of 54.40 (estimate: 52). This is the biggest one month decline since March’13. This may be an indication of slower economic activity after demonetization led business disruptions as feared. In Dec, the figure may be further worsened.

Today, Maruti & Eicher reported blockbuster Nov sales quite unexpectedly. But, on closer scrutiny, it came on the back of surge in sales in lower end models for Maruti (Alto & Wagon-R), which may be an indirect beneficiary of Demonetization in Nov as people with “black money/unaccounted cash” may have rushed to buy these models, rather than surrendering it to the Govt or destroy it (there are many loop holes in the system to utilize unexplained cash without going to banks). The same may be true for Eicher and other 2-W makers and this Nov surge in sales may not be repeated in the months ahead.

The true state of ground economy after demonetization may be felt by the slump in domestic sales for M&M and also for Ashoke Leyland, where LCV/UV/Tractors sales has fallen significantly more than market consensus, which may not be good for the core Indian economy.

Towards, the closing session of the day, market sentiment was further deteriorated after R-JIO announced another extension of the freebies till March’17, which resulted in plunge of telecom stocks instantly. As expected, R-JIO will now give more thrusts to the “Digital Indian Economy” theme and on its JIO-Money (like PayTM). 

The present R-JIO freebies may be great for the consumers, but may not be good for the Reliance investors. It will be interesting to see, how much tariff R-JIO can generate from its present pool of “free customers” (almost whole India), once it starts giving service commercially.

Another factor is that due to present political deadlock and Demonetization led disruptions; passage of final GST & implementation of the same from April’17 looks very difficult and also may be impossible. Naturally, Govt may say that it will implement the GST from Sep’17 for the time being (already hinted by the FM few weeks ago).

But, considering series of state elections and 2019 general election, for which ground preparation may be already started or will be at its peak in late 2018, Govt may not risk taking another “political suicide” as the present Demonetization “master stroke” may have already taken all the “stamps, bails & the pitch”; there may not be any “pitch” left for playing another “master stroke” in the foreseeable future.

Indian market may not be discounted till now for a “No GST” till 2019 general election. 

Also, as par latest reports, an amount of around Rs.11.50 lakh cr has been deposited with the banks in the old 500 & 1000 notes since announcement of the Demonetization. It seems that as par the latest trend, more than the estimated Rs.14.50 lakh cr may be deposited with the banks till Dec-31 and with the RBI till March’17, especially after the Govt announcement of another VDS/Amnesty scheme @50% tax (fake or counterfeit notes entering into banking system as banks may got more than the official circulation of the same by the RBI).

Govt may be hoping for a windfall gain for Rs.3.50-4.50 lakh cr as this amount hoarded by the so called “idiot black money holders” may not be returned into the system for fear of high taxes & prosecution. But the same were not “thrown” at all to the “Ganges or Yamuna River” as expected and instead may be already converted into new notes or will be converted soon and contrary to the earlier perception, it may be a liability of the RBI in its balance sheet, where an expenditure of around Rs.1.50 lakh cr may have already incurred in the P&L A/C as a result of the Demonetization, apart from the bank’s individual expenses, which may be also huge.

Thus, overall collateral damage to the Indian economy may be more than the expected benefit as a result of this Demonetization as 85% currency note replacement at one “masterstroke” may not be so easy; rather than its now proving as “administrative nightmare”  in a country like India, where “cash is king” with very little digital technology/education for most of the people.

As par various reports, only 6% of “black money” may be trashed into old notes and the rest has already converted into other forms of financial assets either in India or out of India. Only 0.02% of the people of India may hold some types of “unaccounted/black money” and for that, this Demonetization effort by the Govt may be an indication that Govt believes all its citizens as some types of “crooks” despite its best effort to divide Indian into a "rich" & "poor" class (with or without black money).

As some analysts/economists are terming the present Demonetization as “running an economy without oxygen” or “intentional bursting of a racing car tyres” in the Indian context, the same may not be wrong at all despite the current Demonetization might be turned virtually into another VDS/Amnesty scheme as the Govt does not have any intentions for the reform of “political donation” system in our country, where the vicious cycle of corruption starts first and ends at the bottom of the economy & bureaucracy (more Governance & more corruption). The root cause of the corruption (higher taxation & Governance) and specific "patients" (black money holders) may be treated first rather than the symptoms (old  currency notes) & vast "healthy people" ("white money holders").

It's also certain that the present chaos of Demonetization may be fizzled out by next 3-6 months, but the long term effect on the Indian consumption story may be prolonged for at least next 5 years as the similar "surgical strike on black money" has demonstrated the same trend in China.

 SGX-NF

Nifty May Open Sideways Following Flat Global Cues; All Eyes May Be On The India Nov Mfg PMI & Auto Sales Data Today To Gauze The Real “Damage” Of The Economy As A Result Of Demonetization After Yesterday’s Disappointing GDP

Watch 8275-8375 & 8230-8130 Zone In Nifty Fut (Dec), Which May Open Around 8260

Market Mantra: 01/12/2016 (08:30)

As par early SGX indication Nifty Fut (Dec) may open around 8260 (+6 points), almost flat following tepid global cues after OPEC led overnight oil rally of around 10%. Japan (Nikkei) trading strong in Asian session following more depreciation in Yen.

After eight years, OPEC yesterday penned some deal to cut production by 1.2 mpd daily by Jan’17 against some market expectation of 1.4 mpd. As the market was extremely short on the assumption of no deal, this news, which also came early yesterday, caused massive short covering and subsequently oil rallied by almost 10% in a day. Going forward, market will keenly watch the actual implementation of this deal as in the past there were several incidences of mistrust among various OPEC nations. 

Also, oil above $50, may induce more supplies from US and together with Trump’s rhetoric about “Oil independence” of America, we may see more US oil production and less import for the US. Thus, it may not so easy for the oil to have an optimum demand supply dynamics (rebalancing) even if one can take the present OPEC deal on its face value.

On the other side, higher oil above $50-60 on a consistent basis can also put pressure on the oil importing economy such as US, China & also India.

In any way, technically Crude Oil (LTP: 49.53), now has to sustain above 50-53 area for further rally towards 62.50-70.50; else it may fall again towards 47-44.50 & 42 in an classic example of “buy the news & sell the fact”.

Although, theoretically, Oil & USD should have inverse co-relation, yesterday USD strengthen on the contrary as a result of above estimate US economic data and upbeat Fed Beige book. All eyes will be on the US NFP job data tomorrow to have an idea about US economic strength to withstand 2-3 rate hikes in 2017 after Dec’16. The blockbuster ADP job data yesterday & the Chicago PMI index has helped the USD significantly yesterday, despite rally in Oil.

Back to home, Indian market today keenly watch Nov Markit Mfg PMI (estimate: 52; prior: 54.4) and monthly auto sales data to have an idea about extent of real damage to the consumption of Indian economy as a result of demonetization led disruptions. 

Market will also watch the ongoing political battle in the Parliament and the expected banking chaos on the pay week for its next trigger.

Technically, NF has to sustain above 8275-8295* area for 8335*-8375/95 & 8425*-8445 zone for the day (under bullish case scenario).

On the other side, sustaining below 8250-8230* area, NF may further fall towards 8180-8130* & 8060-8000* zone for the day (under bear case scenario).

Similarly, BNF (LTP: 18682) need to sustain above 18750* area for further rebound towards 18975-19075* & 19200-19300* zone for the day (under bullish case scenario).

On the flip side, sustaining below 18600* area, BNF may further fall towards 18500-18330* & 18200*-18100 zone for the day (under bear case scenario).

SGX-NF

 BNF