Greek election, RBI meet: Udayan analyses impact on market

Yesterday, the Sensex and the Nifty tanked more than 1% as rising inflation for May diminished hopes of aggressive monetary easing, and weak European markets also added fuel to the fire.

A lot of important events are lined-up ahead. CNBC-TV18's managing editor Udayan Mukherjee says, today is an important day of trade. "It is our last chance to adjust positions for what happens over the weekend. It will be a very important weekend one way or the other," he adds. According to him, global markets should remain stable ahead of the Greece election outcome on Sunday. He further says, there are only three outcomes to Greece election. “One is that the new democracy party, which is the party that the markets would like to win or have a tilt towards majority, gets the upper hand. In that case, you will get that gap up, atleast temporarily,” he adds. Second, he says, the Left party wins. “If we get SYRIZA, the Left party coming in, it is the bad situation for the market. That might cause some kind of a gap down, but then you might see noises from the central banks and the governments to try and switch the market sentiment in case of a bad outcome. But it seems like a low probability outcome that SYRIZA or the Left Party will have a big upper hand or an outright majority or anything like that,” he asserts. The consensus, he says, seems to be towards a middle-of-the-road kind of an outcome, a very split verdict. “In that case, the markets may still be okay because atleast just in the near-term the Grexit is staved off,” he adds. The RBI, he says, might choose to cut rate by 25 basis points because everybody including Delhi is hankering for it. "Since 25 bps on the repo and 25 bps on the CRR as well is very much in the price, if that is what is delivered by the Reserve Bank and nothing much more than that then I think the monetary policy might just become a complete non-event," he adds.  Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos. It is an important day of trade. It is our last chance to adjust positions for what happens over the weekend. It will be a very important weekend one way or the other. Greece election results should come in wee hours of Monday morning to which the markets will react on Monday and then we have the monetary policy. So, it’s an important weekend close that we are headed today. So far global markets appear quite stable. So, we are not starting the day with any great cuts on the Nifty after what happened yesterday. On the global markets: I think the global markets are going in quite stable. That is the way it should be. It should be a very low probability outcome that we come in on Monday morning and we get faced with a really dire outcome from Greece. That’s not the way the wind is blowing I am told. So, global markets having been quite short and extremely well hedged going into this event might see a little bit of covering as well before the event itself and maybe some of the hedges come off or maybe some of the shorts unwind a little bit before the Greek election results. Also, the kind of news flow that is coming through from the central banks and the governments of most European countries seems to suggest that they have some kind of backstop in place in terms of liquidity measures. So, financial markets should not be surprised too negatively with the results, but that’s difficult to call. But if they are, you’ll almost certainly see a huge rush of money being dolled out into the system, which will prevent or at least backstop the damage for the moment. So, given all of that, if you had to bet, atleast for now, you would think that Monday morning will not be a very ugly outcome for global markets. Therefore do not go in fearing the worst between the election result and the central banks stimuli, which might come in, if the result does not turn out to be too savoury. I know there is always a chance of things going wrong particularly with an election. But global markets should remain quite stable today leading up to the event. We are seeing the first signs of that this morning. On Monday trade: It is very likely that a gap happens. Would it be a gap up or a gap down? I think if one has to lean towards one, you would lean towards a gap up. There are only three outcomes. I am talking only about the global election results right now because the monetary policy impact plays out in the middle of the day and people have speculated enough about that through the last one week. So, I think the first hour or two of Monday morning, which is important for traders, is pretty much consumed by the election result in Greece. There are only three options. One is that the new democracy party, which is the party that the markets would like to win or have a tilt towards majority, gets the upper hand. In that case, you will get that gap up, atleast temporarily. That’s important. If we get SYRIZA, the Left party coming in, that is the bad situation for the market. That might cause some kind of a gap down, but then you might see noises from the central banks and the governments to try and switch the market sentiment in case of a bad outcome. But it seems like a low probability outcome that SYRIZA or the Left party will have a big upper hand or an outright majority or anything like that. The consensus seems to wearing towards a middle-of-the-road kind of an outcome, which is not very different from what they had last time around, a very split verdict. All parties need to go into the government, which means it’s a state of status quo. Limbo will continue for a long time now for many months. So, markets may still be okay in that scenario because atleast just in the near-term the Grexit is staved off and you just bought a little bit of time for yourself. The positioning might uncoil a little bit, given that result. That might give you a rally for a day or two. In any case, we are talking about first two hours of Monday and not a big durable global rally playing out. So, for a trader, it’s pertinent whether he gets 1-3% gap up on Monday, which he can then use to exit his long position. I think there is probably more than a 50% probably of that. _PAGEBREAK_ On RBI policy action: I don’t know whether D Subbarao is trying to cool expectations because they have run ahead of themselves over the last five days after the previous comments, which came in from the deputy governor. It could well be that because central bankers often try to cool or temper expectations before the policy. But I think there are two parts to this. One is the repo rate cut because there is such a clamour and last time we had a repo rate cut, there was very inadequate pass through by bankers anyway. So, 25 basis points is not a game changer, it can be given, may not be given. But in the current circumstances, the RBI might choose to give 25 basis points because everybody including Delhi is hankering for it. The bigger question is, ‘what happens to the CRR?’ If you do get a big CRR cut, it will see some kind of transmission into the system. But CRR means quantitative easing. Given the current inflationary situation and what you heard the RBI governor saying, are they in a mood to oblige with significant quantitative easing, which has ramifications for stoking inflation at such a period? So, the jury is still out on that. I won’t be surprised, if the market did the right thing yesterday in cooling expectations. Bond yields came back by about 8-9 basis points from 7.96% to 8.04-8.05%. That’s probably the bond market way of saying maybe we ran ahead of ourselves, we just need to be a bit calmer about what we need to expect on Monday. So, you might get rate cuts, but modest rate cuts. Since 25 bps on the repo and 25 bps on the CRR as well is very much in the price, if that is what is delivered by the Reserve Bank and nothing much more than that then I think the monetary policy might just become a complete non-event at the end of it, despite such a lot of excitement being drummed up around it. On the Nifty: We started the week by saying that the market might be in a 5,000-5,200 zone going into the event. It was 5,050 yesterday. If we do get a modest rally today, we might get to 5,100. That would be midpoint of that range. 5,100 is a reasonable base to work with for receiving all the important news flow, which is coming in on Sunday and Monday. So, for the trader, he is thinking if I start the clock at say 5,080-5,100 today and if Greece works out okay atleast for a near-term and we get a global market pop, if I get a 100 point kind of an up move on Monday morning, something around that and I can still exit my long position maybe at 5,200 kind of level. I know yesterday was a set back. But I think that kind of expectation is still not completely out of the window. But if he do start the clock around 5,080-5,100 or 5,050, wherever we close today, given the news on Greece and what we just discussed about Reserve Bank, is it enough to break the market past that 5,200-5,250 kind of zone and take you to a 5,400 kind of zone? That is really unclear because I think if the news flow is as we have discussed then you might see the market moving up and then people taking profits very quickly around 5,200 or just above it because the conviction on the medium-term macro is not very good. So, all we are discussing right now is the possibility of a trading rally, which has got stifled yesterday, but might see a final release early part of next week before it tops out.