Run upto to major event risk – US Presidential Election, when going gets tough on real economy from pandemic impact!
FOMC/FED continuation of ultra-dovish stance on monetary policy sets the tone for run upto to either Trump 2.0 or Biden 1.0. It’s critical that political policy continuity is essential when real economy is into its worst phase – severe growth contraction, growing unemployment, rising fiscal deficit, uncertainty on timing of permanent relief from Covid-19 and confusion over availability of vaccination before end of 2020. Given these dynamics, it’s no pleasant surprise for FED to subscribe to zero interest rate policy till 2023 with emphasis on ensuring availability of cheap liquidity to support financial markets till credit & investment pick up for turnaround in real economy. The risk for an abrupt end of accommodating stance will only be from headline inflation overshoot & staying sticky above 2%, which at this point is not relevant to consider. So, short term dynamics is mix of political uncertainty (45 days to go for US elections), output & employment contraction (de-growth in top-line GDP), extraordinary fiscal slippages (double-digit on lower base) and soothing impact from easy monetary conditions (zero rate ride over long term pushing for investments & consumption). All combined, there’s nothing to panic while FED-liquidity led euphoria gets unwound to provide stability on sentiment around risk-neutral, neither light nor overweight till election event risk is behind.
US equities in search of base for end of reversal of last mile rally
Positive take-away from DJIA index is resilience at 1st major support zone 27150-27500 (lower end of set last mile zone 27150-29650) holding the reversal from 3rd September high 29199 ahead of make or break support zone 26500-26650. Is 6-8% value normalisation good enough, when in trend down mode below 2019 close 28538? Not sure, but for the week, let’s continue to stay tuned to sideways mode at 26500/26650-28350/28500
S&P500 also at lower end of last mile zone 3300-3600, down from (2nd September high) 3588 to 3292 (lower by over 8%) while above 2019 close 3230. Can consolidation stay boxed at 3200/3250-3450/3500 or into extended correction towards 3000-3050 before stability? It’s bias neutral, but see great value-buy opportunities at 2850-3000.
NASDAQ focus was frozen at 10000-11500 with pull bias into lower end of last mile zone 10000-12000, and the reversal from 12074 (2nd September high) hit 10640 losing over 11% while retaining weak undertone with close around 10790. Consolation here is from holding significantly above 2019 close 8972. For the week, it’s good to stay focused at 10000-11350, and see emergence of value-buy urge at 9000-10000.
India equities outperform US indices despite Bank Nifty losing significant value
India equities encountered 2 severe headwinds – value unwind in US equities and SEBI restraint on multi cap funds, but NIFTY weathered the storm nicely. While small & mid cap indices rallied on expectation of rebalancing of portfolios, there’s no impact on large cap stocks. Major setback is on banking stocks that continue to remain in down-hill mode. The announcement of recapitalisation of PSU banks by ₹20K Crores was not good enough against RBI struggle to contain spike in Gilt yields – 10Y yield spike from 5.75% to 6-6.20% within 45 days of issuance is not a small matter to brush aside. Over all, while it’s pleasant surprise to see NIFTY resilience (unsure of how long?), it’s sentiment negative from absence of resilience on Bank Nifty despite losing ~14% (3500 points down from 31st August high 25232).
NIFTY turned out to be star performer, held strong at 11350-11385 for unsustainable upside break at 11550-11585 before firm weekly close (11383-11618-11446-11504). It’s solid show despite (expected) failure at midpoint of 11585-11650 (keeping extended last mile 11650-11800 out of radar) and notwithstanding close at lower end of 11500-11585. What Next? It’s bias & risk-neutral with close above 11500, but don’t see cues for sustainability at 11500-11650/11800 with near zero probability of move beyond 31st August high 11794 while retaining pull bias into 10882-11387. When outlook on the economy & banking sector is not good, don’t know how to get positive on NIFTY index and how long few stocks can help to hold steam? For the week, while keeping zoom-in focus at 11350/11385-11585/11620, breakout bias is towards 11085-11185 while retaining short term big picture focus at 10850-11650. Hope to see completion of reversal from extended last mile 11650-11800 (high 11794) as dynamics turn tough on run upto end of Q2/FY21.
Bank Nifty focus was set at 20500/20850-22650/23000 and got the upper-half of move (similar to NIFTY) at 22757-21784 with weak weekly close at 22031. What Next? Collapse from 25150-25500 to 21650-22000 is violent, highlighting lack of long term investment appetite on most banks. Investment strategy has been to buy for hold at 19500-21000, but not getting wedded to the position while at 24650-25350 and to be a proactive investor rather than being passive buy-only mindset. For the week, focus set at 20650/21000-22500/22650 supported by short-squeeze bids at lower end, ahead of buy for hold zone on extension into 19500-20650. Need to wait for better clarity from Q2/FY21 results (impact of top-line growth contraction & earning squeeze) and thereafter from Q4/FY21 on Covid-19 loan restructuring impact on NPA and CAR. It’s way to go, 6 months of time value when outlook is between suspect & nervousness!
It’s sign of yield stability both in US & India markets, while RBI stuck between sticky elevated headline inflation and struggle to handle higher market borrowing
US 10Y Treasury yield got stuck around 0.675% (at 0.65-0.70%) which is as per script given that shift of policy rate from above to below 0% is kept off the radar till 2023, and if all goes well on real economy and inflation gets sticky over 2%, then it would be back to aggressive hardening rate cycle. So, demand for Treasury gets shifted to 3-5 years for lower duration portfolio, lightening beyond 10 year exposure. Having said this, it’s not yet end of the game as carry-trade appetite will remain good till sighting of economic recovery. So, big picture play on 10Y yield is between 0.60-0.65% (duration-cut urge) and 0.75-0.85% (buy for carry appetite) pushing 0.50-0.60% off radar for now with most play at 0.65-0.75%
India 10Y bond 5.77% 2030 recovery from 6.075-6.10% lost steam at 5.975-6% for comfortable stay at no-man’s zone 6-6.05%. It’s kind of hide & seek game between RBI & investors and PDs stuck in between. OMOs & OTs is the support to keep 10Y bond yield below 6.20-6.35% in addition to India-US yield spread elevation at 5.35-5.50%. RBI would need to push ₹6 Trillion of market borrowing in H2/FY21 without disrupting liquidity & yield, which is not easy but not impossible. The need is to keep 10Y yield investor friendly at 6.05-6.20% while resisting push towards unrealistic yield 5.85-6%, which would trigger one-way supply for duration-cut and portfolio-light, while higher HTM utilisation will be good at 6.05-6.20% when deposit rate has bottomed out for tenor beyond 1 year. All combined, retain pull bias towards higher end of big picture range 5.85/6-6.20/6.35%. For the week, let’s retain 5.975/6-6.075/6.10% focus, with RBI holding both ends!
USD index risk-neutral undertone extends stability on USD/INR when domestic dynamics mixed & uncertain
USD Index big picture focus was for consolidation above 90-91.50 while being heavy at 93.50-95 with most play at no-man’s zone 92.50-93.25 of comfort range 91.50-95. Now that there’s better clarity on US interest rate outlook, it’s validation to our focus at 91.50/92.50-94/95. So, there’s no need to look beyond.
USD/INR spike from 72.65-72.85 got done at 73.65-73.85 for sideways mode at 73.35-73.65, that put an end to chase of 12M $ from 79.65-80 to 76 (with 4 month carry of ₹1). It’s worry that despite elevated 12M premium at 4.35%, carry-trade support is not seen for ₹ when there’s no clarity on FPI appetite, which could shift from equities to debt. For the week & rest of Q2/FY21, stability at 72.65/73-73.65/74 is the way to go and do not rule out emergence of 12M $ export cover appetite at 77-77.35 (when spot at 73.85-74.15).
EUR/USD held on to zoom-in focus 1.1725-1.1925 (of comfort range 1.1650-1.20). Given the current dynamics, EUR/USD gets heavy on entry into 1.20-1.2150 and don’t see cues for sustainability at 1.15-1.1650. So, let’s continue to stay with back & forth momentum (here) till sight of breakout triggers.
EUR/INR got boxed at 86.50-87.50 post shift of focus from 86.50-90 to 85-88.50 in alignment with USD/INR at 72.85-73.85 and EUR/USD at 1.1725-1.1925. There are no cues as yet to look beyond here.
USD/JPY push back from 105.75-106.50 to 103.50-104.25 is in order post FED guidance on policy rates. While bias is for extension towards March 2020 low 101.18, need caution below 103.50 not ruling out bounce back into 106.50-108. For the week, let’s watch 103.50-106.50 and overshoot either way to attract.
Gold retain risk-neutral safe-haven appetite while Brent Crude attracts at lower end of comfort corridor
Gold in comfort mode at no-man’s zone of $1935-1965 (of big picture $1865/1900-2000/2035) failing to sustain either way overshoot. There’s comfort that August high $2073 is off short term focus and so is $1865, but good on sentiment on price stability on this safe-haven asset.
Brent Crude resilience at $37.50-40 for pull back into $42.50-45 is perfect to script and in order for value neutrality at $40-45 of big picture comfort range $35-50. When demand is set to increase from Q4/2020, there would be demand at $35-40. So, good to play for either way overshoot at $40-45 for rest of Q3/2020.
Have a profitable week ahead…
Moses Harding
