It's the end of trigger season

We are coming to the end of a trigger season. The markets are at an interesting juncture; they are in for some interesting times over the next three weeks. But an uptrend is still very much on.

Asian Indices:

Asia is a mixed back though China is roaring this morning; the other markets are absolutely comatose. They are only half a percent or fifth of a percent up here or there. The Asian markets are very quite this morning.

Where from here for our markets?

That’s the big question, what will the market movements hinge on in probably a week’s time? - Earnings are almost done, yes a few will trickle in with audited numbers later in May and in June but at the end of this week, 75% of earnings would be done, you would have heard form most of the large companies at the end of Friday.

So earnings, you have pretty much got a handle on, the credit policy is out of the way, unlikely that you are going to hear in the next 3 weeks by way of the monetary policy moves, FOMC will be out of the way later tonight so you wont have any great global triggers either and inflation while there might be some gyrations up and down, we hope on the way down, but 7% inflation is pretty much digested by the market I don’t think it will fall too much if we get a couple of weeks of 7% plus, it may inch up a bit if you get sub-7% levels.

But all those triggers are pretty much in the price right now, so what’s going to drive the market going forward, left to itself will the market continue to move up and the global markets will they continue to have their upward trajectory throughout the month of may, or having had such a nice rally, will the market ease off and consolidate in the month of May.

I don’t know the answer but I think people will start asking these questions in a week’s time after we are done with Friday and what will take the market higher from here, or if it has to correct, what will drive it down. It is a little difficult to answer that question from here on but if tonight’s event goes peacefully and we come back on Friday and trade up then I think you have a reasonable chance of trading in the higher end of this trading range maybe a 5,000 or 5,400 for the near-term and not crack too much, that’s the best one can hope for and expect that you hold the higher end of the range and don’t make a go back and retest where you came from which would essentially mean staying above that 5,000 mark for theNifty.  

On the Fed meet:

The Fed has done nothing in the last 6 months, which is shocked or which has come as a negative for the equity markets. So if one just looks back at the history of the last 6 months all that the Fed has done is to try and bail out the equity market, when the equity markets want rate cuts it gives it rate cuts, it sometimes gives it more rate cuts that the market wants. When it wants bailout for financial institutions, it does that as well. When it wants money to be injected in the system, it does that as well.

I’m struggling to see what the Fed will do at this juncture now which will spook the equity markets and if the Fed does not want to cut any more rates going forward, I also doubt whether they lay out so explicitly today. At best they will say data dependent; we are going to watch inflation etc and stuff like that.

I don’t know whether tonight there is a potential of any huge set back for global markets, but more importantly I think we are coming to a phase, where the Fed action will probably begin to recede as the primary global trigger for the market because the Fed does not have too much of ammunition left.

I think the focus might now shift to the kind of earnings which are coming in US and the kind of macro data which is coming in. So when we come back to trade on Friday, I think the important triggers would also be the ISM data which is coming in, the Q1 GDP data which is out, the jobless claim data which is out, all of that is something which the markets will react to.

In sum, if the macro triggers is not too bad and you can inch up on Friday then I suspect you could have a situation, where the markets does not correct in the near-term. But I suspect the global triggers having played out with earnings and macro policy etc we will now be hostage to global cues to guide us in the month of May.

Key takeaways of the RBI policy:

I think what the market has taken relief from is that the Reserve Bank of India (RBI) is not signaling to the banks that they need to tighten lending rates and that is the single biggest positive which came out. The RBI is not telling the banks that you need to go out and hike lending rates to curb inflation and credit growth and therefore the market is relieved that big a negative it does not have to swim against just right now.

Essentially that key takeaway, which we had from the policy yesterday, is that RBI’s fight against inflation will be on the liquidity front and that means it will probably put the burden off that fight on the shoulder of PSU banks or the banking system. So while the equity markets should be relieved and justifiably relieved that things are not tightening and lending rates will probably not harden, one needs to be a little less sanguine about how bank stocks will do.

There might be relief rally in the near-term because the repo rate hike has not come through. In the near-term there might be some short covering and these stocks have got pummeled quite a bit, they might give you a bit of a bounce back but in the medium-term I think people would still be quite vary of banks because if the CRR is the chosen vehicle for fighting inflation and there is more liquidity tightening which lies ahead of us then I suspect it is not very positive for bank margins.

We may have a different kind of situation; the equity markets may not struggle too much with the interest rate cues from here but you could see the banking system not do very well because their margins will not be protected. So I would be a bit cautious about banks even from here but from an equity perspective we are still pleased that their repo rate hike did not happen.