It’s kind of mixed emotions between uncertainty & relief on denial of Trump 2.0
Most voters wanted Trump to go, for being different & maverick and running the Government as entrepreneur that he is used to and known for. There’s no denial that results are there to see, but believe Covid-19 came as bolt from the blue to un-do the good work of 2016-2019. No doubt, he did his best to keep undertone good holding equity indices above 2019 close and driving policy rate to near zero ensuring that the system stays flushed with liquidity at low rates. He also ran the extra mile on fiscal stimulus to keep sentiment good for turnaround from economic contraction to expansion in quick time. But, voters didn’t appreciate what he did beyond economy and the tough & gutsy stance against China, Iran & North Korea, and squeezing more from US alliances. It was new for US voters to branding Trump as arrogance & tyrant. So, it’s unfortunate that Trump was seen to be not deserving for second term when most past presidents got 8 years on the prestigious seat.
The big event risk is now behind with no major setback or euphoria. Taking this as business as usual is the positive takeaway, and What Next shifts to building expectations from President-elect Biden, whose entry is threatened by fear of next round of Covid-19 impact on the US economy and financial markets. There’s nothing to reinvent when the need is to stay on course with more fiscal stimulus to pump prim the economy. What more from the balance sheet of USA Inc (tolerance for fiscal deficit) and how much expansion in FED balance sheet (from asset purchases & printing)? Will Biden push for shift in monetary stance from above zero to below zero? While he has time on his side (till 2024), will he opt to use high cost ammunition when there’s no guarantee of desired results? These are the questions that would need answers for better way forward clarity. All combined, it’s not straightforward bullish undertone on Biden 1.0 and prudent to stay in risk-neutral mode till he gets on to the hot seat in the New Year 2021.
At this stage of end of 2020 ahead of Biden 1.0, don’t have visibility beyond set tolerance ranges on US equity indices, hence don’t see sustainability of either way overshoot leading to breakouts. Continue to stay in back & forth mode on NASDAQ at 10000/10519-12000/12074 (comfortably over 2019 close 8972), S&P 500 at 3200-3500/3588 (over 2019 close 3230) and DJIA at 26150/26500-29000/29199 (in & out of 2019 close 28538).
India fortunes not high dependent on shift of power from red to blue against positive short term outlook (for rest of FY21) from capacity expansion in H2 over H1/FY21
India undertone is between mix of politics and economics. There will be uncertainty on the political front shifting from Trump-NaMo combination to Biden-NaMo. Will the strategic alignment stay business as usual or dilution from as-is or bring it more closer having an Indian origin as Vice President. How will be China-US-India formula evolve? Will it remain India advantage or India-China balance? Need to wait till end of Q1/2021 to get clarity.
On the domestic front, undertone has improved since confirmation of extended ultra-dovish monetary policy stance of RBI being aggressive on liquidity injection (keeping short term rates at LAF corridor and arresting upside momentum on medium/long term yields) while keeping rate cut option open, inflation willing and not resorting to rate hikes from unwilling CPI trend. Here, two unknown animals are the extent of fiscal stimulus for rest of FY21 and clarity of NPA hit on the banking sector inclusive of pre & post Covid-19 asset portfolio. Need to wait till Q4/FY21 results to get better pulse on profitability leading to capital requirement for sustainability & growth capital.
Bank NIFTY bounce back vigour from turnaround zone 20400-20750 (of strategic base 19500-21000) turned out to be extraordinary (from good Q2/FY21 results of most banks) lifting focus into 26000/26350-29000 and higher strategic base at 24150-25650 for push into 29000-32000/32613. For now till end of Q1/2021, there will be improvement in profitability (from combination of intermediation margin and treasury income from profit on sale of investments) and neutral bias on top-line growth and NPA impact. Banks that are able to contain Net NPA around 0.50% will be out performers, which will be good balanced view between profitability and asset quality.
NIFTY ability to hold on to upper half of 10800-11800 followed by breakout into 11800-12300/12430 is from combination of external tailwind momentum and domestic optimism. The upside break in the absence of support from heavy weight stocks kept the index relatively weaker than Bank index. Undertone is good shifting big picture at 11350/11500-12300/12450 and building steam for punch of new 2020 high above 12430. If into consolidation mode for rest of 2020 at 12000-12500, it would be good post-Covid landing for 2020.
US-India monetary dynamics stuck between base formation on policy rates and upward pull on long term yields, but administered to keep it good for shift from capacity contraction to expansion
US 10Y Treasury yield shift from lower to higher end of big picture focus 0.50/0.575-0.925/1.0% followed by consolidation at 0.65-0.85% is script perfect and so is India 10Y yield down from higher to lower end of 5.775/5.85-6.175/6.25% for consolidation at 5.85-5.925% thanks to regular OMO purchases and overnight rate administration around Reverse Repo rate. This stance of RBI is there to stay till H2/FY21 GOI borrowing gets completed & when credit demand stay muted. Beyond FY21, it wouldn’t be easy task for RBI to manage combination of elevated Government borrowings and higher demand for credit, when headwinds emerge at lower end of India-US 10Y yield spread tolerance zone of 5-5.5%. At this point, there’s comfort for banks on mark-to-market from 4% special HTM dispensation against mandatory SLR of 18%. For now, retain back & forth focus on US 10Y Treasury yield at 0.575/0.65-0.925/1.0% while India 10Y bond 5.77% 2030 stay administered at 5.775/5.85-5.925/6%.
USD struggle for recovery against major currencies while EMs take comfort from sustainability of inflows beyond 2020
USD Index boxed in sideways mode at 91.50/92.15-94.35/95 is fine unable to set up extended recovery for shift of play into 93.50-97, but good that most play held at 91.75-93.25 intermediate zone of 90-93.50 and 91.50-95. In the absence of sustainable breakout clarity, let’s continue to watch 90/91.50-95 retaining long term strategic base at 88.50-90 keeping focus at 100-103.50.
USD/INR got the recovery from 72.65-73 to 74.65-85 before stability at intermediate zone 73.50-74.15 in alignment with 12M hedge tolerance range 76-78 (squeezed to lower half of 76-80). What Next? Resist point is now down from 77 to 75 retaining strategic support zone at 72.65-73.50 allowing play at lower half of big picture 72.65/73.50-76.35/77. It’s important for RBI to retain exchange rate stability to ring-fence its impact on interest rate & yield management. For now, prefer sideways mode at 73.50-75 in the absence of USD Index breakout momentum at 91.50-95
Gold gets the appetite covering uncertainty from change of guard at White House while Brent retain consolidation mode
It’s good $100 pick-up from $1850-1865 to $1950-1965, intermediate zone of $1765/1800-2035/2070 and would need emergence of risk-off sentiment and weak USD to get sustainable focus beyond $1865-1965 to $1965-2065. For now, see it good at $1900-2000.
Brent Crude play stick to boundary line of $35-42.50, lower half of comfort range $35-50, which is expected to still global GDP growth shift from contraction in 2020 to expansion in 2021 preparing for higher shift into $42.50-50. Continue to see attraction on overshoot at $37.50-42.50
Good luck…..Moses Harding
