US equities: End of last mile with violent turnaround
Expectation was high for end of FED liquidity driven rally in US equities with most expressing concerns from disconnect with the real economy, building risk of asset bubble formation for explosion. It happened post the long weekend pushing markets down by 6-11% across indices. When the “last mile” play was steady for a month, the reversal was swift losing most in 7 days! What Next expectation is between consolidation given that most dynamics remain unchanged or extended reversal with confirmation that best of run upto US Presidential election is behind, and if so how deep could be the value correction, good to call it as normalisation aligning with real economy!
The script since start of August was for start of last mile rally on run upto US Presidential election. DJIA upside break at 26500-26650 set up last mile focus at 27150-29150/29500, not beyond all-time February 2020 high 29568. It was quick spurt at 26534-29199 (by 10% in a month) turning into waterfall collapse to 27447 (by 6% in 7 days) before close at 27665. What Next? DJIA collapse below 2019 close 28538 is sentiment negative, which could turn worse on breakdown at 26500-26650, previous resistance turned support now, and upside restricted at 28350-28500. For the week, keep focus at 26500/26650-28350/28500 with big picture focus at 25000/26500-28000/29500.
S&P 500 2-step rally from 2950-3000 and 3250-3300 ended at higher end of last mile 3300-3600 (at 3588) for reversal at 3310 before close at 3340 (down by 7.75% from 2nd September high), held between 2019 close 3230 and previous high 3393. What Next? Sentiment remains weak for push towards 3050-3250 while below 3450 ahead of slippery track 3450-3600. For the week, let’s set focus at 3250-3450 of big picture 3000/3250-3450/3600 with pull bias into lower end.
NASDAQ extraordinary rally beyond 10K overshot end of last mile zone 11650-12000 (at 12074) only to be followed by over 11% collapse to 10728 between 3-11 September before close at 10853. Consolation here is from staying well above 2019 close 8972 and pre-Covid high 9838 and significantly above March low 6631. When there’s no rational for over 80% rally from C-19 low, there’s no logic for violent turnaround except shift of undertone from euphoria to good sense! Is it from fear of unsustainable euphoria led rally with break of stretched elasticity and/or losing hope on real economy taking more than expected time for recovery? What Next is worse here turning from super out performance to leading the rout! For the week, let’s set focus at 10000-11500, not ruling out extended reversal into 9350 pulling 2019 close 8972 into focus.
India equities: Resilient but in slippery track
Consolation for India equities is pleasant surprise resilience despite supporting external tailwinds turning as violent headwind. It’s thanks to FPI’s appetite for India risk riding on the liquidity wave, notwithstanding the expression of displeasure by RBI Governor on build up of significant disconnect from rising market cap against declining earnings of most listed companies. Nevertheless, it’s mixed cues – NIFTY held by RIL & FPI while Bank Nifty on decline from emergence of another headwind in the form of rising Gilt yields against worsening demand-supply dynamics. What Next? It’s combination of external headwinds and domestic uncertainties on real economy and banking sector. While DIIs are firmly on sell-on-recovery mode, not sure how long RIL impact will support when FPIs turn towards exit door sooner than later. Latest bolt from the blue is SEBI regulation of diversification of investments across large, medium and small cap companies by multi-cap MFs. While it can be argued that it’s good for the system as every listed entity (irrespective of size) will get aggregator’s investments, subject to meeting investment parameters, the immediate impact is loss of appetite for large cap from rebalancing of portfolio from large to small & medium cap companies. It’s blow on the index, which may be the exit trigger for FPIs in the absence of their appetite beyond large cap companies. Bottom-line is that investors can’t be forced into investments in particular group or sector, and that if they don’t like the enforcement, they will choose the easiest option of “quits”, going elsewhere where there’s freedom of investment as per their choice, whether good, bad or ugly. The issue is on the timing of this news when market dynamics weak ahead of final fortnight of Q2/FY21. It’s turn from bad to worse from first to second week of September!
NIFTY held resilient at set focus 11000/11085-11500/11585 with most play at intermediate quartile of 11185-11460 (11437-11185-11493) before firm close at 11464. While set up of lower high’s (11794-11493) and lower low‘s (11303-11185) on weekly basis at start of September keeps undertone negative highlighting end of last mile (of 11500-11800) at 11794 despite push back hold at 11185. What Next? Let’s retain focus at 11000/11085-11500/11585 looking for intra-week push into 11000-11185 ahead of 1st reversal target 10850-10885 (of big picture 10350-11850).
Bank Nifty continues to fight losing battle since end of August giving away gains at 22000-25150/25500 (25232-22086) with weak close at 22479. Despite losing over 3000 points in 9 sessions, inability to sustain above 22650 is strong signal of extended weakness into 19500-22000. It’s getting tough on banking sector from top-line growth contraction & earning squeeze and worsening cost of credit & market risks (from credit & investment portfolios) and worsening cost-income ratio affecting PAT/EPS, only positive is from retaining dividend payout on the books, which is the only consolation. For the week, let’s focus at 20500/20850-22650/23000. Will 19500-20500 bring in value-buy bids along with short-squeeze urge for profit-booking? May be, Yes!
India-US 10Y yield spread gets elevated, Will this emerge as support for India 10Y bond?
While US 10Y yield in comfort mode around 0.675%, midpoint of big picture focus 0.50/0.575-0.775/0.85%, India 10Y bond 5.77% 2030 yield spiked from 5.75% to 6.10% pushing yield-spread from 5-5.15% to 5.35-5.50%. When appetite emerge for US Treasuries from sell-off in US equities, there is very little demand for India Gilts at lower yields, which is validated by successive devolvement of auction at cut-off 5.96% and 6.02% within 2 weeks, and worse within 5 weeks of issue, YTM is up from 5.75% to 6.10% before close at 6.04%. What Next? 10Y bond resistance is firm at 5.95-6% having great appetite to sell to absorb OMO/OT, such is the urge for portfolio-light and duration-cut. On the downside there’s good appetite at 6.10-6.15% for usage of additional HTM limit. As per script, the focus has shifted from 5.75-6% to 5.95-6.20% and have comfort that RBI will defend sternly to avoid overshoot into 6.20-6.35%. For the week, see most play at 6-6.10% and overshoot into 5.95-6% or 6.10-6.15% not expected to sustain.
USD/INR price stability is positive while USD Index is range bound, FPI holding either way trigger
USD Index remain boxed at set comfort range 91.50/91.85-93.50/93.85 (91.75 to 93.66) with outlook that 90-91.50 is high risk for initiating short-USD position while not sure of sustainability at 93.50-95 in the absence of supporting cues. Having said this, see higher possibility of consolidation at 91.50-95 rather than 90-93.50.
USD/INR resilience bounce back from 72.65-72.80 to 73.85-74 is sharp before close at 73.54 despite FPIs in $ supply mode and RIL bringing in FDIs. It’s also from short-squeeze of 12M $ down from 79.65-80 to 75.65-76 pushing 12M FX premium to ₹3.20 (at 4.35%, 12M FX yield of 4.75%, higher than 364D T-bill yield). What Next? USD/INR upside break at 72.65-73.15 is first signal of end of correction from 77 to 72.75 with support at 73.15-73.50 for 74.50-74.85, and beyond here into 75.15-75.50 will need FPIs exit from India risk. It’s possible that RBI in comfort with value normalisation consolidation at 73.50-75.50 after allowing temporary overshoot beyond 73.50-75 into 72.65.
EUR/USD has stuck to set focus at 1.1650-1.20 and tossed up between 1.1650-1.1725 and 1.1925-1.20 with most trades at 1.1725-1.1925. In alignment with USD Index, see EUR/USD pull bias into 1.15-1.1850 rather than 1.18-1.2150. USD/JPY is boxed at 105-107 with pull bias into 107-108.50 rather than 103.50-105.
EUR/INR reversal from 89.35-90 finds support at 85.85-86.50. What Next outlook is mixed between 85-88.50 and 86.50-90 given upside pressure on USD/INR and downside risk on EUR/USD and prefer consolidation at intersection zone 86.50-88.50, either way overshoot tough to sustain.
Gold and Brent Crude into risk-neutral sideways mode in the absence of dominating one-way cues
Gold retain sideways mode at $1900-1965 (1906-1966-1937) of comfort range $1865/1900-1965/2000. This consolidation mode is in order when both USD exchange rate and Treasury yields in price stability mode. No see fresh cues to review this stance.
Brent Crude goes down from $45-46.50 to $38.50-40 of big picture $35-50 keeping play at mid quartiles and unable to sustain either at 46.25-50 or 35-38.75. With dilution in geo-political tension, economic capacity contraction triggers downside momentum and need economic turnaround in Q4/2020 to get the focus back into $42.50-46.50. Till then, back & forth at $37.50-42.50 is in order.
Have a profitable week ahead!
Moses Harding
