Markets rally after surprise early rate cut

Indian bonds, rupee and stocks gained on Wednesday after the Reserve Bank of India (RBI) surprised investors with a 25 basis points rate cut before markets opened and left open the prospect of additional monetary easing over the year ahead.

Although markets had been widely pricing in a RBI rate cut, most investors had expected the central bank to move either at its policy review on Feb. 3 or sometime after the government unveiled its annual budget at the end of February.

Instead traders were caught off guard, as the RBI cut its repo interest rate by 25 basis points to 7.75 percent, citing easing inflation and government efforts to contain the fiscal deficit.

"The statement was dovish in our view and with the disinflationary trend being strong, we see room for a further rally in bonds, in line with our economists forecast of more repo rate cuts," strategists at Barclays wrote in a note.

"We revise our 10 year government bond year-end target lower to 7.25 percent from 7.40 percent previously and continue to recommend being overweight duration in government bonds."

The rate cut pushed the benchmark 10-year bond yield to 7.65 percent, down 12 basis points on the day and its lowest level since July 15, 2013.

Meanwhile, in the overnight indexed swap market, the one-year rate dropped as much as 13 bps to 7.50 percent, its lowest since July 15, 2013, which traders said priced in the prospect of cuts of around a further 75 bps over the next year.

"In OIS - we think the flattening trend has most likely come to an end. The curve will steepen. The pace of steepening will be dependent on how aggressive RBI is," said Kumar Rachapudi, a fixed income strategist with ANZ Bank in Singapore.

Stocks rallied with the Nifty gaining more than 2 percent in early trade, while the rupee partially convertible rupee gained to as much as 61.71, its strongest level since Nov. 24.

The NSE Bank index rose as much as 4.3 percent to a record high of 19,410.40 points.

Odds tilted in favour of bears

It was a very disappointing show by the stock market last week. Bulls were in retreat as a selling fury was unleashed across global markets on Tuesday.

Both the Sensex and the Nifty caved in, signalling that the path of least resistance has now turned downwards. Despite the recovery in the later part of the week, the short-term trend is tilted in favour of the bears now.

It is not as if anything changed for the worse overnight. Crude continued plumbing new depths causing a fresh wave of concern on its effect on global growth and demand. The problem economies of the Euro zone and their debt issues moved back in to the limelight, this time with concern on Greece. It was finally left to the central bankers to make comforting noises about another round of stimulus to assuage market sentiments.

The continuing fall in the price of crude is disconcerting. But as explained earlier, the commodity had critical support at $65 on the chart, the Fibonacci support (61.8 per cent) of the rally from 2009-low. Once that level was breached, the stage was set for a plunge to the low at $33.

The critical 61.8 per cent retracement is being tested in yet another commodity — gold. It is currently attempting to build a base around $1,155, the 61.8 per cent retracement of the rally from October 2008-low.

This level has been tested thrice since June 2013. Breach of this buttress can be pretty bad for the yellow metal.

The severity of Tuesday’s sell-off in India signals intense nervousness among investors who have purchased stocks in recent months. They are likely to head for the exit at the mere hint of a reversal. Foreign portfolio investors too turned net sellers last week.

As the December quarter earnings start flowing in, investors will turn their attention to number crunching again. We will also get indications about the state of the economy once the industrial production and consumer price inflation numbers are released next week.

Sensex (27,458.4)

The Sensex reversed lower on Monday to hit the intra-week low at 26,776.

The week ahead: The failure to move beyond the 28,000 mark last week is very disappointing. The recovery in the later part of the week was far from satisfying and the short-term prospects for the Sensex continue to be under a cloud. Immediate resistance for the index is at 27,610 and then at 27,793 (50 DMA).

The failure to move above this level will result in the index moving lower to 26,776 or 26,512 in the coming sessions.

On the other hand, a strong close above 28,000 will make the short-term view positive, paving the way for a rally to 28,731.

Medium-term trend: We were expecting the formation of a diagonal triangle since August 8. The Elliott wave of this move was expected to take the index to a new high.

But the movement last week has put this count in jeopardy and opens the door for completion of a running correction at the December 4-peak. A strong close below 26,469 is needed to confirm this count. Downward targets in that case will be 25,726 and 24,500. Since the 200-DMA is also poised at the second target, we can look forward to some support at this level.

Nifty (8,284)

The Nifty too could not make a strong break beyond the 8,400 hurdle indicated last week.

The week ahead: The Nifty needs to move back above 8,445 this week to signal the reversal in the short-term trend. It can then move on to the previous peak at 8,626.

However, if Nifty reverses lower before moving above the 50-DMA at 8,329, it will mean that the index can move lower to 8,031 or 7,776. Presence of the 200-DMA at 7,700 also makes it a critical medium-term support.

Medium-term trend: The medium-term trend in the index is positive. But it will be under threat if the Nifty goes on to close below 8,000. It will also shut the possibility of the index rising to a new high in the immediate future.

Global cues

It was a very volatile week for most global markets. Indices whipsawed in both directions before ending the week with marginal losses.

The CBOE volatility index moved close to 23, but ended the week much lower at 17, following the recovery in the second part of the week.

The Dow appeared to be about to launch a deep correction but it recovered from the low of 17,262, much above the key support at 17,185.

It will be interesting to see if the index is able to move above its recent peak at 18,103. Else, the index will continue to vacillate in the zone of 17,000 and 18,100.

Asian benchmarks such as the PSE Composite and Shanghai Composite Index however continued moving higher.

The performance of the indices last week has turned the short-term view negative

FIIs pull out Rs. 1,700 cr from equities so far in Jan

  

Overseas investors have pulled out nearly Rs. 1,700 crore from the Indian stock markets so far in January following a steep fall in crude oil prices amid slowing global growth.

The outflow comes after FII investments in equities hit a 10-month low of Rs. 2,100 crore in December.

These investors got re-christened as FPIs or Foreign Portfolio Investors last year under a new regulatory regime that promises to make it easier for them to invest in India.

Foreign investors were gross buyers of equities worth Rs. 18,544 crore between January 1 and 9, while they sold shares amounting to Rs. 20,216 crore — a net outflow of Rs. 1,673 crore ($264 million) for the period, latest data with Central Depository Services Ltd (CDSL) showed.

Debt market inflows

However, overseas investors took a bullish stance on the Indian debt market and invested Rs. 2,620 crore during the period.

Market analysts attributed the FIIs outflow to fall in crude oil prices.

“The steep decline in oil price is positive for all consumers including big importers like India, as it helps in narrowing their trade deficit and strengthens their currencies,” CNI Research Head Kishor Ostwal said.

“In contrast, for the oil producers this is a negative news as it lowers their export earnings. Given that many countries are dependent on oil exports, their growth would be affected,” he added.

Crude oil prices

Brent crude oil price is hovering at around $51 per barrel. On January 7, it fell below $50 a barrel — first time since May 2009 — mainly due to increased supply of oil and slowing global growth. It had dropped to as low as $49.66 a barrel on that day.

In 2014, the net investment by overseas investors into the equities was Rs. 98,150 crore, while in the debt market it was Rs. 1.6 lakh crore, aggregating Rs. 2.58 lakh crore.

FII equity inflows hit 10-month low of Rs 2,100 cr in December

Overseas investors pumped in a little over Rs 2,100 crore in the Indian equity markets in December, making it the lowest investment in 10 months, primarily on account of profit booking.

The net investment by Foreign Institutional Investors (FIIs) for the entire 2014 was more than Rs 98,000 crore.

These investors got re-christened as FPIs or Foreign Portfolio Investors last year under a new regulatory regime that promises to make it easier for them to invest in India.

 According to latest data, FIIs have made a net investment of Rs 2,132 crore in the stock markets in December.

This was the lowest investment by FIIs in a single month since last February, when they had pumped in a net amount of Rs 1,404 crore.

Market analysts attributed the low inflow to profit booking, even though the central government took up the ordinance route to raise the overseas investment ceiling in insurance sector. 

However, experts are of the view that there is nothing to worry and FIIs will be back to the Indian stocks markets this month.

Apart from equities, foreign investors have infused a net of Rs 11,836 crore in debt markets last month.

In 2014, the net investment by overseas investors into the equities was Rs 98,150 crore, while in the debt markets it was Rs 1.6 lakh crore, aggregating to Rs 2.58 lakh crore. 

Return of the bull brigade

It has been a buoyant start to the New Year. The bulls, back from their year-end break, seemed determined to continue the party in stock market.

Both the Sensex and the Nifty ended the week with more than 2 per cent gains.

But as we begin 2015, there is a sense of unease on the pace of the expected recovery in economy and corporate earnings.

Most stock prices have run up ahead of the fundamentals, making them rightly, if not stiffly, valued at the current juncture.

The major trigger that everyone is awaiting is the interest rate cut by the Reserve Bank of India. This is expected to boost consumption and kick-start the investment cycle.

It will also provide some relief to our debt-laden companies. Margin expansion due to lower commodity prices is another plus for companies.

The risk to equities largely stems from global factors. Falling crude prices, causing contraction in economies of oil producing companies, can impact our exports and FDI inflows.

The possibility of foreign investors withdrawing funds once the US starts hiking rates and the impact of economic contraction in Europe, Japan and China on our exporters, are other concerns.

Nervousness was evident in other global markets too last week. Volatility returned as concerns on global economic growth resurfaced.

The Institute of Supply Management’s factory index dropping sharply in the US, slower than expected expansion in manufacturing in Euro zone, and a Chinese manufacturing index slipping to the lowest level in 18 months, further stoked these concerns.

But then, hope springs eternal in human hearts.

Investors decided to latch on to the positive fallout of these depressing statistics — the possibility of another round of stimulus in the Euro zone and China and the US postponing its policy rate hike.

That helped indices stabilise in the later part of the week.

Economic data releases last week were mixed. The eight core industries growing at 6.7 per cent in November over last year and HSBC manufacturing PMI at two-year high of 54.5 in November were the positives.

But the burgeoning fiscal deficit and the government’s attempts to salvage it by increasing excise duties on petrol and rolling back excise duty cuts on autos and capital goods does not lend much comfort.

Sensex (27,887.9)

The Sensex moved higher from the low of 27,267 to end the week 646 points higher.

The week ahead: Friday’s surge has taken the Sensex close to the short-term resistance at 27,932 that occurs at 61.8 per cent retracement of the previous down-move. The index has also managed to close slightly above the 50-DMA at 27,730.

The close above 28,000 in the early part of the week will mean that the index is headed higher towards 28,822 and then to 29,381 in the upcoming sessions.

But a reversal in the early part of the week will find the index halting at 27,091 or 26,469. Short-term view will turn negative only on a strong move below 26,469.

Medium-term trend: The movement of the index suggests that we can have one more spurt that takes the index to a new high before a serious decline. The index is expected to move close to the 30,000 level before a serious correction sets in.

This view will be negated on a close below 26,469. Key medium-term support stays at 24,500.

Nifty (8,395.4)

The Nifty too has closed on a strong note on Friday.

The week ahead: The Nifty managed a close above the 50-day moving average but it is halting just below the critical resistance at 8,400. If the index manages to move above this level on Monday, next targets will be 8,550 and then 8,626.

Short-term traders can then buy in declines with stop at 8,250. Supports below this level are at 8,244 and 8,142.

Medium-term trend: The medium-term trend in the index is positive. The rally that commenced last week could take the index to yet another new life-time high. The immediate targets are 8,724 and 8,825.This view will however be negated on a close below 7,961. Key medium-term support stays at 7,600.

Global cues

It was a turbulent week in global equity markets. Most benchmarks began the New Year on the back foot. CBOE volatility index spiked to 20.1 as the US benchmarks launched into a sharp decline.

The Dow did not make any progress this week and ended 220 points lower. Short-term support stays at 17,200 and 16,700. Short-term view will turn negative only on a close below the second support. Target on a strong break above 18,100 is 19,200.

Many of the Asian benchmarks such as the Jakarta Composite, Karachi 100 and Shanghai Composite Index closed the week on a firm note.

The strength in the dollar index is however a cause for concern. It is currently drawing close to the 2005 peak of 92. If this level is breached, it can move on to 96 or 102.

With a reversal in the benchmarks, the market appears set to surge to new highs

India raises excise duties on petrol, diesel

India on Thursday raised excise duties on petrol and diesel by 2 rupees ($0.03) a litre to fund infrastructure projects in the current and next fiscal years.

The increase, the third since Prime Minister Narendra Modi lifted diesel price controls in October, seeks to cash in on lower world oil prices to bolster strained government finances without stoking inflation.

The allocation of these resources to fund 15,000 km of road projects would spur economic activity and boost employment, the government said in a statement.

The higher excise duties come into effect from Jan. 2.

The government last raised excise duties on petrol and diesel by 2.25 rupees a litre and 1 rupees a litre respectively on Dec. 2.

India's fiscal deficit was 5.25 trillion rupees ($83 billion) during April-November, or 98.9 percent of the full-year target. The deficit was 93.9 percent during the same period a year ago.

($1 = 63.35 rupees)

Happy New Year 2015