Monday 5 December 2016

Sensex, Nifty will have a cautious start, Euro sinks to 20-month lows

The failure of Italy’s referendum on constitutional reform has taken its toll on the euro. Fear is that the verdict of the Italian population will give a boost to anti-Europe and nationalist forces. The outlook is a cautious start. The RBI meet later this week will keep interest-rate sensitives in focus. Healthy monsoons and the ensuing softening in food prices have created space for further policy action. Moreover, growing bank deposits and billions of unaccounted cash finding its way into the mainstream economy (due to demonetization) have paved the path for a lower interest rate regime. The consensus calls for a 25bps rate cut in the coming policy. The developments on GST, the impact of demonetization and the ongoing winter session of Parliament will keep investors nervous in the days ahead.

Asian markets opened flat to mildly negative as results from the Italian referendum indicated a loss for the present Italian Prime Minister and sent the Euro plunging to a fresh 20 month low. Italian Prime Minister Matteo Renzi resigned following a heavy defeat in Sunday’s constitutional referendum. This will see Italian and European banks under pressure initially, however a large part of this move seemed already discounted by market participants. The US$ and bonds continue to hog the limelight as money chases US assets in the form of stocks, ETF's and fixed income.

Tokyo's benchmark Nikkei 225 index opened down 0.41%, or 76.16 points, at 18,349.92. Other Asian indices, overall mixed trading was observed, including Hong Kong’s Hang Seng (up 0.18%), South Korea’s Kospi (flat) and Taiwan’s TWSE (down 0.14%).

Investors may react to November US non-farm payroll data released on Friday by the US Labour Department. Data showed US unemployment rate fell to a 9-year low of 4.6% in November. US non-farm payrolls rose by 178,000 jobs in November against a rise by 142,000 in October, department said. It seems that the December Fed rate hike is going to happen.

Nifty ended the week with sharp losses as disequilibrium caused by the recent demonetisation move kept seeing market react to monthly sales of fast moving consumer stocks and auto's. The recent rally till 8250 has seen a fast reversal with rupee weakness, slowdown in GDP and global uncertainty make sentiment brittle. For today we expect Nifty to pullback from these oversold levels as strong value buying emerges locally and from foreign investors.

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