Nifty boosted by low euro yields; see 3-4% upside: Barclays

But because of the massive rally equity indices have posted, Sarin sees a pause or a consolidation before the uptrend starts again. “But following such a pause, we are still bullish on these equity indices,” he said.

Sarin is also positive on the euro-dollar, and in fact many euro cross currencies. With Spanish and Italian yields slipping, Sarin says bearish positions on the euro-dollar are being cut, which is pushing the currency higher. “What is happening now is that those positions are actually getting cut. So markets are taking profit on their bearish euro positions. This is having various repercussions across assets, from euro-dollar pushing higher to a softer dollar to actually bullish gold,” he explained.

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He goes on to say that Indian equities are also a beneficiary of falling yields in Europe. Along with other emerging markets, Indian equities have recorded strong gains for the past couple of months. According to Sarin, the Nifty still has more upside potential.

“As long as these yields remain low in Italy and Spain, I think Nifty has more room to the upside. The kind of levels we are looking at is back towards 5500-5600. So another 3-4% higher in the least I would think,” he said.

Sarin says these gains will continue for equities till year end.

Below is an edited transcript of his interview with Udayan Mukherjee.

Q: Last time we spoke we were examining the possibility of a correction in global equities. That’s not quite happened has it?

A: No, not really. Over the last few weeks, what has really changed is European yields. If you look at peripheral debt, Spain and Italy, the key levels we are watching on the downside in yield have given way. They gave way actually a little over a week ago at which point the markets started to turn more positive and we turned a little bit more bullish on equity markets.

The second factor is US equities themselves. NASDAQ rising, housing index in the US rising. This is also a sign of returning confidence in markets. This has what's changed over the last couple of weeks which has actually put a positive spin on some of these global equity indices.

Q: So what kind of upside do you see on the S&P from this level of 1,420?

A: These are very critical levels for the S&P, for the DOW and for the NASDAQ. Many markets, including the DAX and the CAC in France, are just a couple of percent away from the year to date peaks. So what we are looking at in the S&P is near term resistance at around 1,243. That is the peak that we saw earlier this year. We need a close above that in the least, preferably a weekly close, to suggest that this uptrend can resume.

For the time being, just two-three days ago, the DOW actually posted a bearish signal on daily charts which suggests that the market needs just a little bit of a pause, little bit of exhaustion here on this up move. But following such a pause, we are still bullish on these US equity indices.

Q: Even the euro-dollar has clawed its way back to above 1.25. Is there more headroom there?

A: You bring an interesting point there on euro-dollar because it is not just euro-dollar, euro-Aussie dollar, euro-Korea, euro-Singapore dollar. You look at most euro crosses globally, they have started to push quite sharply higher.

We have seen a strong buildup of bearish euro positions for many months. What is happening now is that those positions are actually getting cut. So markets are taking profit on their bearish euro positions. This is having various repercussions across assets, from euro-dollar pushing higher to a softer dollar to actually bullish gold.

For euro-dollar itself, we think that markets can move up to 1.2630. We look for a short-term top and a pull back there. But if 1.2630 starts to give way, that’s the 100 day average, then we would have to raise our sides to the June-July peaks around 1.2750.