Nifty rally may fizzle out soon, says Barclays

Although the current rally is a temporary phase that might last for a few sessions, Dhiren Sarin, technical analyst, Barclays expects the Nifty to surge to 5390-5500 levels. In fact, he sees signs of strength in the INR as well.

He further goes on to say that even as global equities have seen a meaningful rally in the last couple of weeks, the medium-term picture hasn’t changed much. In his view, “the key market is euro-dollar because that is still maintaining a larger downside trajectory for well over a year.

There is plenty of resistance to overcome on the upside before can assume that the worst has passed. So the medium-term trajectory is the same direction which is unfortunately still lower growth expectations.”

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: What would you say is the next logical target for the market? Do you expect to see an extension of the rally or do you think this is about it?

A: The last time I was here, we were looking at 5200 on the Nifty as a pretty important level - the previous March lows. I think the fact that the market has actually emerged above this level, it is a pretty meaningful barrier. We think there are further gains in store towards 5390, 5500. We are even getting sense of optimism coming back into the INR. However, the year-to-date (YTD) peak has come in at 5625 and we don’t think that is going to give way that easily. This rally we are seeing is likely a temporary phase that might last for few sessions.

Q: What would you do then in terms of an approach in terms of Nifty because we have pierced 5200 and gotten all the way to 5300. Would you expect to see a sharp retracement and start shorting this market or do you think we will just revert back to our range?

A: Not just yet, I would be patient before shorting anything because what we are seeing is that beyond the Nifty, a little bit of easing of tension in Italian 10 year yields, Spanish 10-year yields. Even though there is a domestic story in India we must pay attention to the international factors because global markets are just tied to the hip here. So Italian yields Spanish yields, if they keep coming down then I would just stick with the trend and try and stay bullish on the Nifty. But for the time being, ideally we get pushed towards 5340-5500 and then we start to look for a top.

Q: Has there been any change because of what you have seen in the last 2-3 weeks on medium-term direction for global markets?

A: I think the medium-term hasn’t changed too much. We have seen little bit of short covering, so all the euro shorts have little bit been squeezed out to the top side. But I think the key market is euro dollar because that is still maintaining a larger downside trajectory for well over a year. There is plenty of resistance to overcome on the upside before can assume that the worst has passed. So the medium-term trajectory is the same direction which is unfortunately still lower growth expectations.

Q: What does that tie-in with in terms of targets on the euro-dollar that you are working with right now?

A: Euro-dollar, I think we will probably get slightly better levels. We think it’s a slow grind low probably not a sharp collapse as many might be expecting. We think we push towards 1.20-1.22 area in the next 3-6 months.

Q: How does crude fit into the big rally we have seen across asset classes?

A: We saw a massive breakdown in Brent crude that happened a few months ago, a huge double top on the charts. Targets are still lower towards USD 82 per barrel. In the last couple of days, you have see a little bit of relief rally, some respite, a few signs of optimism. Ultimately, Brent crude the area where you should be looking at top is around USD 102.50- USD 105 per barrel. Once it tops out, we can start to head back down again.

Q: What do you expect to see on the Indian rupee now?

A: Equities and INR are really tied to the hip. US equities are leading the rally to the upside. As that continues to happen, the INR has the potential to gain a little bit towards 54.30-54.00. But I won’t get too carried away in this move just yet until Italian, Spanish yields can come off a little bit more, go lower say the Spanish yields below 6%. Until that happens, we cannot get over bullish on the INR.

Q: Any specific stocks or sectors that you think will be lead indicators for someone tracking the Nifty b because there has been strength form banking as a space but also pockets like Capital goods?

A: Banking has been a leader and that has been a new change. I think the banking ratio; the bank’s Nifty divided by the broader Nifty sector that ratio is reaching for its peaks of the year, which come in just a little bit under 2. I think those peaks are very important. What we need to see is banking continue to out perform if the market internals are improving. So we are keeping a close eye on that.

Again sticking to the US markets – what is leading over there? The housing sector, the Nasdaq, the technology sector. As long as those keep leading in the US, the banks keep leading in India then the outlook can continue to improve and that is exactly what we saw in the last 2-3 sessions.