It turned out to be great post US Presidential election week for US equities setting up risk-on sentiment and undertone. The weekly gap-up opening resulted in DJIA punching new all-time high at 29993 but got pushed below previous Feb’20 high 29568. S&P500 hit new high at 3645 for comfortable stay over Feb’20 high 3393, while NASAQ hit 12108 leading from the front and leaving Feb’20 high 9838 distant behind. So, it’s great handover of equity markets from Trump to Biden despite black swan event Corona pandemic.
What Next? The setup of so-called second wave of Corona virus in the West is big setback to global economy. While the expected turnaround expectation – shift from contraction to expansion of the US economy starting Q4/2020 from higher demand & consumption of festive season – gets pushed behind when not sure of extent of fiscal stimulus from President-elect Biden and FED preparedness for shift from zero interest rate regime to negative interest rate policy. Needless to say, need both to prevent water-fall collapse in equity markets. But, hope & belief is from Biden not letting go this position and taking the positivity beyond what Trump has achieved in the last 6-8 months.
NASDAQ gains in 2020 against 2019 close 8972 by over 30% is impressive and don’t see losing this advantage with hold above 10750-10850 while heavy above 12000 till news of next round of actions on fiscal & monetary stimulus. S&P500 has delivered YTD return of over 10% against 2019 close 3230 and seen good for consolidation at 3300-3650 not ruling out overshoot into untrodden territory. DJIA despite lagging behind post modest YTD return of modest 3.5% over 2019 close 28538 and good for consolidation at 27000/27350-30000.
The period between now and 20 January 2021 (when Biden takes over as President) is no-man’s phase, hence high dependence on the Treasury and the FED to hold markets sentiment and to keep undertone positive.
India equities continue to benefit from US tailwinds support and domestic optimism
NIFTY intra-November lift from 11500-11650 to over 12430 for punch of new high at 12828 with weekly close at 12780 is amazing to say the least when the upside momentum is driven by FPIs while DIIs in profit-booking mode. What Next? Given the Covid-relapse in the West, FPI appetite for EMs will get bigger in the short term, which is important to retain “buy on dips” undertone. NIFTY above 2019 close 12168 weathering the storm of NBFC & Covid crisis with limited fiscal stimulus is big thing, thanks largely to Trump, FED and RBI. Positive take-away from here is significant lift of big picture support base from 10785-10850 to 11500-11585 while the immediate make or break support point is 12350 against take-profit urge zone 12850-13000 retaining zoom-in focus at 12350-13000. Beyond here and if FPI willing, could see upside extension into 13500-13650 before end of 2020 and into 14300-15000 in Q1/2021 for great landing for FY21. What about domestic cues? GOI is participating slowly & steadily keeping RBI in the front. But, sticky headline inflation above 6% will keep LAF corridor steady at 3.35-4% but RBI will use liquidity measures to contain short term rates and long term yields. Both together, positive bias from external sector and neutral outlook from domestic cues will set up way forward undertone between neutral to positive despite profit-booking and portfolio-light urge from domestic investors.
BANK NIFTY 2-step lift from 20400 (buy call on banking sector ahead of end of Q2/FY21) and 23650 to over 29000 was on the script followed by consolidation at 27650-29000. While NIFTY has delivered positive YTD returns, Bank index lags behind with stay below 2019 close 32161. What Next? While RBI supporting measures help banking sector on the bottom line, need GOI fiscal & consumption led actions to push top-line growth. Both combined would lift the index over 32161-32613 to new all-time highs catching up with NIFTY. Till then 27000-27650 is good support base with lift of big picture support zone from 19500-21000 to 25000-26500.
US 10Y Treasury support at higher end of 0.5-1% is relief for India 10Y at 5.75-6%
US 10Y Treasury risk-off push from 0.52% to 0.975% is perfect to big picture script b4 weekly close at 0.90%. Undertone is mixed between vaccination for Covid by Q1/2021 and relapse adding to more burden. While confidence on Covid virus could push yield over 1% but second round of lockdown pushing FED to NIRP would push yield down below 0.5%. So, it’s 50:50 bias on the direction of overshoot at 0.5-1%. For now, it’s safe to stick to support zone at 0.925-1.0% with pull bias into 0.65-0.725%.
It’s thank to RBI stubborn stance both on primary & secondary markets that keep 10Y yield locked at 5.85-5.925%, unable to sustain either-way overshoot. Investors urge for duration-cut is more than portfolio-unwind below 5.85% given the special dispensation comfort on HTM (up at 22% against mandatory SLR at 18%) while RBI steps in aggressively to prevent stay for long over 5.925%. US 10Y yield retreat from 5.975% is relief to cut the headwind force from sub 5% yield spread. All combined, don’t see volatility in 10Y bond 5.77% 2030 while retaining sideways mode at 5.775/5.85-5.925/6%.
USD strength gets fatigue which is relief for INR when in weak undertone
USD index hold at 91.50-92.15 is fine but repeat failure at 94.35-95 is worry pulling the need to shift focus from 91.50-95 to 90-93.50. USD losing interest rate advantage and resultant yield spread squeeze with major & emerging markets will exert downside risk towards big picture base 88-90 for completion of push back from 102-103.50.
USD/INR back & forth at 72.65/73-74.65/75 is done for consolidation at comfort range 73.50-75. Having completed the correction phase from 77 to 72.75, the recovery momentum need to go past 74.85-75.35 to pull 77-78.50 into the radar. Rupee under pressure despite USD weakness and FPI inflows is mystery when Current Account turns from deficit to surplus. RBI in buy mode expanding FC reserves is one of the reason, and why this action when system liquidity is in overhang mode is another mystery. So, given these dynamics, USD/INR short term focus is not seen beyond 73.50/73.85-75/75.35 (12M $ lift support base from 75.65-76 to 76.50-76.85 with risk-neutral export cover & carry-trade supply at 78.15-78.50).
EUR/USD continue to struggle either way overshoot into 1.15-1.1650 and 1.1850-1.20 (1.1603-1.1920-1.1745-1.1834). While big picture play at 1.15/1.1650-1.20 has stood firm since August 2020, there’s build up of pressure for extended strength into 1.20-1.2150 shifting comfort range from 1.15-1.20 to 1.1650-1.2150 with most play above 1.1750-1.19.
USD/JPY locked at 103.50-105 and failure to sustain either-way overshoot (103.17-105.69-104.63) is sign of set up of indecisive undertone. Given that 100-103.50 is big picture support (attracting BOJ intervention), recovery from below 103.50 makes sense. But on the other side, above 105 gets heavy from general USD weakness. Both combined, can’t wish away from trend down into 100-103.50 with short term focus at 100/101.50-105/106.50
Brent Crude and Gold stuck in cross winds of global growth uncertainty, USD interest & exchange rate bias and absence of risk-aversion
Gold got pushed down from doorstep of supply zone $1965-2000 to support zone $1850-1865 (1965.92 to 1850.36 before stability at $1865-1900). Don’t see any fresh cues to shift focus beyond $1850-2000 and retain bias neutral between $1765 and $2075.
Brent Crude rally from $35 to $42.50-45 was in the script with all play restricted at comfort range $35-50. In the current dynamics, there’s no reason to look beyond $45-50. So, the strategy to buy/hedge at $35-37.50 and to stay light at $45-47.50/50 remain valid.
Good luck…..Moses Harding
