Liquidity keeping market afloat, macros remain poor: Udayan

Udayan Mukherjee, managing editor, CNBC-TV18 says, it is very quite across global markets for the last couple of days. "So far, liquidity has kept us afloat. But let's see whether we can manage to stay here and negotiate this important resistance level with liquidity, despite some of the news flow which is not great," he adds.

According to him, the next couple of days will be absolutely crucial. "The S&P has closed twice above 1,400. If it can pause and then take off once again to 1,450, I think that might once again relieve the question marks that have come into the market at this point in time," he adds.

He further says, June IIP numbers were poor. "I think we are looking at a fairly horrific April to June GDP number, when it comes out, at the end of this month," he adds. 

He says, risks to market are going up many folds. "When you move up on the back of liquidity, on the back of such poor macro then with every 100 points, the risks are going up many folds. Prices may still move high because of liquidity. But when they are not fundamentally warranted then you are creating risk for yourself, at every higher level, of a much deeper correction," he adds.

Below is the edited transcript opf his comments on CNBC-TV18.

It is very quite across global markets for the last couple of days. We are getting through a fairly important part of our earning season, late burst of big earnings. Yesterday, you saw it from Tata Motors and Ranbaxy. Today, State Bank of India, Sun Pharma will announce their results. Terrible macro numbers keep popping our way. So far, liquidity has kept us afloat. But let’s see whether we can manage to stay here and negotiate this important resistance level with liquidity, despite some of the news flow which is not great.

On global cues:

There is a suspicion. It is not confirmed yet that the rally is beginning to fade or run into some resistance. If you just look at how global markets have moved the last couple of days, it is almost like liquidity is just managing to keep it afloat at this level for some time now.

The volumes are drying up, the breadth is closing in. Even some of the factors, which were supportive for the rally, the euro-dollar etc, have started coming off again. That is not great. We are not at that point where you can say with confidence that the rally has topped out and we are going to turn because there is still ample liquidity in global markets. This may well be a pause.

You are just getting that bad feeling that the rally is just running out of any kind of juice and momentum. So, the next couple of days will be absolutely crucial. The S&P has closed twice above 1,400. If it can pause and then take off once again to 1,450, I think that might once again relieve the question marks that have come into the market at this point in time. But it can also turn from here because the last couple of days have been very inconclusive.

On IIP numbers:

I think you should focus on the trend rather than whether it’s -1.8% or +0.1%. We have been hearing a lot of debate about the accuracy of the IIP numbers. We all know that the IIP is an unreliable number. But can you take away from the weak trend that we are seeing in the economy? I think the answer to that is no. A lot of elements of that also go into the GDP calculations. So, I think we are looking at a fairly horrific April to June GDP number, when it comes out, at the end of this month.

For agriculture, I think for even April, May, June will be great because May was quite bad. June just buttered on the rainfall. So, you cannot expect a great agriculture number for April, May, and June. But now you look forward to July, August, and September. July was the power cut month. So, IIP will be -5% or something like that. You add up the numbers, July was such a bad month for the monsoon as well. So, looking at manufacturing and agriculture, it looks like the July, August, September quarter, which is Q2, will also be a very bad quarter. I won’t be surprised, if it’s even worse than Q1.

What kind of full year numbers are we looking at out here? Things are getting very murky. Even the Finance Minister is talking about resetting the fiscal deficit target. He knows there will be slippages. He would want to put his hand up and say I have taken charge and this is what it looks like rather than tell us the bad news at the end of the year, if only to manage expectations. So, the short point is that while we know that things are not great out here, I think the straws are piling up on the camels back. So, I have been saying consistently this kind of macro setup, with crude at a USD 114 per barrel, is not very supportive for stock prices moving higher.

When you move up on the back of liquidity, on the back of such poor macro then with every 100 points, the risks are going up many folds. Prices may still move high because of liquidity. But when they are not fundamentally warranted then you are creating risk for yourself, at every higher level, of a much deeper correction.

I think we are probably getting there with every passing day. The data just keeps getting worse and prices keep moving higher because there is still a lot of liquidity sloshing around. Since yesterday, one can sense that there is a lot of caution getting back into that market. People are not that foolish at the end of the day.

We have a few more months to get our act together. The other thing is crude has gone up to USD 114 per barrel. That means sometime by the end of this week or next week, we’ll have to look at a petrol price hike of Rs 3-4. That gives the finance minister even less elbow room to think about the diesel price hike because there already will be hue and cry because petrol prices will go up.

That’s a critical point which all the rating agencies are working with. So, say in another two-three months time, the rating agencies are reading this as India that growth is coming down to nearly 5%, no interest rate cuts have happened. Diesel prices are not being passed down. That’s a dangerous cocktail you are working with. I hope that they will give us a little bit more breathing time.