The CRB, a global commodities benchmark broke 300 level on Wednesday; this fall according to Dhiren Sarin, chief technical strategist - Asia-Pacific, Barclays Capital is concerning and shows weakness in commodities.
The downside driver for the CRB index has been base metals, he said. “If you look at the likes of copper and platinum, it seems to have broken down quite sharply, which is causing some drag on commodity markets.”
Given this, he expects commodities especially, base metals to underperform in the near-term.
He expects Brent crude to find support at USD 116.30-116.50 levels. "If WTI crude is looking a little bit more bullish we expect this Brent sell off to start to stall over the next week and we start to see some signs of life in energy markets," he added.
Meanwhile, he expects India to be an underperformer in the equity markets and has a moderately neutral-to-bearish view on India.
Below is the edited transcript of Sarin’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Crude slipped to USD 118 per barrel. Do you spot a breakdown or do you think this is just a temporary cool off? I am talking at Brent Crude?
A: We are seeing a little bit of weakness for Brent crude. There is some important support coming around USD 116.30-116.50 area, those are peaks of late last year and the markets are approaching that pretty quickly. That should hold up for the time being.
This is why I bring up WTI crude as well because we don’t expect them to diverge too greatly. If WTI crude is looking a little bit more bullish we expect this Brent sell off to start to stall over the next week and we start to see some signs of life in energy markets.
Q: For the commodity universe though, would you say the trend is lower rather than for it to be moving up. Yesterday, the CRB broke the 300 level?
A: The CRB is concerning, primarily the downside drivers aren’t energy though, it is base metals. If you look at the likes of copper, platinum, it seems to have broken down quite sharply, which is causing some drag on commodity markets.
Ultimately, we do view this entire move in commodities as corrective, but for the time being this trend for commodity underperformance, we have seen that for a few months now, we are going to stick with that trend for the time being. We expect particularly base metals to underperform.
Q: What is it that you see on the charts of S&P and Dow? Is this looking like a pause before a big up move or are markets running out of steam?
A: We have had a very solid move in first few months of the year. A rise of 15-20% these are kind of moves where subsequently you do see a pause, but this pause should be healthy, it should be corrective. Ultimately, we do think this will resume higher.
For the time being the S&P could probably dip down another 2-3%, but it has started to look for a base. Similar to our view in crude oil, around 1,340- 1,350 is a reasonable basing zone for the S&P.
Q: Would you say the same for the European charts that you are seeing at this point or do they look shakier?
A: That’s drastically different, the European charts particularly the Spanish charts – if you look at the Spanish IBEX that’s approaching it lows from 2009. That is the credit crisis lows. It’s just showing how fearful the market is. They are entrenched in this psychology of a bearish trend.
Q: Any thoughts, which way the Nifty congestion might end because we have got stuck in a bit of a trading range out here in India as well for the last many weeks?
A: That’s right. We have been stuck in a bit of that. For the last six-10 weeks we have seen this range holding out. There are some technical aspects to this range. If you look at the Nifty and Sensex the 200 average has broadly supported this range.
For the Nifty that comes in around 5040. For the time being our bias is – we continue to buy dips against that 200 day average hoping for a move back higher towards about 5,450-5,500, but not a massive move. Ultimately, this is still in a range. Where we do start to get a bit more concern is if price closes below the 200 day average and that again would start to suggest that the trend is shifting lower.
Q: How important role are currency markets playing, technically for the global screen what is it that you see for the dollar index and by extension for the rupee-dollar?
A: From the beginning of this year the markets have been in a contracting range, which just really means that it’s going nowhere fast and the markets have been quite locked. Similarly, Euro-Dollar as well – despite all the negative issues in Spain that the charts are showing Euro-Dollar has failed to breakdown.
So, the dollar is a bit lackluster, but that doesn’t mean that other currencies can’t start to trend and move. For example, in the INR we are starting to see a lot of signs of weakness and Dollar-INR can keep moving higher towards 52.10-52.40. We are watching those levels hoping that we get a pullback from here, but if you do start to see 52.40 give away, 53.50 would be the next target on that one.
Q: Are there any broad trends that you see in terms sectors such as banking or energy, which are leading sectors for the market?
A; It’s been a little bit lackluster on the sector rotation front. We usually look at this as lead indicators, but at the moment if you just take a step back and look at global markets, they have been very fragmented. You see some signs of optimism in the likes of Jakarta, Philippines, but then again you see pessimism in the likes of Brazil. Taking a global market as a whole and internal sectors within countries they are very mixed.
We aren’t getting many signals from these sectors themselves, but we are getting signals from the likes of US equities, US banks, which are still doing okay and outperforming. The bottom line here is net net relative value trades are good, picking the strongest in the world and then selling the weakest in the world. For the time being, India is still a little bit of an underperformer in the equity markets. So, we would tend to be moderately neutral-to-bearish looking for a base, but not quite bullish yet.
Q: What sense do you get from the Chinese market? Do you see the Shanghai index bottoming out somewhere around this 2350-2370 levels or is there a whole lot more downside because that’s been one of the weakest markets?
A: Absolutely. What we see in the Shanghai Composite is a lot of lackluster trading and there has been a steady flow of negative news, but what’s impressive is the market is holding up despite all the negative news. When price response in a stable manner or even positively to negative news, we are slightly encouraged that said the levels haven’t given away.
The 200 day average in the Shanghai Composite comes a little bit higher around 2,450 that’s finally capped the downtrend so far. We would want to see at least some closes above 2,450-2,480 area and then we can assume that the Shanghai is forming a larger base. That has been in place and it’s potentially forming in this space over the last 8 months, but once again we want to see some confirmation from price given this fragmented view of the world at the moment.