Nifty Almost Flat on Muted Global Cues despite Renewed Hopes of Rate Cuts

The Indian stock market () made another lifetime high around 14653.35 early Wednesday on positive cues from Wall Street amid hopes & hypes of a big CARES Act 3.0 by incoming Biden admin. As per reports, despite the 11th hour ‘Trump chaos’ and Trump’s removal/impeachment move by the U.S. Congress, Biden will focus on a trillion-dollar COVID stimulus package (including $2000 stimulus checks/$465B CASH Act) in his first 100-days and may unveil the proposal as early as Thursday (14th January). But a big CARES Act 3.0 is not 100% assured as some Centrist/fiscal hawk Democrat Senators may oppose it beside the filibuster rule requirement of 60 vote majority; presently Democrats have an effective majority of only one tie-breaking vote (VP Harris) in the 50:50 Senate.

The Indian risk-trade was also supported by the launch/progress of COVID vaccinations/distribution process (EUA) and increasing flattening of the corona curve even before the actual vaccinations. But Dalal Street was also dragged by the concern of expensive valuation as TTM Nifty PE is hovering around 40, in line with Wall Street. And on late Wednesday, was also undercut by the concern of higher bond yield (borrowing costs), negative for equities and , affecting the .

Now from global to local, the Indian market was also boosted by hopes of additional fiscal stimulus in the forthcoming ‘dream’ budget (FY22) to be presented by the FM on 1st February. But the market was also concerned about any additional corona cess and tax on super-rich coupled with higher LTCGT (long term capital gain tax) in the budget to fund corona stimulus to some extent. On the positive side, the Modi admin may also reduce some additional taxes (ED/cess) on transportation fuel (petrol/diesel) to ease high inflation.

In India, the total tax component on transportation fuel is now more than 175%, imposed by both Federal and State governments and most probably the steepest in the G20. This is a legacy issue for collecting the easy indirect tax by the government as the direct personal income tax/GDP ratio is very low due to various structural and also habitual reasons.

On Tuesday, Nifty surged +0.54% on earnings optimism despite banks dragged on RBI concern about rising NPA/NPL. On late Tuesday, Dow Futures was also upbeat on hopes of CARES Act 3.0. On Wednesday, the Indian market was helped by PSU banks (rate cut hopes), automobiles, energy (higher oil price), infra, metal, FMCG, and media, while dragged by pharma. Nifty was boosted by Infosys Ltd (NS:) (hopes of an upbeat report card), ICICI Bank (NS:), SBI (NS:) (analyst & FPI optimism), M&M (NS:) (deleveraging optimism for its SK subsidiary and NA unit cost-cutting), ITC (NS:), Bharti Airtel (NS:) (hopes of FPI limit to 100% and analyst upgrade), Axis Bank (NS:), Adani (NS:) Ports, NTPC (NS:), Tata Steel (NS:), Tata Motors (NS:) (buzz of JV with Tesla/e-car in India and upbeat JLR sales from China) and Indusind Bank. But Nifty was also dragged by HDFC (NS:), RIL (renewed concern of Future retail deal), Bajaj Finance (NS:), HDFC Bank (NS:) (corrected after fresh lifetime high on FPI stake hike optimism), Kotak Bank, TCS (NS:), DRL, and Sun Pharma (NS:).

The Indian market sentiment was also supported by SC step to put a temporary stay on the implementation of three disputed farm laws and to form a committee to resolve the lingering farmer’s protest. The farmer’s protest near the Delhi border and agitations all over the country is causing significant losses to the economy. Although there is an unwillingness on the part of the farmers to accept the SC nominated committee members because of their alleged known (biased) stance in support of the contentious farm law, ultimately there will be reconciliation by both sides.

Both farmers and the government are now looking for a face-saving formula (exit) to relent from their respective hard stance. The government has now left the matter to SC nominated dispute resolution committee for possible modification or even cancellation of the three disputed farm laws. This will cause minimum damage to the Modi government’s pro-reform image among the angel investors in the worst-case scenario of repelling the farm laws. The government can shift all the blame/responsibility for farm law policy flip-flops to the SC committee.

Both Wall Street and Dalal Street may be at the last leg of its present rally, primarily on Biden optimism and Trump’s exit, started soon after the 3rd Nov U.S. election, when it became clear that Biden will win with thin margin and thus he may not be able to hike tax as per his election campaign agenda. Since the 3rd Nov election win, Wall Street as-well-as Dalal Street was in winning streaks almost all the weeks barring one or two minor blips primarily on hopes of Biden light (no tax hikes, no re-regulation, and modest stimulus package); a Goldilocks situation.

Now, after 11th hour Trump chaos and unprecedented Capitol Hill seize by diehard Trump supporters (instigated by Trump himself) and subsequent U.S. political storm including 2nd impeachment of Trump, the market may be finally relieved on 20th Jan, when Trump will leave the White House of his own (without being ‘escorted out’). So, there may be some risk-on sentiment left to cheer ‘Trumpexit’ (policy uncertainty) till around 20th January, the Biden inauguration day.

Thus the main focus is now on the incoming Biden admin, his policies, and his strategy to combat COVID & the corona recession. The incoming President Biden said Tuesday despite Trump’s impeachment process in the coming days, his priority will be combating COVID and a multitrillion-dollar stimulus package (CARES Act 3.0).

But the biggest challenge for Biden is now to pass his stimulus package in a bipartisan way as he will face opposition from not only his political opponent Republicans but also some of his own centrist Democrat Senators. The stimulus addicted Wall Street as-well-as Dalal Street may disappoint & correct any doubt about a big CARES Act 3.0. The market will also focus on Biden’s plan to fund CARERS Act 3.0; if there is any tax hike, it would be negative for equities, at least as a knee-jerk short term reaction.

Locally, all the focus will be now on earnings, guidance, and also the FY22 ‘dream’ budget as expectations are quite high. But, as Modi admin is a fiscal hawk, the government may not go for any further big-bang fiscal stimulus; there may be only some additional targeted stimulus along with structural reforms to improve India’s productivity in the long run, which is the ultimate.

Bottom line:

There may be some healthy corrections in both Wall Street as-well-as Dalal Street from last week of January after an unprecedented rally of almost +30% in the last four months.

Technical View (Nifty, , and USDINR-I):
NIFTY FUTURE
NIFTY FUTURE
NIFTY FUTURE (INDIA 50)


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