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My January narrative
In January I kept saying the Nifty could give us a larger X wave retracing the entire 9 month market decline as it was oversold. The supporting global factors were, an A-B-C decline in US markets, a top in the dollar, a rally in EM currencies, a rally in EM markets. Most of the global factors started to play out by late Jan, but the Indian market continued to decline for our own reasons till the end of FEB. Here is a chart of the Transports that I used to mark Wave C, and see how it overshot down for a week more and then turned up by 20/01/16.Since then we have see the largest rally in EM currencies and a bounce back in US markets as seen above. Our market tried to play catch up after the Budget. And now the question is what is the narrative for our own markets? ??????????The Inflation trade.
The view that the dollar will top and commodities bottom has played out perfectly. In fact many were thrashing my view for a rally in Crude on FB and my point was you cannot catch the last dip in Oil. So it has been.
What is becoming apparent to more now is that deflation around the world from commodities has been absorbed and we maybe at the start of the reflation trade. But will it become the inflation trade?
A day after the FED paused on rates, even as inflation was rising for the last few months surprised many, and add to that higher commodity and energy prices the pressure will continue to mount.
A falling dollar is not just rising commodity prices but also falling US bonds that were bought on the deflation trade or the safety trade. This reallocation of money from bonds to equities and commodities and EMs sounds great right now especially for those particular markets.
Remember that Equity markets always love inflation because it supposedly pushes up earnings and tax revenues. And normally if interest rates rise in this environment it maybe absorbed.
So the markets are on fire on the return of the Inflation trade. Great! ??The India Story
The question is then what about India? India, was to be the great beneficiary of the deflation trade and to the extent that it brought down our fiscal deficit it was. How will we respond to inflation?
Core CPI is rising not just in the US but also in India. India was with the US the best emerging market in equities. However after we price in the positives from the Inflation trade what happens when Oil reaches 50$ or goes beyond it. Second what happens when the US 10 year drops driving up yields to 2.4% or even to 3% in the year ahead? ??The Bull market narrative first -
Markets move today more on liquidity and not on Economic factors which are poor everywhere. So liquidity and inflation play a very positive role until they do not. So the bull market case is, FII selling is done and flows are positive, and once domestic flows, that were so strong till Dec, come back, the India buying stocks story will be back. All that liquidity with government spending and the pay commission is a perfect recipe for the bull market to resume or at least benefit consumption based sectors enough to keep the GDP growth going. This is a perfect narrative for the bull market to go on. ??The Bear market narrative -
India has been on a war footing with inflation recently. The RBI will not cut rates if it cites inflationary pressures. The government is also cutting back expenses to avoid either bloating the budget or inflating the economy out of control. So what happens when Oil and other commodities shoot up, especially food. This may be visible to me today but the market will only recognise it in hind sight so there is time for it to come into focus.
Secondly what would happen to our Bond yields not just on inflation but when the Dollar falls driving up US bond yields as well. Remember the FED has paused but not changed direction on interest rates, they will go up again at some point of time.
This reminds me of 2013 when the dollar was in decline and US bond yields started to shoot up on Taper talk. It caused our Bond and currency markets to overreact to the risk of higher interest rates. The falling dollar and rising yields on US bonds can easily become headwinds in a environment where the trade is ''Long Inflation'' the dollar index and Nifty shows you how after 2013 the dollar relationship with Nifty turned on its head, but the real reason is because the rising dollar also reflects the safety trade into US bonds, and so the reverse should mean money moving out of safety and out of US bonds. This is also called risk-off. Now risk-off trades should be bullish equities but at a time when debt levels for the rest of the world are so high, higher interest rates even signalled by bond markets can quickly become an economic headwind. So a risk-off trade in this environment can quickly become a headwind for countries whose currency and bond markets are dependent on foreign money flows. ??What the falling dollar means?
What might also be forgotten easily why the dollar was rising in the first place. This has become a convoluted argument. The reason is that we often think of a currency in a fixed rate environment with interest rate parity or purchasing power parity. However floating rates simply reflect money flowing from one asset to another. So when the 2007 bear market started in the US, the dollar continued to decline as money moved out of US markets into commodities as a safe haven. Only after June-July 2008 when that trend turned did commodities crash and the dollar went up again as money chased safety of US bonds. So come QE1-QE2 the dollar declined again as markets recovered around the world till there was the European crisis with Greece and the risk of sovereign defaults. It was followed by Operation Twist, Tarp, and many other funny things now knows as ''What ever it takes''. The point is that when Europe started to fight deflation it devalued its currency the Euro. Japan also followed the same narrative and devalued the Yen. So the rise of the dollar was not because of rising interest rates but the decline of these two major components of the dollar index. In effect this is what you can call a currency war. The rise of the dollar hurt commodity EMs most which also then saw and let their currencies decline. However history shows that currency wars are a zero sum game and no one wins. And we are seeing world trade stagnate irrespective. In this context what does a falling dollar mean. Good for EMs as their currency crash normalises. But the Euro and Yen are rising. In case you did not notice DAX and Nikkei are falling again. In short the falling dollar is again deflationary for Europe and Japan. So will they fight back again? In the interim this is not good news for them. In a currency war the benefits are short lived for those devaluing their currency. In a globalised world if I win and you lose, actually no one wins. The rising dollar hurt the Commodity world, the falling dollar will hurt the debt world. Central banks are taking turns to prop up what they must to avoid a debt calamity. Each win for some nations is turning a crisis for others. This game has gone on for a while but at some point it hurts everyone. When will the market realise and give up on it, no one knows. So we should be aware of it that in the market today we are not chasing fundamentals of the economy but liquidity only.
For India this is a 50% story. Falling Commodity prices and the rising dollar hurt one half of the Nifty earnings. A falling dollar and higher interest rates will hurt another half. If we allow inflation to persist however like we did in 2010-2012 by not raising rates too fast, markets will be happy. ??What should markets do?
You will simply have to take it level by level. In my Long Short report for the Month I discussed a small x wave ending at 7600, and a large X wave making it to higher levels. The longer the market holds on above 7400 it raises the odds of a larger X wave. The inflation trade is likely to be positive for Indian stocks in the short term till the point that bond yields start to matter. So there will be a inflection point in yields that will bother everyone in every market. But till then the risk on trade may continue to exhibit a positive impact on markets. India in particular has chosen the path of writing off its banking debt and NPAs this year and therefore the headwinds are many. The key positive in the short term is the rising rupee, which puts downward pressure on inflation in the near term. But in a currency war that also leaves our exporters facing headwinds.
So unlike the rest of the Television crowd I do not believe India is in the best position in the world today. It can be tomorrow after our economic cycle is complete but not now and not today. Today we are the most fragile and can easily be pushed in any direction numerous factors. Our external debt at 25% of GDP mostly in private hands is a major headwind. A falling dollar which means inflation and higher interest rates cannot be good.
But as markets bounce off oversold territory, the market can always have a mind of its own. If everyone is bearish it can overshoot on the upside. So while I expect 7600 to hold out as a small x wave and markets to go lower from , if it is surpassed consider the larger X wave scenario for wave C up to 7750 7977 [50%] or 8250 [61.8%].
copy pasted from my whatsapp:rofl::rofl:
In January I kept saying the Nifty could give us a larger X wave retracing the entire 9 month market decline as it was oversold. The supporting global factors were, an A-B-C decline in US markets, a top in the dollar, a rally in EM currencies, a rally in EM markets. Most of the global factors started to play out by late Jan, but the Indian market continued to decline for our own reasons till the end of FEB. Here is a chart of the Transports that I used to mark Wave C, and see how it overshot down for a week more and then turned up by 20/01/16.Since then we have see the largest rally in EM currencies and a bounce back in US markets as seen above. Our market tried to play catch up after the Budget. And now the question is what is the narrative for our own markets? ??????????The Inflation trade.
The view that the dollar will top and commodities bottom has played out perfectly. In fact many were thrashing my view for a rally in Crude on FB and my point was you cannot catch the last dip in Oil. So it has been.
What is becoming apparent to more now is that deflation around the world from commodities has been absorbed and we maybe at the start of the reflation trade. But will it become the inflation trade?
A day after the FED paused on rates, even as inflation was rising for the last few months surprised many, and add to that higher commodity and energy prices the pressure will continue to mount.
A falling dollar is not just rising commodity prices but also falling US bonds that were bought on the deflation trade or the safety trade. This reallocation of money from bonds to equities and commodities and EMs sounds great right now especially for those particular markets.
Remember that Equity markets always love inflation because it supposedly pushes up earnings and tax revenues. And normally if interest rates rise in this environment it maybe absorbed.
So the markets are on fire on the return of the Inflation trade. Great! ??The India Story
The question is then what about India? India, was to be the great beneficiary of the deflation trade and to the extent that it brought down our fiscal deficit it was. How will we respond to inflation?
Core CPI is rising not just in the US but also in India. India was with the US the best emerging market in equities. However after we price in the positives from the Inflation trade what happens when Oil reaches 50$ or goes beyond it. Second what happens when the US 10 year drops driving up yields to 2.4% or even to 3% in the year ahead? ??The Bull market narrative first -
Markets move today more on liquidity and not on Economic factors which are poor everywhere. So liquidity and inflation play a very positive role until they do not. So the bull market case is, FII selling is done and flows are positive, and once domestic flows, that were so strong till Dec, come back, the India buying stocks story will be back. All that liquidity with government spending and the pay commission is a perfect recipe for the bull market to resume or at least benefit consumption based sectors enough to keep the GDP growth going. This is a perfect narrative for the bull market to go on. ??The Bear market narrative -
India has been on a war footing with inflation recently. The RBI will not cut rates if it cites inflationary pressures. The government is also cutting back expenses to avoid either bloating the budget or inflating the economy out of control. So what happens when Oil and other commodities shoot up, especially food. This may be visible to me today but the market will only recognise it in hind sight so there is time for it to come into focus.
Secondly what would happen to our Bond yields not just on inflation but when the Dollar falls driving up US bond yields as well. Remember the FED has paused but not changed direction on interest rates, they will go up again at some point of time.
This reminds me of 2013 when the dollar was in decline and US bond yields started to shoot up on Taper talk. It caused our Bond and currency markets to overreact to the risk of higher interest rates. The falling dollar and rising yields on US bonds can easily become headwinds in a environment where the trade is ''Long Inflation'' the dollar index and Nifty shows you how after 2013 the dollar relationship with Nifty turned on its head, but the real reason is because the rising dollar also reflects the safety trade into US bonds, and so the reverse should mean money moving out of safety and out of US bonds. This is also called risk-off. Now risk-off trades should be bullish equities but at a time when debt levels for the rest of the world are so high, higher interest rates even signalled by bond markets can quickly become an economic headwind. So a risk-off trade in this environment can quickly become a headwind for countries whose currency and bond markets are dependent on foreign money flows. ??What the falling dollar means?
What might also be forgotten easily why the dollar was rising in the first place. This has become a convoluted argument. The reason is that we often think of a currency in a fixed rate environment with interest rate parity or purchasing power parity. However floating rates simply reflect money flowing from one asset to another. So when the 2007 bear market started in the US, the dollar continued to decline as money moved out of US markets into commodities as a safe haven. Only after June-July 2008 when that trend turned did commodities crash and the dollar went up again as money chased safety of US bonds. So come QE1-QE2 the dollar declined again as markets recovered around the world till there was the European crisis with Greece and the risk of sovereign defaults. It was followed by Operation Twist, Tarp, and many other funny things now knows as ''What ever it takes''. The point is that when Europe started to fight deflation it devalued its currency the Euro. Japan also followed the same narrative and devalued the Yen. So the rise of the dollar was not because of rising interest rates but the decline of these two major components of the dollar index. In effect this is what you can call a currency war. The rise of the dollar hurt commodity EMs most which also then saw and let their currencies decline. However history shows that currency wars are a zero sum game and no one wins. And we are seeing world trade stagnate irrespective. In this context what does a falling dollar mean. Good for EMs as their currency crash normalises. But the Euro and Yen are rising. In case you did not notice DAX and Nikkei are falling again. In short the falling dollar is again deflationary for Europe and Japan. So will they fight back again? In the interim this is not good news for them. In a currency war the benefits are short lived for those devaluing their currency. In a globalised world if I win and you lose, actually no one wins. The rising dollar hurt the Commodity world, the falling dollar will hurt the debt world. Central banks are taking turns to prop up what they must to avoid a debt calamity. Each win for some nations is turning a crisis for others. This game has gone on for a while but at some point it hurts everyone. When will the market realise and give up on it, no one knows. So we should be aware of it that in the market today we are not chasing fundamentals of the economy but liquidity only.
For India this is a 50% story. Falling Commodity prices and the rising dollar hurt one half of the Nifty earnings. A falling dollar and higher interest rates will hurt another half. If we allow inflation to persist however like we did in 2010-2012 by not raising rates too fast, markets will be happy. ??What should markets do?
You will simply have to take it level by level. In my Long Short report for the Month I discussed a small x wave ending at 7600, and a large X wave making it to higher levels. The longer the market holds on above 7400 it raises the odds of a larger X wave. The inflation trade is likely to be positive for Indian stocks in the short term till the point that bond yields start to matter. So there will be a inflection point in yields that will bother everyone in every market. But till then the risk on trade may continue to exhibit a positive impact on markets. India in particular has chosen the path of writing off its banking debt and NPAs this year and therefore the headwinds are many. The key positive in the short term is the rising rupee, which puts downward pressure on inflation in the near term. But in a currency war that also leaves our exporters facing headwinds.
So unlike the rest of the Television crowd I do not believe India is in the best position in the world today. It can be tomorrow after our economic cycle is complete but not now and not today. Today we are the most fragile and can easily be pushed in any direction numerous factors. Our external debt at 25% of GDP mostly in private hands is a major headwind. A falling dollar which means inflation and higher interest rates cannot be good.
But as markets bounce off oversold territory, the market can always have a mind of its own. If everyone is bearish it can overshoot on the upside. So while I expect 7600 to hold out as a small x wave and markets to go lower from , if it is surpassed consider the larger X wave scenario for wave C up to 7750 7977 [50%] or 8250 [61.8%].
copy pasted from my whatsapp:rofl::rofl:
Just want to know like the arsh...derivative analysis...will the body language of the trader also reflect that market will go up or down....ha ha ...i reacall sometime back I saw Ashwani Gujal on the national television. his feet was where the camera was focused. his shoes had covered the 1/3rd of the screen. What does it mean...I mean if i want to understand...something unspoken. is it somekind vengeance towards the television officials.I do not know how good he is as a trader...but I certainly do remember him as a confident trader. i saw him talking in the national television while his feet was on the table. if any one saw him that way. it reflects a confidence a lot.
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