NIFTY REBOUNDS FROM 8154 SUPPORT; FED IN FOCUS

NIFTY REBOUNDS FROM 8154 SUPPORT; FED IN FOCUS

WORLD MARKETS                             

US indices gained 0.6%-1% ahead of key Fed decision where central bank is widely expected to lift the rate by 25 bps.

US 10-year treasury yielded 2.47%, a day after breaking above 2.5% for the first time since 2014. The two-year note yield rose to 1.16%. Dollar index was flat.

November read on the NFIB Small Business index came in at 98.4, above October's 94.9. Import prices fell 0.3% in November.

US crude rose 0.3% to $52.98 per barrel. Brent ended flat at $55.72.

European markets added 0.8%-2.5% with Italy on the top. November inflation in UK stood at 1.2% y-o-y, the fastest pace since October 2014. In Germany, inflation remained unchanged in November at 0.8% year-on-year, in line with the consensus. The employment rate in the euro area went up by 0.2% in the third quarter of 2016

AT HOME

After a marginally lower start, benchmark indices saw a sustained northward move through the session to end with gains of about two third of a percent. Sensex added 183 points to settle at 26698 while Nifty finished at 8222, up 51 points. BSE mid-cap and small-cap indices however lost 0.4% and 0.1% respectively. BSE Auto and Industrial indices gained 1% and 0.9% respectively, becoming top gainers among the sectoral indices while Realty and Basic Materal indices fell 1.1% each, becoming top losers.

FIIs net sold stocks and stock futures worth Rs 2181 cr and 477 cr respectively but net bought index futures worth Rs 236 cr. DIIs were net buyers to the tune of Rs 179 cr.

Rupee depreciated 12 paise to end at 67.54/$.

India’s retail inflation rate slowed sharply to 3.63% in November from October’s 4.2%, mirroring weak demand as households and companies, hit by demonetisation, have put off spending and investment. Core inflation however inched up to 4.98% from 4.9%.

OUTLOOK

Today morning, except a 0.7% higher Hang Seng, other Asian markets are trading little changed and SGX Nifty is suggesting a marginally higher start.

In yesterday's report we had mentioned that 8154, the bottom made on Monday, is the immediate support, a breach of which will confirm a "sell" on the hourly chart and would pave the way for further correction.

The benchmark, after touching a low of 8156, rebounded smartly to close at 8222, holding on to 8154 support and vindicating our view.

8154 continues to be immediate support to eye upon breach of which 8057, the bottom made in early December, would be the next downside target to eye.

8275, the top made on Friday, which also coincides with 34-DAM, is the immediate hurdle on the way up, upon crossover of which 8340, the 61.8% retracement level of the 8600-7916 fall, would be the next upside target.

Traders are advised to hold long positions with the stop-loss of 8154.

US Fed, at the end of its two day meeting today, is widely expected to raise the US funds rate by 25 basis points from 0.5% to 0.75%. It will be the first increase of 2016 and only the second in 10 years. This will be driven by additional progress toward its dual objectives -- full employment and inflation converging to 2%.

It would be no surprise if a 25 bps hike comes and markets have already discounted it. What markets are interested in is the future pace of hike.

However, that again will depend on how both the above factors, employment and inflation, pan out in the future and here President elect Trump comes into the picture. Trump, in his election campaign, has promised tax cuts and government spending, which is bound to increase deficit and inflation in future.

So, to be on the safer side, Fed would wait for the details of the Trump administration’s economic policies before moving toward significant alterations of a forward guidance that remains heavily “data dependent.”

At the moment, the market does not expect another rate hike until June. But there are growing expectations that higher interest rates may be needed, perhaps sooner to tackle higher inflation, if that happens to be the scenario going forward. Bond yields and the US dollar index have risen in the wake of the election in part due to expectations of a more active Fed.