Nifty Edged Up By 0.31% To Another Life Time High On Positive EU Cues And Hopes For Revival In Growth After Mega Stimulus For PSBS

Market Wrap: 26/10/2017 (17:00)

NSE-NF (Nov):10357 (+32; +0.31%) 

(TTM PE: 26.80; Abv 2-SD of 25; TTM Q1FY18 EPS: 386; NS: 10344; Avg PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)

NSE-BNF (Nov):25066 (-26; -0.10%) 

(TTM PE: 28.40; Abv 2-SD of 25; TTM Q1FY18 EPS: 881; BNS: 25022; Avg PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)

For 27/10/2017: 

Key support for NF: 10325-10270

Key resistance for NF: 10450-10505

Key support for BNF: 24800-24600

Key resistance for BNF: 25250-25500

Hints for positional trading:

Indian market (Nifty Fut/India-50) today closed around 10357, edged up by almost 32 points (+0.31%) after making an opening minutes’ low of 10301 & closing session high of 10371; Nifty Spot today made another lifetime high of around 10356 and closed around 10344, up by 0.50% on mega stimulus boost (plan) of Rs. 9 tln in PSBS & road infra.

Indian market today opened around 10310, edged down by around 15 points on muted global/US cues tracking subdued US corporate earnings, renewed uncertainty over Fed Chair & US tax reform. Soon after opening, it went into consolidation mode and focused on fine prints of PSBS recaps and lofty valuation of the same after yesterday’s epic rally, which caused India to enter into the elite club of $2 tln market cap.

But supportive EU market after some dips in EUR ahead of ECB and buzz of truce/fresh election in Catalonia may have supported the Indian market sentiment also and coupled with that, PSBS recap plan clarification by the Govt, market made a late day small rally & closed the Oct exp with 6% gain, the most in 2017, primarily led by mega stimulus plan for the PSBS & subsequent huge short covering.

As par some reports, Govt may also unveil a comprehensive food processing policy for the 1^st time aiming for food retails, which may bring significant FDI into the country and give a boost to retail food giants like Walmart, Tesco, and Carrefour. Govt has also committed for progressive liberalization of food retail policy and eventually include non-food items.

Along with optimism about Govt’s bazooka of around Rs.9 tln stimulus in PSBS & road infra, market has may have also cheered up positive result from HUL, a proxy of rural India economic recovery story after DeMo & GST blues coupled with another upbeat data about air traffic, which accelerated by around 16% in Sep, indicating revival of urban consumption.

But all these data boost may be also seasonal (festival/holiday season) and solid growth in air traffic may be due to flood related disruption of railways in various parts of the country, forcing people to take the costly air alternative. Sudden volume surge in HUL (FMCG) may be also due to factors related to GST de/re-stocking.

Govt “sources” today tried to clarify some points about PSBS recaps announced day before yesterday (issuance of Rs.1.35 recap bonds without hurting fiscal discipline):

·         Govt may form a holding company for PSBS

·         Holding company model seen as the most preferred option

·         Govt to transfer its stake in PSBs to holding company

·         Recap bonds to be issued by the PSB holding company

·         Holding co structure to ensure there is no impact on the fiscal deficit

·         Funds raised by holding co not to be counted as sovereign debt

·         No clarity yet if holding co will work as bank investment co

·         Direct issuance of bonds by Govt could spike fiscal deficit by 0.5-0.6%

Govt Sources:

 

·         Weak banks unlikely to be given growth cap, may receive only provisioning amount

·         Recap bonds not be zero-coupon bond

·         Recap bonds should carry a market determined coupon & also to be non-SLR

·         Govt To Issue Front-Loaded Banks Recapitalization Bonds In FY 2018

·         Govt Share In Banks To Initially Go Up After Issue Of Banks Recap Bonds

·         Bank Recapitalization To Precede Govt's Equity Dilution In PSU Lenders

·         Looking at bonds issued in mid-90s as a template for new recap bonds

Govt official says:

·         New PSU recap bonds unlikely to reflect on fiscal deficit

·         Annual interest burden on recap bonds to be borne by Govt

·         Recap exercise may require some 'write off' of bad debt apart from NCLT process.

Thus, it’s clear that Govt will first form a “holding co” and then proceed to the whole recaps process by issuing special bonds to avoid the fiscal deficit breach question and bail out the fragile PSBS. From the overall financial engineering plan, it seems that the whole recap process may take several years and any economic benefit or recovery in credit growth, private investments may also take several years; it’s a long term process (min 2-4 years).

In the short to mid-term, this will not affect earnings of the PSBS or overall momentum of the economy, although it may be a “monumental step” for country’s economic future as observed by the RBI Gov. Most of the PSBS & some private banks which soared yesterday has reacted negatively to this “trial balloon” by the Govt and closed in negative today.

Today Nifty was supported by IOC, HPCL, Maruti (analyst upgrade), RIL (telecom and oil &gas optimism/capex plan with BP), VEDL, L&T (road construction stimulus by the Govt), Infy, HDFC, BPCL & Axis Bank by around 52 points cumulatively.

Nifty was dragged by ICICI Bank, HCL Tech (muted report card), SBI, TCS, IBULLS HSG, Power Grid, Tata Motors, ITC, Bosch & Bharti Airtel by around 24 points altogether.

Overall, Indian market was today helped by energies/OMC (earnings optimism & analyst upgrade), metals, infra & selected techs, while dragged by PSBS/selected private banks & NBFC. For the Oct exp, Bharti Airtel surged by 34%, followed by SBI (+27%) and RIL (+20%), while Axis Bank, Yes Bank and Bajaj Fin fell by around 5% each.

Global Cues Are Muted On Renewed Fed Chair & US Tax Reform Uncertainty:

Asia Edged Up On Mixed Earnings, Stable USD & Muted US Cues Ahead Of Draghi:

EUR Tumbled Below 1.17 On Dovish QE Tapering By ECB:

SGX-NF

EURUSD

Nifty May Open Edged Down On Muted Global Cues Amid Fed Chair & US Tax Reform Uncertainty Coupled With Subdued US Corp Earnings

Indian Market May Focus On Further Fine Prints Of PSBS Recaps & Earnings Deluge:

Market Mantra: 26/10/2017 (09:00) 

SGX-NF: 10270 (-20)

For the Day: updated at 11:15

Key support for NF: 10270-10215/10150

Key resistance for NF: 10325-10380/10430

Key support for BNF: 24850-24500

Key resistance for BNF: 25100-25250

Hints for positional trading: (NF/NS & BNF/BNS)

Technicals indicate that, NF has to sustain over 10325 area for further rally towards 10360/10380-10430 & 10505-10600 area in the short term (under bullish case scenario).

 

On the flip side, sustaining below 10305 area, NF may fall towards 10270/10240-10215/10180 & 10150-10040 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 25100 area for further rally towards 25250-25500 & 25600-25775 area in the near term (under bullish case scenario).

On the flip side, sustaining below 25050 area, BNF may fall towards 24850-24500 & 24300-24000 area in the near term (under bear case scenario).

As par early SGX indication, Nifty Fut (Oct) may open around 10270, edged down by around 20 points on muted global cues tracking some subdued US corporate earnings, renewed uncertainty over Fed Chair & US tax reform. As par some reports, Trump may not announce this week his nomination for next Fed Chair in the form of Taylor, a known hawk and it now seems that he may extend Yellen as Fed chief for another term, bringing either Taylor or Powell as VC.

Basically, Trump now wants someone less hawkish or dovish as next Fed Chair like Yellen; but Yellen’s known political stance (liberal democrat & close to Obama) may be the biggest headwind for Trump right now; although DNC may support his effort to keep Yellen for another term to ensure that USD does not break the barrier of 115 for the interest of US economy.

Overall US economic data released yesterday was quite upbeat despite some hurricane distortion, but despite that USD dropped as prospect of a hawkish Fed leader diminished coupled with renewed uncertainty about passage of US tax reform amid increasing political spats between Trump & some of his own RNC GOP members/senators.

USD was also under pressure on muted earnings from some leading US corporates and subsequent plunge in US stock market along with renewed NK rhetoric, indicating that Kim may be preparing for a Nuke test with an ICBM in the pacific as warned earlier!!

Overnight US market closed in negative on barrage of muted corporate earnings & guidance and higher US bond yields (2.475%), tracking upbeat economic data; DJ-30 slumped by almost 0.48%, most in the last seven weeks; S&P-500 also fell 0.47% and closed around 2557; NQ-100 corrected by almost 0.52%. 

But US market pared losses significantly after some fall in US bond yields tracking Trump’s comment that he is still considering keeping Yellen in the Fed chair post. Also, Trump is now open to negotiate the tax saving retirement program 401(K) contrary to his earlier position few days ago; although it may again open the door for further debates over US tax reform and not benefit the real street, it may be good for the Wall Street. Overall, lower US bond yields/ USD/Fed rates are beneficial for the US stock market.

Subdued earnings & guidance from some big names like AT&T (-3.9%), Chipotle Mexican Grill (-14.6%), AMD (-13.5%), Boeing (-2.8%) dragged the market yesterday despite overall report card till day may be quite upbeat. As valuations are quite stretched as par US standards, market may be scrutinizing every earning to justify the lofty valuation. All the eleven sectors were in red with telecoms & industrials led the decline yesterday, while Tesla helped the market to some extent.

US stock future (SPX-500) is now trading around 2557, edged down by around 0.10% before EU market get opens; market will now focus on Draghi for ECB QE tapering plan.

EU stocks also dropped yesterday on higher EUR & GBP coupled with subdued report card from some corporates.

Back to home, Indian market (Nifty-Fut/India-50) is now trading around 10290, almost unchanged after opening little lower on muted global cues. Market will now focus on fine prints of PSBS recaps and lofty valuation after yesterday’s epic rally.

Govt will also focus on further PSBS consolidation and may bring it to 5-6 large PSB with an immediate cut to holdings to an average 52%. Eventually, barring 3-4 PSBS, Govt may divest all the others to private investors/banks after expected strengthening of the B/S.

Market will also focus on deluge of earnings, which is so far termed as mixed, yet stable but may not justify the stretched valuation.

                                                      SGX-NF