US equities regain bullish undertone with solid recovery from lower end of last mile range
It’s three weeks away from US Presidential election and despite setback of Trump diagnosed as Covid+ and debate with Biden not going great, hope of more fiscal stimulus did the trick triggering recovery momentum. DJIA last-mile focus at 26500-29500 (August to Trump 2.0/Biden 1.0) stood good with back & forth moves at 26534-29199-26537-28676, and shifting to upper-half play at 28000-29500 on run upto Presidential election, while S&P held at 3250/3300-3550/3600 (3284-3588-3209-3482) looking good to punch new all-time high. NASDAQ focus was held at 10000/10675-12000 post the value correction from high 12074 which held at 10519 followed by over 1000 point rally to 11581 building steam for 12000-12074. All combined, undertone is not fatigue despite being close to 2020 high, and what more to ask for when 2019-2020 set for positive close despite worst hit from Covid pandemic on the real economy – squeezing output & employment!
India equites got the benefit from US tailwinds and now gets catalyst momentum from beyond expectation liquidity stimulus from RBI
When NIFTY back & forth at 10800-11800 was seen as extraordinary recovery, RBI stepped into make it dream come true for extended push into 11800-12300 with pull bias into 12168-12430 (2019 close & 2020 pre-Covid high). It’s indeed sigh of relief to many to be at striking distance of 12K (high at 11938 up from 10790). What Next? Undertone looks good when supported at previous resist zone 11650-11800 pushing towards 12300-12450. Is momentum good beyond 12430 when RBI expected to stay supportive beyond FY21, given that it’s not easy to push FY22 borrowings despite relatively better fiscal position? There will be sound bytes on disconnect between real economy & index valuation, despite not being evenly spread out, but deafening roar of liquidity flood emerge as the silencer. So, it’s extended party time in the near/short term with low visibility on medium/long term, which can be handled later – now open the bottle!
Bank Nifty emerged as darling of the investors in this phase with amazing recovery at 25232-20404-23904 (dot from the set bounce back zone 20400-20750) and looking good for 24611-25232 for extension into 25350-26350 but need big-bang measures (Bad Bank and promoter holding cap lift from 15% to 40%) for closer look at 32161-32465 (2019 close & 2020 high). What Next? Shift from 19500/20400-22000 is into 23000-25500. Need bit of caution at 24250-25250, supply from profit-booking urge, but not seen as reversal of positive undertone.
We had ventured into banking sector “buy strategy” for Big5 (1 PSU + 4 private banks) and bullish consolidation on others. Most got triggered: HDFC at 1025 to 1237 and KMB at 1230-1341 (of high value stocks); SBI at 176-198 and ICICI at 333-403 (systemic important on asset side) while missing on Axis Bank at 400-469, awaiting deeper correction into 275-300. IndusInd Bank did nice back & forth at set swing trade range at 450/485-665/700 (712-485-638). What Next? Undertone gets better after policy measures and good to be on upside chase with affordable trail stop. Where’s the t/p target? Need to watch upside break momentum on Bank Nifty at 23000/24250-25500.
India-US yield spread squeeze: spike in US yields from fiscal steroids and easing India yields from liquidity stimulus
US 10Y Treasury yield spike from 0.65% to 0.775-0.85% was the script, gradually moving up from 0.50-0.575% to 0.575-0.65% and now at 0.775-0.85%. This bearish momentum is largely to do with 2020 value appreciation by ~1.5% (2% to below 0.5%) and low probability of shift of FED Fund rate from zero to negative, hence the shift from Treasuries to equities. What Next? Given the FED guidance of zero interest rate regime till 2022, don’t see risk beyond 0.85-1% where investors appetite could emerge balancing the portfolio between equity & Treasury. So, let’s shift big picture focus from 0.50-0.85% to 0.65-1% with near term consolation at 0.675-0.85%.
India 10Y bond 5.77% 2030 push back from 6.075% to 5.925% is thanks to RBI Governor’s extraordinary measures, which can’t be seen as either innovative or out of the box given that the intent is to reduce the borrowing cost of the largest borrower in the system, which has doubled in FY21. It’s gone into vicious cycle mode (call it, round-tripping or trap) – deposits (marginal cost ~6%) invested in SLR bonds & given to RBI on OMOs (yield & cost neutral ~6%), cash from OMO sale reinvested either in R/R at 3.35% or subscribe to fresh issuance ~6% (holding excess SLR of 4% of NDTL, 22% against 18%, which is ₹6-7 Trillion) – from this cycle, it’s obvious that it makes sense to be aggressive investor on GOI bonds than lend to RBI at 3.35%. This cycle is fine as long as banks are happy with 10Y GOI yield ~6% when in credit risk aversion mode. Risks will emerge when credit demand picks up and policy rates start climbing. This phase may take 1-2 years, but need to keep this in mind when into long term investing mode on the comfort of HTM, which will not be available beyond March 2022, when the cycle could get cut, opening up the need to refinance 4% excess SLR at Repo rate for whatever purpose, alternate to high cost deposits or higher yield from good credit. For now, 10Y yield will not be allowed to go beyond 5.85/5.925-6/6.075%, so good to be in back & forth mode, notwithstanding India-US 10Y yield spread squeeze to 5.15% from 5.35-5.50%. Will FPIs stay invested at low yield spread of 5-5.15%? This is the risk factor which can’t be ignored for long term investment, hence caution!
USD index lose steam shifting into risk-neutral mode but not seen weak while ₹ exchange rate boxed between good supply and losing real interest rate advantage
USD Index DXY losing steam at higher end of 91.50/91.85-94.65/95 with push back hold at 92.50-93.25 is no surprise, and don’t see downside risk into 90-91.50 as yet with better prospects of upside break at 93.50-95 with pull bias into 96-97.50. For now, retain focus at 92.50/93.25-94.65/95. EUR/USD is boxed at 1.1650-1.1850, unable to sustain either way overshoot with no clarity beyond 1.15-1.20.
USD/INR back & forth between 72.65-72.80 and 74-74.15 in traction with 12M USD risk-neutral hedge comfort range 76-77 is in order, which is also liking to RBI to see price stability without RBI interference. Will RBI allow break down into 71.50-72.65 is the expectation now given that demand-supply dynamics is in favour of ₹ notwithstanding yield spread squeeze. For now, good to keep focus between 73.85-74.15 and 72.85-73.15 and watch for short-squeeze support at 72.50-72.85. Bottom-line, big picture is shifted from 73.50-77 to 71.50-75.
Gold regain confidence and so is Brent Crude
Gold resilient from below $1865 for bounce back into $1935 (1848.45-1930.83) is good despite being at lower half 1850/1865-2065/2080. It’s bias neutral on immediate term from USD stability and elevated Treasury yields. For now, good for consolidation at $1865-1965 given the dilution of safe haven support.
Brent Crude back & forth at 37.50-42.50 is the best to expect with hedge appetite at $35-37.50, lower end of big picture comfort range $35-50. Given the hope that worst is behind on demand (from growth contraction) and prepared next for supply side adjustment, there’s no need to look beyond $37.50/40-45/47.50.
All combined, last mile run into US Presidential election is turning good with no sign of sell-off ahead of the event Risk. It’s also emerging as tough & equal fight between Trump & Biden, while FED is prepared to do the balance between real economy & financial markets. It’s safe to be positive in the near term but prudent to stay with trail stop on the market! Be safe, have a great week ahead!
Moses Harding
