US equity indices: Risk-neutral undertone post value correction ahead of major event risk against weak real economy
It’s relief from price-stability in US markets post reversal from extended last-mile but concern remain from shallow recovery bounce-back momentum in the absence of resilience on real economy despite overdose of fiscal stimulus. Watch out for developments on run upto US Presidential election and additional fiscal support to keep risk-sentiment between neutral & positive.
Reversal from extended last-mile held firm at lower end of last mile, DJIA at 26500-26500 (29199-26537-27173) and S&P500 from below 3250-3300 (3588-3209-3298) while NASDAQ retains outperformance mode with resilience at lower half of focus 10000-11350 (12074-10519-10913). What to watch this week & end of Q3/2020 is the ability to hold above low & close of previous week building steam toward August close! It’s pain & blood since start of September (set up of value erosion of liquidity led extraordinary gains) and it would be relief & consolation to be in recovery mode for rest of September! Sentiment ahead into Q4/2020 on run upto US Presidential election is not expected to turn bullish when risk of continuity emerge, and it would be soft-landing if end of 2020 is not significantly below that of 2019, covering Covid-19 impact on the economy & financial markets, notwithstanding extraordinary fiscal stimulus and extended zero interest rate phase.
How far DJIA could go beyond weekly low-close of 26537-26713 towards close of August & 2019 (28430-28538)? For the week, don’t see cues to trigger either-way breakout at 26500/26650-27500/27650 while staying tuned to run upto US Presidential election big picture at 25000-28000.
S&P 500 breakdown at 3250-3300 followed by bounce back to 3306-3298 with hold above 2019 close 3230 is relief. Best for the short term (ahead of mid-November) is not beyond 3393 (pre-Covid high) while retaining downside bias towards base 3000. For now, big-picture focus set at 3050/3200-3400 and would be pleasant surprise to see recovery extension & sustainability at 3400-3588.
NASDAQ despite losing ~13% in September (12074-10519), 2020 performance is good with stay well above 2019 close 8982 and pre-Covid high 9838. Good to continue with back & forth focus at 9850/10000-11350/11500 and retain neutral breakout bias at tolerance range 9350-12000.
India equity indices: Reversal from extended last-mile in value normalisation mode is not yet done in the absence of confidence on turnaround on real economy, when monetary stimulus not turning effective and fiscal steroids is in extended work-in-progress process
India equity indices alignment with US on reversal from extend last mile is more or less perfect, picking up from end of August. NIFTY resilience at 11185-11350 was good, but more solid was control of bears at 11500-11650/11800 to execute the collapse to intermediate target 10785-10885, followed by short-squeeze momentum to 11072 (unwind of 11794-10790 collapse). What Next? Bounce back from 10785-10885 to 11000-11150 is as per script post review of focus range at 10500/10650-11000/11150 from 10850/11000-11650/11800. All combined, risk-unwind urge & short-build zone is pulled down from 11650-11800 to 11150-11300 for shift of downside target from intermediate zone 10785-10885 to 10035-10185 ahead of strategic support zone 9500/9650-10000 for end of reversal cycle. For the shortened week (ahead of long weekend), good to stay focused at 10785/10850-11085/11150, moving away from August close 11387. While in expectation of end of month consolidation post intra-September collapse, pull bias into 10350-10850 remains valid given limited scope of optimism from RBI on 1st October policy review measures.
Bank Nifty got beaten badly in September, down from 31st August high 25232 to 20404 (24th September low) before recovery to 21064-20982. Got it script perfect here looking for stability above 20750, midpoint of risk-neutral consolidation zone 19500-22000. What Next dynamics are not that great, not ruling out extended weakness into 17000-19500, hopefully keeping post-Covid low 16116 out of radar. For the week, good to stay focused at 19500/20125-21375/22000 ahead of 1st October RBI policy review measures & actions. Given that there’s struggle to push credit flow and unable to control spike in Gilt yields, there’s less of optimism on banking sector & stocks till emergence of clarity on NPAs, PAT, CAR and EPS from financials of Q2-Q4/FY21. Till then, it’s equal bias between sell-on-recovery for portfolio light and buy-on-dips of excessive weakness without significant buy & hold urge. Stocks are cheap but still not warm to hold!
US-India Gilts: Signals of extended dovish monetary dynamics not leading to decline in long term yields is worry when concerns emerge on inflation from turnaround in real economy leading to pull back of fiscal stimulus
US 10Y Treasury closed firm at lower end of zoom-in focus 0.65-0.70% holding risk-on appetite at 0.675-0.70%. Given the guidance of zero interest regime till 2023, US 10Y Treasury will find support above 0.675%, midpoint of big picture 0.50/0.575-0.775/0.85% retaining pull bias into 0.575-0.65% from extreme volatility on equities. So, nothing new to add and retain focus at 0.575-0.675% taking comfort from price stability, setting up low risk – high reward opportunities.
India 10Y bond 5.77% 2030 continue to find comfort at 6-6.05% while keeping short term tolerance at 5.975/6-6.075/6.10% of big picture 5.95-6.20%, and at this stage see low probability of risk of extended weakness into 6.20-6.35%. India-US 10Y spread above 5.35% is the comfort now when (under pressure) fiscal dynamics make dovish monetary policy mostly ineffective. The tussle between RBI and Banks continue to dominate the street reflected from repeated devolvement of regular & special auctions, but inability to exercise control doesn’t leave comforting undertone. Given that 1st October RBI policy review will go as non-event, let’s continue to stay focused at 5.975/6-6.075/6.10% and be in back & forth mode ahead of policy.
US Dollar in recovery mode: Will it fizzle out to be in range trade or extend higher before stability?
USD Index shift from 91.50-92 to 94.50-95 (91.75-94.74-94.64) is script perfect. What next beyond 91.50-95 is set for extension at 93.50-97 when most dynamics stay supportive of unwind of 102.99-91.75 value erosion since post-Covid March high. Strong bounce back from above 90-91.50 strategic base is confirmation of underlying USD strength over major currencies, pushing EUR/USD focus from 1.1650-1.20 to 1.15-1.1850 with pull bias into lower end, while USD/JPY bounce back at zoom-in focus 103.50/104-106/106.50 has potential of extension into 107-108.50.
USD/INR lift from 72.65-72.80 to 74-74.15 is followed by consolidation at 73.50-73.85, supported by 12M $ supply above 77 (2020 & all-time high on spot) and was in perfect alignment with intra-September move of USD Index from 91.75-94.75. What Next? Despite carry-trade advantage for ₹ and lumpy pipeline FDI flows (thanks to RIL), risk remain from FPIs and extended USD Index recovery into 95-97 & beyond. So, it’s in order to look for extended recovery of USD/INR collapse from 77 to 72.75 to 74.35-74.85 while supported at 73.15-73.50. Beyond 73.15/73.50-74.50/74.85, see RBI protection for ₹ at 75.15-75.50 in the event of lumpy demand from FPIs as the urge to stay invested in equity & debt is on decline.
Gold down but not out while Brent Crude into comfort zone
Combination of USD resilient bounce back and disappointment from extended zero rate regime (not shifting sub zero), Gold got the downside break at $1865-1965/2000 for extended reversal from August high $2073. When dynamics remain same (firm USD and steady interest rates), focus on Gold is held at $1800/1815-1885/1900 along with push down of big picture to $1765-1900 from $1865-2035.
Brent Crude pull back from $37.50-40 to $40-42.50 is in order for stay at comfort zone of $40-45 of big picture focus $35-50. When there’s no Clarity on growth-push demand while retaining hope that supply equilibrium will be managed to extend price stability, it’s in order not to chase either way overshoot at $40-45. This stability is good when real economy is in trouble and serious work in progress to ensure turnaround.
It has been turbulent drive this month across asset classes and hope for consolidation for rest of September. Need to assess impact of RBI monetary policy measures & actions on short term interest rates and long term bond yields when yield spread gets elevated beyond comfort zone to the displeasure of RBI. It can’t be helped when there’s build up of risk for shift of operating policy rate from 3.35% to 4% when LAF corridor is held in extended pause mode and increased dependence by GOI on market borrowing in the absence of not resorting to any alternate options. Market stakeholders expect RBI to provide MPC estimate on FY21 GDP contraction when Government is yet to provide (post-Covid) RE of FY21 on GDP and fiscal deficit despite being half-way through and more than 6 months into lockdown. Situation is like in the midst of monsoon fog with low visibility – expect powers that be, RBI and Finance Ministry, to remove fear of uncertainty and to restore hope of confidence!
Have a great week ahead!
Moses Harding
