Mkt will continue to suffer; weak global cues add to worry

The market disappointed on Wednesday. At one point in the morning the Nifty was scratching 5500, banks were up and then the market just gave it all away in the second half of the session. Terribly disappointing outcome in the second half and the rupee closed at its record low of 64.11 against the dollar. The morning joy was short-lived and the market came back to almost all time lows again, says CNBC-TV18’s Udayan Mukherjee.

“Market performance suggests things are not good, rallies are not lasting for very long. They are mostly intraday and this morning the global setup too does not look great and therefore, it looks like the market will be made to suffer and grind a bit longer,” he adds.

Below is the edited transcript of Udayan Mukherjee's market analysis on CNBC-TV18

On fall in blue chips
The price action was very disappointing because in the last five-seven sessions we have seen at least three failed rallies. The market is attempting these small upmoves but sometimes they last a couple of days and sometimes they don’t. It is an intraday reversal of magnitude of about a couple of 100 points on the Nifty.
Some of the big names have started crumbling not just yesterday, for the last one week. The signs have been very ominous on some of the very large heavyweights in the market. So we are in the stage where the trader psyche has shifted squarely to sell every rally, people are not even waiting to see the rallies progress beyond the day. If they get something intraday that is enough to take profits or more importantly the bear start putting up short positions at the sign of any kind of upmove in the market.
The whole orientation right now is if you get a good day or a patch of a couple of good days that is a heaven-sent opportunity to liquidate positions in the market. This is happening at a fairly low level, which is at a year low and people are not even waiting for the day to use the opportunity to exit.
Market movement has been looking quite awful but every time you are getting any failed upmoves, the case for bearishness is getting stronger. So the market’s scream is looking quite awful right now. Yesterday, the way the rupee and the stock market turned, the way many of the stocks like Reliance and ITC particularly fell off during the course of the day is very unnerving and it is paving way for more declines.

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On global cues
The US bond yield has gone up to more than 2.9 percent and right now there is a perfect inverse correlation between the US bond yield and emerging market currencies and equities.
As long as the US bond yield remains elevated, it will continue to suffocate emerging market assets because it has become that very one-to-one kind of an inverse correlation that people are playing for the moment.
The only silver lining there is that even if tapering were to happen in September, a large part of that has been very clearly discussed in the market. To a very large extent discounted, also the way the US yield has moved and the way some of the EM currencies have moved.
I don’t think when tapering starts, there is case for more significant damage to what has happened already because a large amount of discounting has happened already. However, as long as the US bond yield remains within striking distance of 3 percent, I don’t think there is any case for EM assets to outperform at all.
Also, India has been looking quite awful and we have been discussing the various reasons but now after this morning’s China PMI numbers and some of the other numbers, which have been coming out of China in the last few weeks, India is also beginning to look quite ugly. This is because people who are sitting out with money to put into EMs or Asian markets compare China’s low valuations with India’s relatively high valuations. It is much easier to put money into China than India at this point in time. So both from an absolute and from a relative point, the case for India is just getting weaker. On EM currencies
All the emerging market (EM) currencies are falling and that can be an excuse from the finance ministry but it does not help market participants, it is still falling. The reasons vary from day to day; earlier the rupee was falling because of current account deficit (CAD) issues which the market, the government and the Reserve Bank of India (RBI) were unable to fix. They were trying band aids and the market was just rubbishing all of those band aid patches and marking the rupee down and now the global problem is getting accentuated.
The way the real fell yesterday, the way the Asian currencies like the baht even the Turkish lira fell yesterday, all of that is suggesting that the global pressures are also mounting on EM currencies particularly countries with CAD.
It is like a double whammy for the rupee. First, you got a massive CAD, which you are unable to cure and second, the global pressures are mounting because of liquidity concerns on EM currencies. The rupee will head lower. It seems oversold but the way some of the other EM currencies have moved, it wouldn’t surprise one, if the rupee knocked on the doors of 65/USD today.

On Nifty levels
It is a difficult to predict the Nifty levels now because the market has already fallen such a lot that it will make the shorts a bit reluctant to be aggressive from here on.
If the market starts at 5250 then you are trying to go short after a 250 point fall below the 5500 support and these are levels that we have not seen during the course of last one year. Automatically that creates its own nervousness.
You are in uncharted territory in recent times and therefore, it takes courage to go short at these kind of levels. But the screen is giving no indication that the market is ready to bottom-out right now. In fact at this point these small rallies, the three day rally last week, half day rally yesterday are substituting for slightly more meaningful recovery phases in the market because right now the downtrend is very pronounced.

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There is momentum on the way down and there are different kinds of downtrends. Sometimes downtrends are not very momentum driven and in those phases you will see the market fall 500 points and then it will recover 300 points over a period of time before the next down leg resumes.
But when downtrends are momentum driven and trending very hard on the way down then some of these intraday pullbacks like yesterday actually substitute for phases of pullback and recovery.
We have entered a phase where the market will mark down sharply. It has already done that and to that extent a lot of distance has been covered but the way some of these individual stocks are moving make you feel that we are not quite near the end of the pain. You could stop falling for a bit but the market performance does not suggest that we are done with the pain.
I don't know where we stop, we could stop at 5200 and try to create a range for a few days, we could go all the way down to that 5000-5100 range before this carnage stops. It also depends on how the global situation and how the rupee moves up and that is the problem.
The rupee despite being over sold is not stopping its decline and this morning if it knocks again 65 or close to that, I don't think the stock market will find any reason to pullback.

On Bank Nifty
The way the banks moved yesterday suggest the most bearish price action I have ever seen there, more than days when the Bank Nifty will fall 2-3 percent. Yesterday there was some concrete news, the rally lasted half a day and I was perplexed to see Union Bank of India close down 6 percent. It started the day 8 percent higher and closed 6 percent lower, it is a public sector bank which arguably stands to benefit a lot from the held-to-maturity (HTM) move but during intraday, many other PSU banks like Dena Bank, ICICI Bank gave up all their gains. Yes Bank was up 5 percent but it was up 15 percent in the morning. So intraday from the morning high it lost 10 percent which is not positive price action at all. It suggests market assessment of the RBI moves yesterday.
A bit of juggling to protect the losses for the quarter for some of the PSU banks, some notion that may be monitory policy will not be ultra hawkish which is why the yields got a bit of respite. But by the end of the day it just presented a selling opportunity for a lot of global guys who were stuck in banks. They took it with both hands and starting noon they sold down many of their positions in many bank stocks. Banks are in a sticky place right now.
At sub 5 percent GDP growth banks never outperform or I haven't seen them outperform in such economic back drops. So, I don't think these small fixes, tactical move from the RBI will lead to any significant durable outperformance for the banks. The market did the right thing yesterday in selling them down after the initial rally.