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

Due to the rally in risk assets over the past few weeks, Dhiren Sarin says confidence is returning in global markets. With yields in debt crisis hit regions in Europe falling, Sarin notes that bearish positions have started to unwind and that people are becoming more positive on equities.

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. Also Read: Equities entering see-saw period of high volatility 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. _PAGEBREAK_ Q: What do you foresee for the Nifty from this 5400 level? A: The Nifty is looking quite resilient. Not just the Nifty, if you look at Brazil, the Bovespa, if you look at Turkey. So a lot of the emerging markets are actually doing quite well in the equity space now, and that is as a result of these Italian Spanish yields falling lower. 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. Q: Gold has been strong; in the Indian market it is hitting new highs. Is that headed higher? A: The leaders before gold are platinum and silver. These have been the bullish leaders in precious metal space, so we are watching those quite closely. Let’s look at silver before gold. There is some resistance around USD 30.50. If silver closes above that, that’s a bullish sign for precious metals in general, given that silver tends to outperform in these higher risk environments. For gold itself, we are looking at some big medium term levels. The 60 week average comes in around USD 1670 per ounce, and there are other kind of resistance levels all the way up to USD 17,00. We do want to see gold clear those levels before we can look at USD 1800-1850. Do bear in mind that getting into September gold is getting into a positive seasonal period as well. So it gives those levels just that much more importance. Q: Interesting to see the Shanghai Composite actually plumbing to new lows, even as the price of crude continues to hit new highs in the near term? A: Yes, what a contrast. The Shanghai Composite is just going its own direction. This is very unlike what we are seeing in the US markets. But then again, if you look at the trend for the last two-three years, that has not changed. The trend has been for solid Chinese equity underperformance and that continues to happen. So on one hand it’s a little bit surprising, but if you look at the grand picture, it is a consistent story that is still ongoing. The Shanghai Composite does look like it has more room to the downside. Q: Below what levels would you start to get worried that the rally for global equities is beginning to fizzle out? A: That’s a good question because we have been bullish for US equities for a few months now. We do think that these gains continue till year end. This is also a US presidential election year. But where we do start to get worried is if the S&P gets down to 1,365. If you look at the trend for the last two-three months, it is a very well defined upward channel, the base of which comes around 1,365. I think it gives a lot of room for the S&P to chop around without actually damaging this bullish potential.