Global Equities recovery from Q1 low’s is thanks to beyond expectations fiscal steroids & monetary stimulus from the balance sheets of exchequer & Central Banks of developed economies. Are these good enough for turnaround in real economy in 2021 for recovery of what’s lost in CY2020?

Most didn’t expect global equities to do well in Covid-era (since March 2020) when top-line growth contraction is unprecedented, squeezing economic output & employment leading to loss of livelihood. Large business enterprises lost revenue streams from lockdown, pushing balance sheets into cash losses & capital erosion, and the worst hit are small, medium & marginal business stakeholders and individuals that lost livelihood. Despite set up of gloom & doom from the uncertainty around Covid-19 to get permanent relief by whatever means, it’s not weak on sentiment from having held on to upside consolidation mode in Q2 & Q3 of 2020. So far so good, and What Next into Q4/2020 gets complex from round the corner US Presidential election outcome. It gets more relevant when fiscal & monetary bandwidth is (almost) completely exhausted and anything beyond here will be stretched when US fiscal deficit is already into double-digit of GDP and zero interest rate guidance till 2023. Beyond here into negative interest rate regime and/or follow-on rounds of fiscal stimulus will do more harm than good. Combined with woes around the economy and the need to position for 50:50 bias between Trump 2.0 and Biden 1.0 is not risk-positive on financial assets, hence it would be wishful to look beyond recent (all-time) high’s. So, fingers crossed holding risk-neutral sentiment and stay fleet-footed for shift from risk-neutral position to either risk-on or off. Need to cover Q4/2020 outlook in 2 parts, BE & AE (before & after US Presidential elections), hence focus now is on run upto this major event risk.

NASDAQ consolidation at upper-half of 10000-11350 (10519-11344) post push-back from upper end of last-mile range 10000-12000 (12074-10519) is script perfect. It’s also run-away outperformance beyond 2019 close & pre-Covid high (8972-9838) being beneficiaries of Covid-19 impact. What Next? It’s tough for sustainability of resilience & upside momentum at 11500-12000 while seeing short-squeeze & trading bids at 10000-10500, keeping most play at 10500/10650-11500/11650. Given that either way overshoot is not expected to sustain, it’s good risk-reward to buy below 10500-10600 and sell over 11500-11650.

S&P500 2-step shift from 2950-3000 and 3200-3250 (from recovery of 3393-2191) to higher end of set last mile range 3250/3300-3550/3600 played well at 3588-3209-3397, while finding it tough for hold above 2019 close & pre-Covid February high 3230-3393. For now, price momentum is seen stuck to lower half play of 3200-3600 at 3200-3400 with overshoot limited at 3100-3500 with high probability of stay above 3230. So, good to buy at 3100-3200 and into risk-off or light at 3400-3500

DJIA last mile focus at 26500-29000 held script perfect at 29199-26537-28040 with struggle for hold above 2019 close 28538 and heavy ahead of pre-Covid high 29568. Need next round of fiscal stimulus for sustainability at 28538-29568 while support at 26500-26650 stays rock solid. For now, good to stay tuned at 26500/26650-28500/28650 and stay bias neutral on either way breakout.

India equities continue to stay benefited from external tailwinds while support from domestic (fiscal) cues stay elusive & unclear, keeping undertone nervous despite strong bounce back momentum in recovery of September collapse. It’s high dependence on Q2/FY21 quarterly financial results and economic data.

It’s good tailwinds support from combination of firm US equities at set last-mile range, USD Index failure for upside break and steady US Treasury yields that provided relief momentum for India equities for decent close for Q2/FY21 followed by good start for Q3/FY21 despite disappointment from deferral of scheduled MPC meeting of 29/9 – 1/10/2020. There’s nothing good on domestic cues – RBI in struggle with OMOs to arrest spike in Gilt yields and powers that be staying tight-lip on RE of FY21 GDP and fiscal deficit. How long India equities stay with the clutches of external cues when FPIs seen to be losing India risk appetite despite having better short term confidence on ₹ exchange rate. Given that What Next is low on visibility, the need is to be in drift-wood mode, hence the prudence to stay risk-light, either way!

Nifty recovery of 11535-10790 to 11428 is pleasant surprise post giving up extended consolidation at 10500-10800, while keeping short term play at 10785/10850-11500/11585 gives confidence for the bulls despite 11686-11794 going off radar. So, back to square-one with positioning for risk-off at 11585-11685, short-build at 11685-11800 (stop at 11835) for 10785-10850, not ruling out extended weakness into 10285-10350. For now, good to watch 11000/11085-11500/11585 retaining breakdown bias into 10785-10885.

Bank Nifty was set for consolidation at 19500/20750-22000 post the volatility between big picture comfort range 19500-21000 and 24000-25500 (21033-24198/25232-20404), and in order for recovery bounce back from 20404 to 22293 with close above 22000. It’s as per script expecting bounce back momentum from set value-buy zone 19500/20400-20750 where most banking stocks (covered in blog of banking sector update) hit the buy-zone. What Next? Banking sector as a whole is not in comfort zone of investors with woes across capital, productivity and profitability. So, there’s no case for looking for sustainability beyond 24350-25350 and on the other side, see good appetite at 19500-20500. For now, let us set focus here keeping close watch on many risk factors in play from Covid-19 impact – NPA hit, revenue squeeze, provisions on credit & investment portfolios and EPS slippage.

US Treasury yield stability against artificially administered India Gilt yields keep demand subdued when pipeline supply in plenty

US 10Y Treasury risk-off below 0.65% for consolidation at 0.65-0.75% (of comfort range 0.575/0.65-0.775/0.85%) was the outlook when short term rates stay steady from liquidity comfort. Given the low probability of shift from zero to negative interest rate regime, consolidation focus is shifted from 0.50-0.75% to 0.65-0.85% lifting base from 0.50-0.575% to 0.575-0.65%. For rest of 2020, it’s safe to assume that 0.50/0.575-0.65% will generate risk-unwind appetite taking monies off the table from the significant rally from 2019 close 1.92% with post Covid-19 consolidation at 0.50-1%.

India long-dated GOI bonds continue to lose appetite from higher market borrowing, while RBI working to arrest excessive weakness, allowing devolvement of regular auctions and OMO/OT market interventions. While RBI wish to push through auctions at sub 6% on 10Y yield, investor appetite is not below 6.05% despite special dispensation of additional 2.5% HTM entitlement (22% HTM against 18% SLR – 4% @ >₹5 Trillion good enough to cover H2 borrowing). So, liquidity is not an issue in the absence of demand for credit and lenders risk-aversion to high-risk lending. Is 10Y yield artificial administration at 5.95-6.10% good for the system, when in risk of shift of operating policy rate from R/R to Repo rate? This could push 10Y yield into 6.10-6.25% (with Repo rate cut to 3.75%) or 6.20-6.35% (on rate status-quo)! For now, do not wish to look beyond 5.95/5.975-6.075/6.10%. Need to have watch on India-US 10Y yield spread resistance at 5.20-5.35% against support zone 5.35-5.50% – need higher spread to keep FPI appetite good for debt when in exit mode on equities.

USD Index lose upside momentum while being resilient while INR finds support from domestic cues turning in favour and RBI off street when trading range in comfort zone

USD Index failure for upside break at 91.50/91.85-94.65/95 is fine, but critical is for hold at 93.50-93.85 to avoid revisit to 91.50-92.50 and keep momentum good for 95-97. Don’t see risk of extended weakness into 90-91.50 and continue to hold way forward outlook between 91.50-95 or 93.50-97.

USD/INR back & forth from 72.65-72.80 to 73.85-74 to 73-73.15 got perfectly aligned with 12M $ short-squeeze at 76 and risk-neutral reinstate at 77. What Next? ₹ exchange rate consolidation at 72.50/72.65-73.85/74 is in the comfort zone of RBI when CA turned surplus from lower imports & Brent Crude. There’s added comfort from lumpy FDI inflows and FPIs not turning big-time sellers. Given this background, direction bias is dependent on USD Index and extent of RBI $ bids at 72.65-73 (12M $ short-squeeze zone 75.75-76). Importers need to wait for 71.50-71.85 (12M $ below 75) for long term hedge with time-decay effectiveness. All combined, it’s win-win proposition to allow USD/INR play it’s own game at 71.50/72.50-74/75 with RBI stepping in at either of the end to retain price stability. With Brent Crude steady at $37.50-42.50 (lower half of comfort range $35-50) and USD/INR at 71.50-75 is win-win for all stakeholders and balancing impact between inflation and competitive for exports & FDIs. It’s best to administer value between 2019 close 71.35 and FY20 close 75.35.

EUR/USD trend down from 1.1650-1.20 to 1.15/1.1575-1.1775/1.1850 (1.2012 to 1.1612 to 1.1770) is in perfect alignment with USD Index play at 91.50-95. At this point, there’s no clarity beyond 1.15/1.1575-1.1850/1.1925 while seeing the pair heavy over 1.20 and resilience at 1.1350-1.15.

EUR/INR focus got pushed down from 86.50-89.35/90 to 85-88.50 (89.47 to 85.52 to 86.45) with shift from export-cover zone 88.50-90 to import-hedge area 85-86.50. What Next bias is mixed between consolidation at 85-86.75 or recovery back into 86.75-88.50 with low probability of overshoot either into 88.50-90 or 83.50-85.

USD/JPY retaining play at 103.50/104-106/106.50 (104 to 105.81) is in order and don’t see any triggers to look beyond here in the short term. So, to keep it simple, good to be in back & forth mode till sight of breakout triggers.

Gold gets the relief from USD failing to get that extra push to turn bullish while Brent Crude weak within comfort zone

Gold value unwound from “hot to hold” zone $2035-2085 ($2073) to short-squeeze zone & value-buy zone below $1815-1865 ($1848) is followed by consolidation at $1865-1935. What Next is risk-neutral in alignment with stability of US interest & exchange rate dynamics! It’s in order that Gold will end 2020 with good appreciation over 2019 close $1517 and 2020 low 1451, cementing new normal base at $1785-1850 (lift from $1450-1515) while lacking strength for punching new high beyond $2000-2065 for rest of 2020. For now, good to stay focused at $1850/1865-1950/1965.

When real economy is weak squeezing demand for oil, Brent Crude consolidation at lower half of comfort range $35-50 is the way to go, hence there’s no case to look beyond $35/37.50-42.50/45 till capacity contraction gets behind to be back on growth track in Q4/2020 to get focus back into $42.50-50. It’s good for importers hedge at $35-37.50 when bounce back momentum into $47.50-50 is on radar.

All combined, it’s not prudent to get into extreme positioning – either overweight on risk or heavy on low yielding Gilts/AAA fixed income. Ahead of 3rd November voting for the next US President, there will be risk from deleverage and unwind of carry-trade positions. When it’s “touch-and-go” expectation on US Presidential election and no great confidence on swift & strong turnaround on the real economy, it’s difficult to get into bullish undertone for rest of 2020 when it’s possible that 2019-2022 will turn as V-shape performance for near identical top-line GDP number on 2019 & 2022, taking 2021-2022 to recover the contraction of 2019-2020. This outlook of loss of capacity in 2020 followed by 2 year catch-up act will result in value de-rating of risk assets covering for capital erosion on balance sheet. So, any good news will at best lead to consolidation and not lead to set up of bullish undertone. Good to be prudent with caution avoiding greed from euphoria!

Have a great week/month ahead…

Moses Harding

It’s not an enviable phase at start of H2/FY21 after complete washout of H1 from Covid–19 triggered lockdown. The newly constituted MPC set to begin on 29th September is now deferred. While it’s not an ordinary course to postpone a scheduled MPC meeting, there’s nothing to get worried when expectations was reiteration of August policy review in the absence of clarity of Q2/FY21 economic and Covid- moratorium & restructuring data.

Conflicts between inflation targeting and supporting growth:

MPC is in cross roads on inflation targeting having allowed headline CPI to stay sticky over tolerance zone of 2-6% since end of FY20 with compulsion to take supporting stance on growth when Q1/FY21 GDP contraction by over 20%. Whether blame it (stickiness of CPI over 6%) on supply-side output squeeze or higher cost of logistics & transport from lockdown, can’t ignore impact from sharp decline in operating policy rate from 6.5% to 3.35% in 2019-mid 2020, and more so from widening LAF corridor from 25 to 65 bps, post shifting of system liquidity from marginal deficit to excessive surplus mode.

Now that, the current dynamics (elevated inflation and contracting growth) is there to stay till end of FY21, MPC is not expected to turn neutral from current accommodative stance. On the other hand, it would be counter productive to cut policy rates in support of growth putting aside upside risk on inflation. So, it’s no-brainer decision to remain status-quo on policy rates, having already cut CRR to 3% and contradictory move by increase of HTM limit to 22% from 19.5% (against SLR of 18%), which highlights the existence and management of conflicts & complexities.

Another point of view is squeeze of LAF Corridor from 65 bps to 40 bps. The purpose of increasing the spread from 25 bps to 65 bps was to push banks into lending post conversion of system liquidity from marginally deficit to excessively surplus. But, this measure has done more harm than good for the system as ₹5-8 Trillion gets back to RBI at 3.35% pushing the T-Bill yield curve sharply down at 3.25-3.65%, lower half of LAF Corridor 3.35-4%. So, it makes sense to squeeze the LAF corridor to 3.35-3.75% in alignment with short term yields. It should also be noted that Banks pay spread of 2.65% (losing 6% YTM on OMOs and earning 3.35% in return) and receive 2% against Repo rate of 4% losing 65 bps spread. This is the major reason for lack of appetite on RBI auctions – regular/OMO/OT, which builds logic to cut Repo rate squeezing LAF corridor. It makes sense when operating policy will any way get shifted from Reverse Repo to Repo sooner and not later than end of Q3/FY21. So, expectation on policy rates is divided between status-quo or 25-40 bps rate cut in Repo rate to squeeze LAF corridor at 3.35-3.60/3.75%. For this, MPC should have greater comfort on headline CPI trend down and sustainability at lower end of tolerance zone at 2.50-2.75% given the unwritten formula of Repo rate = CPI + 1-1.25%

What’s beyond MPC mandate? Eager to know FY21 estimate on GDP growth and extent of policy engagement to support Finance Ministry

Given the unanimity that it’s appropriate to stay in favour of supporting growth in Covid-era, stakeholders will be eager to know RBI’s estimate on FY21 GDP contraction, when Finance Ministry is yet to come out with RE of FY21 taking into account lockdown impact on output and fiscal deficit. Now, stakeholders are left to go by estimates of economists & analysts, which gets revised on monthly basis. RBI estimate on FY21 GDP and CPI will provide clarity on alignment between nominal growth (contraction) and marginal cost of funds to get comfort & grip on the way forward on monetary dynamics.

Another major concern for RBI is from the role of debt manager of GOI market borrowing program, which builds conflict of interest, playing between the Government, the largest single borrower in the system and the banking sector, largest group of investors absorbing GOI/SDL bond issuances. H1 borrowing of over ₹6 Trillion has been smooth without disruption retaining 10Y yield at 5.75-6.25% and short term rates in trend down mode at 3.25-4.25%. Intent of RBI is to get H2/FY21 borrowing smooth retaining rate & yield stability at these levels, which is not difficult to achieve in the absence of credit demand. Banks also have additional comfort from higher HTM limit to support 10Y yield at 6.10-6.25%

RBI’s efforts to push credit flow to neglected sectors has yielded results

It’s relief for RBI that credit flows to NBFCs/MSMEs have improved significantly, lenders taking advantage of subsidised cost of liquidity from TLTRO counter, funding through SIDBI/NHB/NABARD and backstop credit underwriting schemes of the Government.

What Next? There’s no clarity as yet on extent of impact on NPAs and CAR from restructuring scheme of Covid-19 moratorium portfolio. When GDP & output is in contraction mode, demand for credit is expected to be low for rest of FY21 with top line credit growth largely from retention of payment of principal + interest (of 1/3/2020-31/3/2021) in the books, inclusive of higher exposure on account of restructuring of loans. It’s blessing in disguise for RBI that in the absence of credit demand, excess liquidity could easily be diverted into GOI debt without liquidity & yield disruption. RBI’s mandate to ensure adequate credit flow to economic sensitive sectors at affordable rate can be shelved till April 2021 policy review. Banks excess SLR limit of over ₹5 Trillion (4% of NDTL) is the trump card for RBI for smooth sailing of GOI borrowing. What about beyond int FY22?

In conclusion, what’s the expectation from RBI and impact on financial markets? Keep it simple and focus on price stability till real economy shifts from contraction to growth mode

Policy rates – status quo on rates & CRR/SLR) or Repo rate cut by 25-40 bps

LAF corridor at 3.35-4% is abnormal when Banks will hold 4% of excess SLR in HTM (over ₹5 Trillion) and there would be need to release this liquidity from Repo counter at spread of 2.50-2.65% between 10Y yield & Repo rate. As of now beneficiaries of dovish monetary stance are GOI (from lower yield) and AAA/AA (lower credit spread) and losers being banks & depositors. So, expectation is mixed between 25-40 bps cut in Repo rate leaving Reverse Repo rate unchanged to squeeze spread between Reverse Repo rate and Repo/MSF/Bank rate or keep policy rates unchanged. Having done enough on liquidity releasing permanent liquidity of ₹1.25 Trillion through CRR cut and an extraordinary position of elevated HTM at 22% (diverting ₹5 Trillion from banks to GOI), there’s nothing left to be done to liquidity, other than adding liquidity to arrest ₹ appreciation and through OMOs to arrest spike in long term Gilt yields. Advantage for RBI is the comfort that H2/FY21 borrowing of over ₹6 Trillion would be managed from system liquidity without significant yield disruption without resorting to deficit monetisation.

What’s impact on India financial markets?

Money market will retain price stability amidst liquidity overhang. T-Bill yield curve will trend up from 3.35-3.65% to 3.65-4% on assumption that weighted average call money rate in H2/FY21 may not be beyond 3.50-3.65%. This assumption holds good when (a) LAF remains unchanged at 3.35-4% and operating rate at lower end in Q3/FY21 and thereafter to upper end in Q4/FY21 (b) LAF corridor squeezed at 3.35-3.65/3.75% that would push excess liquidity into HTM triggering shift of operating policy rate from Reverse Repo to Repo rate before end of Q3/FY21. This scenario is good for GOI & AAA/AA borrowers and relatively better for Banks & depositors.

What about 10Y benchmark yield? If seen against H1/FY21 range at 5.75-6.25% and now at 6.05-6.10%, RBI should be fine to administer H2/FY21 range at 6-6.25%, which is not bad at all given the beyond expectation GOI borrowing for FY21. What if private demand picks up, diverting flow from GOI bonds to credit & non-SLR portfolio? This is the risk factor in play that brings the risk-off & duration-cut urge at 5.85-6% keeping 6.20-6.35% in radar with better comfort that 6.35-6.50% would be excessive in FY21 when credit demand is muted. Risk also remains from external dynamics in the event of US 10Y yield spike into 0.85-1%, which is low given the FED comfort of retaining zero interest rate policy till 2023.

Interest rate dynamics will continue to stay ₹ supportive with elevated yield spread across 1-10 years (current range at 4-5.5%) which is good to pull-in carry-trade flows, both on debt & equity. It’s outlook positive on FDI flows from fresh investments and Indian corporations diluting equity with foreign investors, Reliance & others have showed the way. For rest of FY21, don’t see major risk of big-time FPI pullout. All taken, RBI would continue to be in the enviable position of buying USD/INR to arrest ₹ appreciation allowing orderly depreciation at 72.50/73.50-76/77. It suits when RBI is fine to expand USD reserves (steadily moving upwards of $0.5 Trillion) and adding to system liquidity.

It’s impact neutral for equity markets given that RBI doesn’t like creation of asset bubbles (from overheated valuation in contrast to performance of real economy and corporate earnings) from low cost liquidity overhang, to be used primarily for subscription to GOI bonds and credit deployment. Having said this, market friendly LAF corridor and extended phase of accommodative monetary stance will stay supportive to equity market. So, from monetary policy perspective, it’s more of non-event as price & valuation continue to be dependent on external cues (in alignment with US equities) and impact of Covid-19 on earnings and weight on the banking sector.

It’s business as usual despite low visibility on the timing of Covid-19 going off radar and the impact that’s left behind on the lives & livelihood and on the economy & exchequer. It’s another 3-6 months to get better visibility & clarity on as-is position and turnaround momentum.

Moses Harding

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

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

Intent is to prevent aberration from build up of euphoria to avoid concentration risk

Of late, post Covid-19, investors have limited options to put monies when fixed income yields at rock-bottom making post-tax returns not attractive to hold for long term when headline inflation is beyond RBI’s tolerance zone. It gets worse when there’s limited options on floating rate products. So, retail monies flow into large cap stocks that are considered safe bet, adding to the weight of already heavy appetite from FPIs for large cap stocks. All taken, roughly 75% of investors monies move into large cap companies, the top-100 in market cap! It’s not that appetite gets spread-out evenly, but ends up in chasing the top-quartile, that builds up significant divide between the market cap of top 25 stocks and rest of the listed stocks, spread across mid cap (101-150 top stocks) and small cap (other than top 100 + 150 stocks).

SEBI, as regulator see this as emergence of systemic risk in the event of burst of asset bubble. While wholesale investors will be able to digest big hit given their capacity to absorb or playing with third-party monies, the worst hit is on retail investors, also taking on the risk of failure of fund managers. It’s obvious that when into “waterfall” kind of collapse, exit option gets closed from absence of liquidity on the bid and trigger of lower circuit. Be that as it may, SEBI also don’t see aggregators (Mutual Funds) as shield to dilute systemic risk and defend & prevent harsh impact on retail investors. Needless to say, the top priority and purpose of creation of AMC/MFs was to attract retail investors into primary & secondary debt & equity capital markets to add depth & liquidity to financial markets.

Unfortunately so, multi-cap Mutual Funds haven’t spread their investments across large, medium and small cap companies. It’s largely skewed towards large cap, thus pushing major indices up in disconnect with the performance of real economy. Obviously so, the regulator need to force-in the course correction, hence the restriction of minimum 25% on each category, leaving the flexibility of balance 25% with the fund manager. From regulatory perspective, need to take this as intent to safe guard the interest of passive retail investors and to preserve system’s level playing field to all, cutting the greed of deep pocket & large investors.

Have AMCs living to expectations and for the purpose of creation?

AMCs exist to support retail investors and increase retail participation in India equity & debt capital markets, given that retail investors lack bandwidth on time, skills and volume. It’s felt that with the backing of retail monies, MFs can emerge as shield for the system to minimise the risk from wholesale investors, especially the FPIs. Unfortunately, AMCs got into AUM greed diluting the focus on preserving stability on the NAV.

Why AMC play for the gallery? Is it from the fierce competition for AMUs? Is it from relative better performance on NAV, pull trigger to attract investors? Is open ended option a deterrent for higher emphasis on liquidity? While giving importance to the system and retail investors, regulators need to resolve irritants around some of these questions.

So, the intent is not to blame AMCs in general and Multi-cap funds in particular that they stand in deviation in letter and spirit, being fully aware of limitation on execution. It’s time to get real – either into rebalancing of allocation by selling in large cap counters and buying in mid & small cap counter or stripping of the fund to avoid disruption of the market (that would damage the NAV of their large cap & sectoral funds) and to get into more specific to small & medium cap funds, avoiding large cap companies. AMCs also have to worry about “opportunity loss” that dilute the act of prudence from fear of underperformance with benchmark indices.

What’s the impact? Is it enough from SEBI?

SEBI’s follow-on clarification to the order has restored normalcy, and set to achieve the valuation objective sooner than later. There’s again 2 opinions on this matter. When (excess) liquidity is chasing safe-haven stocks, what could be done to close the liquidity gates? Is there need to do away with the index, which glaringly reflect the distortion with the real economy. In all probability, this restriction can help around 25 companies in each category (max around 100 in number)? Will there be intra-category restrictions? So, in the big picture, this stricture is not to be seen as systemic benefit, and kind of “stick on the knuckles” for the fund managers to act as per mandate.

What’s the feel of retail investors, the worst impacted stakeholder? Most times, these passive investors are taken for serious ride and RBI coming to their rescue extending liquidity support to erring Mutual Funds. Is SEBI doing enough on investors literacy? Can systemic stability on capital markets be achieved when large numbers of listed companies not exhibiting transparency on disclosures, understated earnings, below-par standards on compliance & governance and absence of regulatory shield for the passive & innocent stakeholder, the retail investor? Need elaborate discussion on these rather than doing piecemeal actions for the record.

What’s bottom-line and take-away for the way forward?

Bottom-line is that issues are many while the resolutions are few lacking precision. Equity markets most often get into disarray by FPIs, either flooding the market with leveraged liquidity (accessing cheap monies from developed economies) or seek one-shot exit when going gets tough on domestic market place or external liquidity tap gets closed or become costly, cutting carry-trade advantage. Obviously so, FPIs are categorised as “fair weather friends” and major contributors to “hot money component” of India foreign currency reserves. So, it’s like riding the tiger, can’t get off from FPI’s back or keep riding for perpetuity. If resolution is achieved here, it’s kind of half-way through situation and makes the rest of the journey smooth. Leaving this as thought, as this itself is major topic for discussion which I shall handle separately.

Are AMCs emerging as good alternate to FPIs? Most often, they get caught between FPIs and markets while enjoying the best times and unable to handle the worst, sending SOS calls to RBI for liquidity support to face redemption pressures. They are also seen as fallback for cash rich domestic wholesale entities including Banks, parking excess cash in so-called liquid funds, pushing MFs into round-tripping (investing on CPs/CDs/NCDs) taking huge ALM risk exposure. So, there is enormous clean-up needed in utility of AMCs for the system – keep this for discussion for another day.

So, all combined, nothing spectacular to emerge for the system, either to increase attention & appetite beyond 100-odd listed companies nor provide better comfort to retail investors nor set AMCs in order. Need lots to do to make India financial markets a better market place!

Just thinking aloud….happy reading,

Yours Truly….Moses Harding

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

It’s unfortunate that banking sector has lost investors & depositors trust and appetite in 2019-2020 when dynamics turned from bad to worse post start of NPA woes since mid FY19, leading to Banks losing momentum on growth rate across productivity, profitability and efficiency, resulting in unwind of valuation and market cap by 65-90% between H1/2018 to March H2/2020. The worst hit was on YES Bank that had to be bailed-in by SBI, while most others in struggle to stay afloat. Having discussed in detail on the “how & why” part of it in the earlier blog (published before release of restructuring scheme for C-19 moratorium loans), let’s assess the way forward for medium term positioning for the investor community, that can’t shy away from banking sector allocation.

Position on high-value stocks:

The study has to obviously begin with Big2 high value stocks – HDFC Bank and Kotak Mahindra Bank, both have clearly weathered the storm with prudent banking and being conservative on high risk – high yield – high fee credit & non-SLR investments portfolios. If portfolio risk-weight need to be maintained at above-par level, allocation of minimum 25% (12.5% each) is necessary despite elevated P/BV of 3.5% (PE at 20-30%), which is significantly lower from the high multiples that they commanded from the investors community. Given that RBI is yet to take favourable view on dividend payment for FY21 & beyond, it’s good on book value even on declining PAT scenario given their high PAT even during tough times. The positive take-away are from (a) comfort on CET-1 without dependence on AT-1 or Tier 2 bonds (b) well positioned on cost of funds to be competitive on acquiring AAA/AA risk borrowers (c) stability on NII & fee income despite growth contraction and credit risk aversion to sub-investment grade & unsecured exposures (d) sign of turning risk-neutral (from aversion) to systemic important high risk sectors with intent to be participative to turnaround (e) advantage from ability to sustain low paid-up equity as percentage of net worth/Book value arresting downside risk on ROCE/EPS from earnings pressure. All combined, both stocks have high degree of safety to be categorised as low risk – moderate reward stocks.

HDFC Bank CMP around 1100 is not away from 52 week high of 1305 (behind by only 20%) but significantly below all-time high 1985 (of February 2018) with minimum upside potential of 80% when GDP expansion is restored. It was good entry point around 1000 (50% value erosion from all-time high) for buy & hold for H1/FY22 target 1350. So, good to retain buy on dips strategy at 950-1050 for 1350-2000. It’s prudent to have a stop at 925, despite being one of the top 3 to hold as permanent stock in the portfolio.

Kotak Mahindra Bank is unique in a way that the stock didn’t participate in value de-rating between February 2018 to February 2020 to hit peak of 1740 before Covid-19 collapse to 1000 followed by consolidation at 1300-1450. KMB is relatively better than HDFC Bank on NPA with minimal downside risk from retail & unsecured credit portfolio. Given the ability to absorb NPA woes from deep pockets and capabilities to arrest earnings squeeze, investors will like to hold KMB in their portfolio, hence see value-buy appetite at 1185-1285 (CMP at 1320) with stop below 1150. KMB is one of top 3 stocks for perpetual holding given the combination of clean book, high on efficiency & prudence, conservative on Credit & non-SLR investments portfolios and best in class risk, compliance and governance standards despite double-hat of major shareholder as head of the management. The strategy to share wealth with domestic investors rather than give away to foreign investors provides the price stability when FPIs gets into exit mode. It may not be an exaggeration to say that KMB stock is darling of both retail & wholesale investors, pushing Uday Kotak into top end of wealthy Indians in span of 15 years since launch of the Bank in 2004. It’s an extraordinary success story scripted & directed by Uday Kotak with solid (but little known) team that have stood with him for decades – different from what Aditya Puri built with HDFC support. Investors will like KMB stock despite emerging Key Man Risk at the top management.

High on systemic importance from supporting economic asset creation

Focus in this segment are the systemic important banks on the assets side of the balance sheet – State Bank of India, ICICI Bank and Axis Bank that participated heavily for economic capacity creation & expansion since 2004. They are the lead banks for most of high value lending to corporate India across all sectors, taking the best & worst on their books. Why it’s important to hold these stocks in the portfolio? (a) will continue to maintain dominant position in project & asset financing of large borrowers, high on productivity (b) will have NII advantage from lower cost of funds & relatively higher yield (c) higher fee income post cut-off of flow to non & marginal lenders accessing current account & fee based income from sourcing non-credit products without much skin in the game from credit exposure (d) reciprocal support from Finance Ministry diverting CA float and fee based income (e) ability to raise AT-1 and Tier 2 bonds, avoiding increase of paid-up capital to preserve EPS. The downside risk obviously is from relatively higher credit cost despite mitigation from revenue support & improved account profitability. All combined, it’s good to allocate 25% of portfolio to this category, SBI (12.5%) , ICICI (7.5%) and Axis Bank (5%).

SBI, being the daddy of banking sector got the moves differently, peaked out in July 2019 at 374 before sliding down to 150 in May 2020 before consolidation at 150-250 with recovery high at 231. While the strategy was to stay in back & forth at 185-235, it’s good for buy & hold at 150-185 given the upside potential of 100% to bridge the gap with all-time high and beyond in FY23. Good to take additional comfort on SBI from being the single largest beneficiary on RAROC from acquisition of credit & non-SLR investment portfolio with back-stop and 20-100% credit underwriting schemes of the exchequer.

ICICI Bank had gone through rough patch for wrong reasons with emphasis on growth & size (productivity) compromising on risk, compliance and governance. This is behind now, and time to look ahead given its contribution and hunger for economic capacity creation. It’s been 552-268-422 moves between December 2019 and August 2020, finding support around 350 (CMP ~370) with base at 300-325. It’s buy on dips strategy at 325-350 (stop at 300) for recovery into 422-522.

Axis Bank lost heavily between June 2019-March 2020 from 826 to 285 before sharp recovery to 533 by August 2020. Despite the Bank going low profile post change of leadership, it’s need to be seen as phase of confidence building to get back into peak. Given the base support at 275-300, good to accumulate here while in the chase for over 500. What’s the differentiator with SBI and ICICI Bank? It’s existence of relatively better level of competency at senior level management and fleet footed speed to be ahead of the competition. This stock could emerge as the trump card, and till confirmation, good to start with lower allocation before scaling up.

Spotlight on 4 PSU banks that would emerge to strengthen PSU banks market share

The decision of Finance Ministry to promote 5 PSU banks as systemic important banks, while giving away majority stake to private entities on 7 banks turns spotlight on BOB, PNB, Canara Bank and Union Bank of India that would be in state-owned category along with SBI. Why bet monies on these banks? (a) momentum on gaining market share on financial intermediation will lead to significant top-line growth on deposits & advances (b) significant growth in (ex-NPA provision) earnings from ability to access low-cost funds for deployment in high-yield loans (c) availability of backstop & credit underwriting support from Finance Ministry giving better RAROC (d) cheap to acquire valuation trading at deep discount to book value (e) ability to raise AT-1 and Tier 2 bonds to avoid beyond necessary increase in paid-up capital. Given the possibility of significant upside performance against manageable downside risks, it’s prudent to have exposure of 7.5% each on BOB & PNB and 5% each on Canara Bank & Union Bank of India.

All these 4 stocks are beaten down stocks with no correlation or alignment with others. But CMP of BOB at 45 (off from 5 year high over 200 against May 2020 low 36) sets up buy on dips mode at 35-45. PNB collapsed from 3 year high over 200 to May 2020 low 26 with CMP at 33, and good to be in buy on dips mode at 26-33. Canara Bank down from 3 year high of 463 (October 2017) to 74 (March 2020) with recovery into 120. While CMP around 100, it would be good buy for hold set up at 75-95 for recovery over 120 beyond FY22. Union Bank of India is no better, pushed down from 205 (May 2017) to 22.65 (May 2020) to 36.55 before stability around 30, and would find appetite at 23-29. Need to note that investment of 25% of portfolio in these 4 banks is with long term horizon of over 3-5 years in anticipation of support from exchequer to strengthen performance and valuation of PSU banks, building 50-65% market share for 5 PSU banks (including SBI), leaving out the balance to new & old generation private sector banks.

What’s the investment strategy beyond 5 PSU banks and 4 new generation private sector banks?

Having allotted 75% portfolio risk-weight on 9 banks where RR is relatively better, need to split the balance 25% between PSU banks that would be privatised (opening up opportunity for short term gains) and left-behind new & old generation private sector banks as proactive investment strategy, which means that these stocks are not for buy & hold but to get engaged in back & forth swing trades to encash extreme one-way volatility providing astronomical returns than the banks that are held for long term value investments. For this agenda, it’s not prudent to look beyond index stocks – IndusInd Bank, Federal Bank, Bandhan Bank, IDFC-First Bank and RBL.

IndusInd Bank stock de-rating from August 2018 high 2038 (and 52 week high 1596 to March 2020 low 235) by 88% knocked out investors trust on the stock. There after recovery to 712 (in August) by whopping 200% followed by push back to 588 sets up fear of volatility rather than comfort from stability, with book value volatility at 0.5-1.5. Another phenomenon is the trust deficit from depositors post YES Bank bail-in reconstruction. Both combined, while Institutional Investors (domestic & foreign) are into sell on recovery from fear that worst is not behind and depositors either look for higher premium or restrict exposure to ₹5 lacs of insurance coverage. What’s outlook? (a) there’s no clarity on combination of pre & post Covid-19 NPA position when the hit is expected to be from all corners – wholesale book (Corporate & Project Finance), Vehicle Finance, non-vehicle retail and recently acquired Micro Finance (b) earnings squeeze from the need to pay higher risk premium for deposits and refraining from high yield & high fee credit business (c) temporary shift to top-line contraction pushing the base productivity behind by 3-5 years (d) given the tough market for AT-1 and Tier 2, high dependent on increasing paid-up capital against low share premium, which may not be EPS positive as before (e) lack of visibility on competency and expertise of top & senior management to weather crisis situations. So, where to buy for swing trade? The strategy since start of 2020 is on down-hill chase to target 200-350 (building momentum on break down at 1000-1150) followed by consolidation at 450-600, but surprised with momentary overshoot over 700 post UBS buy recommendation, which is now undone with push back into 585-620. Let’s stay aside for below 585-620 while investors lighten portfolio at 635-700 (when low probability above 712). There could be unpleasant surprises starting Q2/FY21 results through Q4. When Index has come off from 25200-25350 to 22000-22150 retaining downside risks into 17500-21000, see swing trade entry point at lower end of 450/485-665/700, while awaiting below 350 for value buy & hold appetite for exit at 700.

Federal Bank as leader of old generation private sector bank has dismal market cap of ~10K Crores at sub-par P/BV of 0.7, losing value since October 2017 high 127 to March 2020 low 36 by 250% and now building breakdown pressure at 50-65. It’s good swing trade set up at 40-60 with stop at 35 or 65 for 1:4 RR. Here again, need clarity on profitability and CAR (adjusted for higher provision & earning squeeze) and source of cost efficient capital to get into long term value-buy mode.

Bandhan Bank established well in quick time with current market cap of over ₹50K Crores at P/BV of over 3, at par with HDFC and KMB on enterprise valuation. Stock is significantly down from August 2018 high 741 to March 2020 low 152 before recovery to 402 for consolidation now at 285-320. The major advantage for the Bank is very high NII post conversion of operations from Micro Finance NBFC to Universal Bank and fee income from cross-sell opportunities from large customer base. The downside risk is the uncertainty on credit cost (from high risk micro finance and retail business loans which are largely unsecured) despite having better bandwidth from elevated yield on loans. There’s no issue on capital raising at 3+ Book value. Only irritant for buy & hold investors is its inability to emerge as universal bank, being in comfort zone akin to Small Finance Bank. It would need makeover from SFB to Universal Bank to get price focus to over 700 for 5-7 P/BV. Till better clarity on Covid-19 moratorium book, good to watch support at 270-285 with stop below 250 for first target 400. Between Bandhan Bank and IndusInd Bank (with similar market cap), Investors preference could be biased to Bandhan Bank (despite higher P/BV) given high NIM and ability to absorb elevated credit cost.

There’s no real clarity on RBL and IDFC First Bank at sub ₹10K market cap and at P/BV of 0.50-0.65%. It would have been great stocks to buy if the economy is in growth mode as-in 2008-2018, but given the uncertainties, it’s tough for medium & small banks to absorb earnings and capital impact to stay in business. So, the agenda for 25% of the portfolio is to stay in 15% cash with trading portfolio allocation of 5% each on IndusInd Bank and Bandhan Bank and stay aside for now on Federal Bank, while 15% cash to be used for short term opportunities in “to be privatised” 7 PSU banks and banks that are not covered in this review, including IDBI Bank and YES Bank which are heavy on paid-up capital with relatively lower PAT, which may not be investors envy for longer term.

What’s the immediate way-forward execution strategy?

When there’s no turnaround signs on the big picture, it’s good to be in wait & watch mode. There are umpteen number of issues that need immediate resolution when into top-line contraction despite being an essential service during the lockdown phase. It’s less said the better on bottom-line, declining PAT from rising NPA provision, loss of m2m advantage on investment book and rising cost-income ratio from declining non-interest income. All these are covered in NIFTY Bank index valuation (gross under performance to NIFTY index) and in extreme volatility between 16000/19500-22000/25500, and would need stability at 19500-22000 to provide comfort for buy & hold initiation.

Banking Sector can’t be ignored by the Government to make up for GDP contraction between FY20 to FY22, wiping out 2 years of productivity & revenues. It’s already too late to delay any further. The identified 4 PSU banks (except SBI) need support from combination of recapitalisation and credit underwriting for better CAR and NPA, that would be followed by uptrend in PAT and EPS. 4 new generation private sector banks have the capacity to fend for themselves, making it Big9 to take economy beyond FY22, building scale on GDP growth momentum. Need close watch on IDBI Bank to get into Top-10 banks (Tier-1 banks) that could cover minimum 75% of market share.

What about foreign banks contribution? Going forward foreign banks presence as branch offices wouldn’t work, unfortunately most are not ready to buy-in the WOS concept operating as domestic SCB with backstop from head office balance sheet. DBS is the bank to watch for as competitor to the Big4 private banks, while SBM will take a long while to come into the radar holding very heavy capital (paid-up of ₹750-800 Crores) against PAT of <0.25% of net worth of ~550 Crores.

At this point, it’s only hope that banking sector get to see light at the end of the tunnel soon, not later than end of Q4/FY21 when there would be clarity both pre & post Covid-19 NPA position and the impact of FY21 GDP contraction on credit growth and profitability. The unknown angel for the banking sector is recovery from NPA provisions that would add direct to P&L account, which got diluted from Covid-19 cash flow impact. In the meanwhile, RBI has done its best with some first of its kind supportive measures, keeping the sector afloat. It’s time for the Government to act big & fast to avoid regret!

Best wishes, stay safe!

Moses Harding

The Approach: Coverage of 3+2 financial ratios and 26 sectors

The scheme is limited to Covid-19 impacted borrowers, remaining standard as at 1st March 2020, and not for accounts in SMA-1&2 categories before enforcement of economic lockdown. It considers differentiated approach for sectors – partially impacted & heavily impacted, leaving out borrowers that wouldn’t need restructuring support remaining unaffected during lockdown phase. Financial ratios are diluted in 2-phase approach (a) ability to meet enhanced debt servicing phase by FY22 (b) retained cash to reduce debt leverage by FY23. Needless to say, it’s common sense & practical approach without going big-bang while seeking banking sector support with higher risk assumption during this stop-gap arrangement.

Financial Ratios: Combination of sustainability and continuity

The two phase approach is to give one final opportunity to impacted borrowers to sustain in business through lenient liquidity ratios (on Current Account) for adjustment of cash erosion and to enable to stay in business. The 3 ratios are Current Ratio, Debt Service Coverage Ratio and Average DSCR. This would need to take into account deferred payment dispensation of obligations due from 1st March to 31st August 2020 for repayment on or before 31st March 2021. If the borrower’s business stays sustainable and afloat by March 2022, then the other 2 ratios for continuity in business will kick-in, namely Total outstanding liabilities to adjusted tangible net worth and Total debt to EBITDA. All looks well on paper, will the scheme turn effective or go behind as another well-intended attempt?

Cash flows irritants in Phase I for migration to Phase II? Will assumptions stand valid?

It’s good to assume that one-third of economic capacity is in business as usual mode, which includes agriculture & allied businesses and those that engaged in critical & essential services got benefited from Covid-19 impact. Out of remaining 65%, it’s possible that 15-25% can fend for themselves without getting into rigmarole of restructuring exercise, bringing the focus to 40-50% of borrowers in the wholesale segment, while it could be 50-65% on retail, MSMEs and high risk sectors of real estate, infrastructure, transport, tourism, hospitality etc.

It will be wishful to assume that all that begins well will end well, more so when the start is loaded heavily on optimistic assumptions and adjustment of carry-over baggage of lockdown impact. There will be need to work backwards to make the restructuring process work for most borrowers to turn this as meaningful exercise, to avoid spike in NPA numbers – gross & net and low PCR. Once the restructuring terms is agreed, execution becomes major challenge when none is sure of estimate of FY21 GDP target and time of worst behind on C-19 and the system is preparing for living with Covid to avoid elongated lockdown that would harm the economy beyond repair. So, there’s big uncertainty to get comfort that borrowers that have gone into restructuring phase would be firm on feet till end of FY22. At this point, it doesn’t make sense to go into the merit & demerit of set limit on the 3 sustainability financial ratios.

The most critical ratio (at start and beyond FY22) is Total Outside Liabilities to Adjusted Tangible net worth. It’s make or break determinant factor. It’s the ability & capacity of the borrowers to bring cash despite the long rope provided in the scheme for sectors that are in verge of collapse. The elevated ratios also make the lenders taking high risk exposure than the promoters – kind of “heads I win – tails you lose” in favour of equity holders for peanut fixed rate return for lenders. The next ratio of Total debt/EBITDA is 2nd step to ensure continuity, whether the company can sustain profitability growth to repay principle & interest, which is not easy task when total outside liabilities is high to cover higher interest obligations.

What’s the take-away?

To be frank & realistic, there’s nothing optimism to cheer about when loaded with high execution and performance risk. There’s no clarity on the quantum of the portfolio (across sectors and size) that would go under the process. There’s no comfort on how many will get through to Phase 1. Need to stay fingers crossed till the process is behind, on or before 31st December 2020.

Concluding part: Ball pushed to taxpayers

Will the Government step in to “credit underwrite” to bridge gaps on risk assumption by lenders? So, back to the concept of “Bad Bank” to make the reconstruction scheme work?

What matters is the end result, not the intent and efforts!

Let’s hope for the best!

Moses Harding

India financial markets got weak across asset classes – equities, fixed income and Rupee. But, there was RBI to support Debt capital market, while concern emerged on the equities when RBI not seen comfortable on the overheated equity valuation, not aligned to contraction in the real economy and significant earning squeeze on most business enterprises, and more importantly when pushed by external players – when retail investors join FPI play, regulator’s concern & caution is relevant and appropriate. The outlook was to expect turnaround in first fortnight of September on run upto close of Q2/FY21. Blessing in disguise is that India equities reversal is not mirror impact of collapse in US equities from 3rd September high, but dilution of external tailwinds support against worsening domestic dynamics is cause to worry. Given the H1/FY21 GDP contraction is expected to be 15-20% from FY20, need strong H2 performance to achieve soft landing for FY21 GDP, contraction to stay in single-digit, while FY21 fiscal deficit overshoot target is anybody’s guess but worst is that system unable to fix on it for workaround. Need to get clarity on deficit monetisation, disinvestment and any other methods that would be used to avoid printing double-digit number on fiscal deficit as % of (lower) GDP. Another unknown is the extent of NPA escalation from C-19 impact, but would need to wait beyond September to get clarity on (a) size of restructured portfolio (b) migration of other loans to SMA 0-2 for NPA effect in Q4/FY21 (c) ability of borrowers to repay moratorium amount (principal + interest for period March-August) on or before 31st March 2021. So, all is not well for the banking sector and worse from (a) fear of hardening interest rates from risk of shift of operating policy rate to Repo rate (b) headline inflation trend ahead of October policy review, providing bandwidth to remain accommodative, avoiding shift of stance to neutral which will be negative, bringing possibility of rate hike into the radar. All combined, What Next for this week and through end of Q2/FY21 is uncertain, and when way ahead is not bright & clear, good to stay light and not overexposed to risk.

NIFTY previous week outlook was restricted at 11350-11850 (allowing maximum upside of 150 points over previous high 11686); got script perfect moves at 11794-11336-11585-11303 before close at 11333, lower end of intra-week revision at 11285/11350-11500/11565. What Next? While close below 11350-11565 is negative, need breakdown at 11200-11350 for deeper into 10850-11000 for completion of 10882-11792 rally. For the week, let us set focus at 11000/11085-11500/11585 with pull bias into lower end, and not ruling out deeper correction into 10850-11000, given the urge to dilute risk ahead of hardening short term interest rates.

Bank Nifty outlook was not to chase gains beyond 24500-24650 for reversal below 23350-23500, advising take-profit on Big7 holdings; got the reversal from 25225 to 22876 before close at 23011. What Next? For the week, retain pull bias towards 21000 for complete unwind of 21033-25225 recovery with risk-off supply below 24000. I am yet to find one strong cue that would push for buy for hold for crossover to FY21, and the worry is from break-neck volatility and unsustainable overshoot.

10Y bond volatility at 5.75/5.80-6.20/6.25% came to an end with nervous consolidation at 5.85-5.95%, thanks to RBI’s out of the box (wouldn’t call it innovative or big-bang) measures, pushing banks to use the excess liquidity in their balance sheet to buy Gilts (issued on or after 1st September, both in primary & secondary markets), avoid lending in R/R counter with indirect message to use liquidity before dynamics shift to operation of Repo counter – the idea is to buy when 10Y yield at 5.85-6% (available for refinance at 4%) with agenda to resist 10Y yield spike beyond 6.25-6.35%. Makes sense and worked well shifting 10Y yield play from 6.20-6.35% to 5.85-6%. Can RBI achieve 10Y yield stability at 5.85-6% when odds are heavily against? Can these one-sided measures bring in permanent relief or at least be temporary resolutions? There’s no sign of strategy to fund widening fiscal deficit in the absence of lack of clarity on size of the hole? Having squeezed India-US 10Y yield spread from 5.50-5.65% to 5.20-5.35%, FPI may not consider shift from equities to debt option to stay in the India play? While these uncertainties remain, investors will opt to portfolio-light or duration-cut when 10Y at lower end of 5.85-6% while traders play back & forth taking near term comfort from RBI. There’s no clarity to buy for hold at 5.925-6% when short-medium term risk into 6.20-6.35% is in the radar.

It was perfect landing of USD/INR from 74.85-75 to 72.65-72.80 ending down-hill chase (with trail stop at 75.15) for 72.65-72.85 (12M $ at 75.65-76, down from 79.65-80.0 + ₹1 carry premium). While extension below 72.65-72.80 to 71.50 was kept in the radar, combination of USD Index recovery at 91.50-93.50 and risk-off set up in equities turned the tide into 73.15-73.50 before close around 73.15, trail stop loss for those in chase into 71.50-72.65. What Next? It’s possible that USD/INR reversal from 77 is done at 72.75 for pull back into 73.50-74.50 with best case at 71.50-72.50 if FPIs continue to be in $ supply mode. So, good to be in back & forth mode 72.50/72.85-73.50/73.85 and need to keep attention on USD Index at 91.50-93.50/94.50 and FPIs net flows in FX market, while RBI expected to be hands-off while at 71.50-75

EUR/INR reversal from 89.15-90.0 to 86.50 is script perfect – 89.46 to 86.30 before close at 86.76. Given EUR/USD outlook at 1.1650/1.1725-1.1925/1.20 with pull bias into lower end, need to consider EUR/INR focus shift from 86.50-90 to 85-88.50 for consolidation at 85-86.50, which is also seen as short term base. For the week, good for back & forth at 85.75-87.75 with either way overshoot into 85-85.75 or 87.75-88.50 not expected to sustain.

All combined, it’s not the time to stay risk-heavy on India assets given major event risk in end of September (extent of contraction in Q2/FY21 top line growth and PAT) and the tone of MPC in October policy review. When way forward is dark, stay still and when not clear with poor visibility, stay aside!

Have a great week ahead…stay prudent & safe!

Moses Harding

The strategy on US equities for the week ended 4th September was to cash-out on extended rally as the last mile journey into untrodden territory got euphoric despite caution from the FED on the overheated equities valuation. It turned out to be validation of strategy to trim portfolio risk-weight from heavy to zero-light at 0-15% of portfolio value. Following the collapse, undertone shift to sell-on-recovery towards 3rd September high for extended correction below 4th September low. There’s no need to panic to take focus towards 2019 close – (February) 2020 low, when FED stays in ultra accommodation mode for extended period of time, and no significant impact expected on financial markets between Trump 2.0 or Biden 1.0!

NASDAQ was not expected to hold over 12000 for value normalisation to 11000-11350, and collapse from 12074 to 10875 got overdone before good sense prevailed for close at 11313. What Next? Close below 11695-11775 is negative with high probability of end of FED-triggered 6631-12074 rally by 82%, and by 35% over 2019 close 8972. If this is not good for investors when the economy is in big time contraction, it’s something beyond greed. For the week, consolidation at 10875-11500 is preferred outlook with sell-on-recovery mode at 11500-12000 and value-buy portfolio build from 0-15% to 25-50% at 10000-9350.

S&P 500 was seen to be hot to hold above 3500 for push back below 3350-3400 and got the push back from 3588 to 3349 before close at 3426. Here again C-19 stimulus rally from 2191 to 3588 by >60% is best opportunity to cash-out. Close below 3500 is first signal of best of 2020 is behind, but expected to stay above 3000-3100 against portfolio-light supply at 3500-3600.

DJIA Index got to the striking distance (high 29199) of February 2020 high 29569 only to get pushed back to 27664 before close at 28133. Here again, the outlook was failure above 29000 for push back into 27000-28000. For the week, let’s set zoom-in focus at 27000/27500-28500/29000, either way overshoot not expected to sustain.

US 10Y Treasury yield was expected to in back & forth mode at 0.575/0.65-0.775/0.85% post push back from portfolio light zone 0.50-0.575%. It’s been 0.79% to 0.60% to 0.72%. Given that FED is expected to be in rate-pause stance beyond 2020-2021 and not ruling out shift from above to below 0% on FED Fund rate, don’t see sustainability of weakness into 0.85-1% nor sustainability of gains into 0.35-0.50%. Given that US equities is already into value normalisation mode, it’s impact neutral from shift of appetite from equities to safe haven & low risk Gilts.

USD Index DXY outlook was for consolidation at 91.50/91.85-93.15/93.50 with upward bias, and got the recovery from 91.75 to 93.24 before close at 92.72, midpoint of short term big picture 90/91.50-93.50/95. Retain outlook that shift from 91.50-92.50 into 93.50-94.50 is work in progress, but don’t see cues as yet for upside break at 94.65-95.

EUR/USD outlook was failure at upside break at 1.1650/1.1725-1.1925/1.2000 and extended recovery into 1.1965-1.2085 not expected to sustain. EUR/USD got sold off from 1.2012 to 1.1781 before close at 1.1838, around midpoint of short term comfort range 1.1650-1.20 and continue to stay focused here, not ruling out weakness into 1.15-1.1650 which is not expected to sustain.

USD/JPY is boxed at no-man’s zone 105-106.50 (105.29 to 106.50 before close at 106.25. Retain pull bias into 107-107.50 while 105-105.50 stay firm. In the big picture, not beyond 103.50/105-107/108.50

Gold outlook was for consolidation, heavy at $2000-2035 & supported at $1865-1900, and saw intra-week drift down from $1992 to $1916 before close at $1934. Don’t see fresh cues to review risk-neutral outlook between $1865-1900 and $2000-2035 keeping 2020 high $2075 out of radar for now.

Brent Crude drift down from $45-47.50 to $40-42.50 against contraction of global economies is not surprise and consolidation around intermediate zone $40-45 of comfort range $35-50 is the best outlook for rest of 2020, risk only from geopolitical tensions, which are not expected to emerge while the US presidential elections gain steam.

Overall, start of September is worst for the bulls that were into extended chase unmindful that the reversal will get into kind of waterfall, higher it goes beyond tolerance levels. Given the higher probability that 2020 high is behind on equities, undertone will be between value normalisation in alignment with the real economy (high dependent on Covid vaccine) and sell-on recovery to lock-in decent YoY gains, being prudent and happy to make positive returns in 2020!

Have a safe week ahead!

Moses Harding