US equities losing steam at set last-mile focus range ahead of US Presidential election is worry
Dow Jones Index last mile play for Q3/2020 on run upto 3 November event risk was set at 26500-29000 for failure below pre-Covid February high 29568. While it failed above 29000 (at 29199), push back momentum turned strong with overshoot below 26500 (low 26143) before managing close above 26500. Over all, it’s in order to see risk-unwind & portfolio-light urge over 29000 and buy & hold appetite below 26500.
S&P500 focus for Q3/2020 was set for consolidation at 3200-3500 in absence of cues to withstand either way overshoot and in back & forth mode at 3101-3588-3209 before stability above 2019 close 3230.
NASDAQ stood out with better performance within set last mile focus at 10000-12000 (10048-12073-10882) holding resilience mode at lower quartile 10000-10500 staying well above 2019 close 8972.
What Next? Now, along with 3rd November event risk, fear of second round of Covid-pandemic impact is into the radar against hope of build up of economic expansion from Q4/2020 when activity gets back to pre-Covid normalcy. Combination of Trump 2.0 and no major disruption on normal economic activities will be good for sustainable upside break at set last-mile range. What’s the impact from unpleasant surprises & outcome? While there’s no absolute clarity on way forward bias, see buy for long term hold appetite on NASDAQ at 9350-10000 and so is on S&P500 at 2900-3100 & DJIA at 24500-25500. Given the comfort of extended ultra-dovish monetary dynamics and preparedness for more fiscal stimulus (whether from Trump 2.0 or Biden 1.0), sentiment on financial markets will not be allowed to get worse while in pursuit of expansion of output and employment. There’s no panic from push-back from recent highs as correction is from portfolio-churn for risk-weight normalisation, to stay between risk-off & light ahead of major event risk.
India equities extended rally from RBI ultra–accommodation monetary policy stance couldn’t hold against external headwind force
NIFTY upside break at last-mile 11650-12000 (high at 12025) couldn’t sustain despite repeated attempts (3 times since 12th October). There’s no complaints on the correction phase if seen against the swift recovery from buy for hold zone 10765-10850 to risk-off zone 11850-12000. What Next? First sign of worry will be on breakdown at 11350-11415 when there’s not enough optimism from fiscal stimulus against escalated market borrowing. RBI’s effort to handle this without disruption on liquidity or rates & yields could at best be short term solution. So, dependency on higher revenues in FY22 from growth expansion is high to get focus beyond 12000, while keeping 2020 high 12430 out of focus. It’s good to keep way forward bias between 10800-11500 or 11300-12000. Don’t see either pleasant or unpleasant surprises to get focus beyond 10800-12000.
Bank Nifty rally from buy for hold zone 20400-20750 (low 20405) to risk-unwind zone 24650-25350 (high 24823) was followed by correction into base 23000-23650 to script perfection. What Next? Positive for rest of FY21 for banks is from NII and profit on sale of investments, both thanks to RBI and not seen as sustainable when private credit demand picks up against elevated GOI borrowing in FY22. Risk is also from emergence of true reflection of NPA position in Q4/FY21, which is not expected to be good combining pre-Covid and moratorium portfolio. Positivity can emerge only from being liberal on opening up to private capital. When Government is unable to recapitalise all PSU banks, it would be prudent to go liberal on private capital without being restrictive on promoter holding, upward revision from current 15% to 26-40% in alignment with higher public capital in PSU banks. The need is to establish strict compliance & governance norms to keep largest shareholder and the management at arm’s length avoiding overlap & double-hat. This could be the only trigger to push Bank Nifty beyond 25350 towards 32465-32613. Else, any unpleasant numbers on NPA would get the focus back into 16500-19500 from 22000-25000. RBI need to ensure that sentiment on the banking sector remains high on entry into FY22 to keep funding engine supportive to output expansion.
US Treasury goes down along with equities while extraordinary measures of RBI drives yield spread down
US 10Y Treasury back & forth shift between risk-off zone 0.50-0.65% and buy for hold zone 0.85-1% is set for consolidation at 0.75-1.0%. At this stage, don’t see risk of upside break at 0.85-1% and also don’t see investors appetite at 0.50-0.65% unless dynamics push FED from ZIRP to NIRP driving FED Fund rate to sub zero percent.
On the other side, RBI has successfully managed to shift 10Y yield from 6-6.15% to 5.85-6% despite being against the wind, generating round-tripping impact on Gilt markets to cover elevated Central & State Government borrowings without disruption. RBI OMO purchases versus Banks subscription to fresh issuance (filling the gap between 18% SLR and 22% HTM) will keep R/R counter active for rest of FY21. Combination of upside momentum on US 10Y Treasury yield and downside push on India 10Y yield, resultant yield spread squeeze from 5.65-6% to 5% may not be attractive for foreign investors when ₹ exchange rate is not in strong footing despite into Current Account surplus mode. All combined, RBI close administration on medium/long term Gilt yields is there to stay for rest of FY21 to keep 10Y bond 5.77% 2030 in back & forth mode between 5.75-5.85% (duration-cut zone) and 5.95-6.05% (buy for carry zone backed by RBI bids). RBI could stay hands-off at 5.85-5.95% allowing India-US yield-spread to settle at 5-5.15%.
USD Index stick to range play while ₹ exchange rate gets under pressure into value normalisation mode
USD Index stood firm on its feet at 92.50-94 of comfort range 91.50-95 generating resilience below midpoint 93.25, and pushing for upside break momentum to lift comfort range to 93.50-97. There’s no change in view retaining support at 92.50-93.25 preparing steam for upside break at 94.65-95.
USD/INR prepare for shift of play from 72.65-73.50 to 74.15-75 pushing 12M $ from short-squeeze point 76 (for end of chase from 80) into risk-neutral export cover zone 77-78. Why ₹ weakness when $ is not strong? Why, when current account into surplus mode and foreign inflows in plenty?It’s obvious is that one of the reason for ₹ weakness is from steady buildup of RBI FC reserves beyond $ 0.5 Trillion, now at $555 million. It’s also from belief that USD/INR at 73.50-75 is win-win for all stakeholders & the system. It’s good to discourage non-essential imports & make it non-competitive on China imports and to keep exchange rate good for exporters and FDI/FPI inflows. Marginally weaker ₹ is also not seen to be tough on inflation when Brent is weak & down at lower end of comfort range $35-50. The balancing act between Gilt & USD purchases is good to keep the system liquid to cover H2/FY21 market borrowings and to give exchange rate advantage to FDI/FPI inflows to have better comfort on India risk. For now, focus is back at 73.50-75 recovering collapse from 77 to 72.75 with bounce back from 72.65-73. Need to have close watch at 74.85-75 which will pull 76.50-77 (12M $ 79.65-80) into the radar.
EUR/USD is script perfect in back & forth mode at 1.1650-1.1850 with failure above 1.1850 building downside break momentum into 1.15-1.1650. It may need to review big picture resist zone from 1.1850-1.20 to 1.17-1.1850 given that USD Index upside momentum is good for break at 94.65-95 for 96.50-97.25. For now, let’s stay tuned at comfort range 1.15-1.17/1.1850.
EUR/INR settle at 86.50-87.25 of big picture 85-88.50 (revised down from 86.50-90); Given the outlook of USD/INR at 75 and EUR/USD at 1.15, see comfort at 86.25-87.25, intermediate zone 85-88.50 and don’t see sustainability above 87.25 for push towards 85, unless ₹ weakness extend beyond 75.
Brent Crude under pressure from lack of growth optimism and Gold struggle from USD resilience and higher Treasury yield
Brent Crude gets tossed up & down between $35-37.50 and $42.50-45 keeping most play at lower-half of tolerance range $35-50. Given that break down sustainability of $35-42.50/50 is very low probability, it’s high risk to chase weakness below $35. Let us continue to stay in back & forth play at 35/37.50-42.50/45 and stay aside on either way overshoot. It’s good long-term hedge for oil importers at $25-35.
Gold under pressure at $1850/1865-1900/1915 unable to recover from collapse at $2073-1848, and longer lower end play at $1865-1935 builds up risk of extended weakness towards $1765. Short term outlook is not in favour of Gold if seen against stable dollar with upward bias and US Treasury in comfort at elevated yields. For now, it’s necessary to shift big picture focus from $1850-2000 to $1750-1900.
Have a great rest of 2020!
Best, Moses Harding
