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Chart-Watchers January 2020

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Chart-Watchers January 2020 Chart-Watchers January 2020 Euphoria Phase Kicks In Currency Bond Commodity Equity Sagar Doshi Ankit Narshana Abhishek Chinchalkar Research Analyst Research Analyst Research Analyst 91 (22) 4088 5757 Ext.6226 +91 (22) 4040 7596 +91 (22) 6141 2725 [email protected] [email protected] [email protected] Date: 9th January 2020 Edelweiss Professional Investor Research ChartWatchers – “Part 2: Euphoria Phase Kicks in” Sagar Doshi Research Analyst Part 1: Beginning of the Final Crest before the Tide Changes (September 2019) 91 (22) 4088 5757 Ext.6226 Part 2: Euphoria Phase Kicks in (January 2020) [email protected] Part 3: Final Call (April 2020) Ankit Narshana In our previous ChartWatchers, we had shown why global markets rally between the time Research Analyst +91 (22) 4040 7596 US yield curve inverts and recession begins. Based on this, we had highlighted that world [email protected] markets could rally until 1HCY20. Abhishek Chinchalkar In line with our expectations, global markets have rallied sharply since 4QCY19. In fact, all Research Analyst +91 (22) 6141 2725 the 4 asset classes including bonds, currency, commodity and equity have started moving [email protected] higher. All asset classes moving higher is a classic sign of Euphoria, which we believe will continue in 1HCY20. The US yield curve has now shifted from inversion to steepening. Looking at the history, when an inversion is soon followed by steepening, it is not a good sign as it is usually followed by a recession. Based on our analysis of the historic yield curve and the subsequent recessions, we still foresee the possibility of the US economy falling into a recession in 2HCY20. Our time cycle analysis and central bank policy actions indicate that EMs are likely to outperform DMs in the coming few months, which is a typical characteristic of a mature bull market. Commodities have been underperforming equities for decades. In fact, the ratio of commodities to equities is at a record low. With the dollar showing signs of softening as central banks turn increasingly accommodative, we expect commodities to be nearing the end of their bear cycle. As we are in the euphoric cycle, our analysis suggests that midcaps in India will outperform large cap by minimum 25%. Looking forward, we expect Nifty to extend gains in 1HCY20. We foresee the index rallying towards 13500 mark and as such, recommend creating longs above 12250, while keeping a stop loss of 11800. Sectors which we like are Metal, Cement, Pharma, and Midcap. FOCUS STOCKS FOR TRADING: Long ideas – Ramco Cement, Vedanta, Bharat Forge Short ideas – Titan 1 Edelweiss Professional Investor Research – Trading Desk Date: 1st August , 2017 EUPHORIA PHASE KICKS IN AS ALL ASSET CLASSES RALLY Equities, commodities, bonds, and currencies have all started to rally, indicating we have entered 3rd phase of business cycle, which is the euphoria phase Source: Bloomberg, Edelweiss Professional Investor Research The above is an equal-weighted chart of all the four asset classes (equity, commodity, bond, and currency) from a global perspective. It can be seen that this index has given a breakout, indicating that the market is now entering a euphoria phase. On the previous occasions as well, during 2000 and 2008, the index had entered similar euphoria phase before falling steeply a few months down the line. The charts below show the performance of these individual asset classes. Individual charts of the asset classes, each showing bullish breakouts Source: Bloomberg, Edelweiss Professional Investor Research 2 Edelweiss Professional Investor Research – Trading Desk Notice from the above charts that each of these indices has started moving higher simultaneously, an indication that we are now entering the Euphoria phase. In the coming sections, we will talk about factors that have contributed to such euphoria as well as state our view as to why the current up trend is likely to extend for the next 5-6 months, before an eventual peak in the market. WORLD MARKETS SURGE AS GLOBAL RATE CYCLE TURNS SOUTH Fed begins cutting rates for the first time in nearly a decade Fed Balance Sheet expansion and interest rate cut lift S&P 500 to a record high Source: Bloomberg, Edelweiss Professional Investor Research Over the course of 2019, not only did the Fed cut rates thrice but it also started expanding its balance sheet for the first time in over 5 years. This combination of rate cuts and balance sheet expansion has caused the S&P 500 index to rise to historic highs, while also breaking above a trend line resistance, signaling at gains in the coming weeks. Increased liquidity because of the Fed’s actions should offer equities support in the weeks ahead. ECB continues its ultra-accommodative stance as growth remains fragile Euro Stoxx index breaks 20-year secular resistance line, boosted by an accommodative ECB stance Source: Bloomberg, Edelweiss Professional Investor Research 3 Edelweiss Professional Investor Research – Trading Desk While the ECB has been on a pause mode as far as rates are concerned, it has nevertheless been expanding its balance sheet. With inflation and growth expected to remain subdued in the coming months, the ECB is likely to maintain its accommodative stance and continue the ongoing €20b monthly bond purchases for the foreseeable future. Given this and considering that Europe’s headline markets have given a long-term breakout, we expect European equities to maintain bullish momentum in the weeks ahead. BOJ too remains accommodative amidst struggling Japanese economy Nikkei 225 continues to gain upside momentum, partly underpinned by BoJ’s liquidity push Source: Bloomberg, Edelweiss Professional Investor Research Not only the Fed and the ECB but even the BOJ has been expanding its balance sheet at an unprecedented pace over the years to revive growth and inflation in Japan. This has now been accompanied by a breakout in the Japanese markets. Accommodative monetary policy of the BOJ along with the possibility of government spending in 2020 to partially mitigate the impact of sales tax hikes is likely to keep the Japanese markets supported in the coming weeks. 4 Edelweiss Professional Investor Research – Trading Desk Central banks around the world turning more dovish Country Policy Rate 3m Chg (BPS) 6m Chg (BPS) 12m Chg (BPS) Interest Rate Trend (12m) Argentina 52.00% -1500 -1500 -800 Cut Australia 0.75% -25 -75 -75 Cut Bahrain 4.00% -25 -50 -25 Cut Brazil 5.00% -150 -150 -150 Cut Chile 1.75% -75 -125 -100 Cut Czech Rep. 2.00% 0 0 25 Neutral Egypt 14.25% -250 -250 -350 Cut Hong Kong 2.26% -24 -49 -24 Cut Iceland 3.00% -75 -150 -125 Cut Central banks continue to India 5.15% -60 -85 -135 Cut be in an accommodative Indonesia 5.00% -75 -100 -75 Cut stance, boosting global Israel 0.25% 0 0 15 Neutral liquidity Malaysia 3.00% 0 0 -25 Neutral Mexico 7.50% -50 -75 -50 Cut New Zealand 1.00% 0 -50 -75 Cut Norway 1.50% 25 50 75 Hike Oman 2.22% -44.5 -71.6 -57.7 Cut Pakistan 13.75% 250 325 575 Hike Peru 2.25% -25 -50 -50 Cut Philippines 4.00% -25 -50 -50 Cut Qatar 2.00% -50 -50 -50 Cut Russia 6.50% -100 -125 -100 Cut Saudi Arabia 2.25% -50 -75 -50 Cut Singapore 0.08% 5 4 5 Hike South Africa 6.50% 0 -25 0 Neutral South Korea 1.25% -50 -50 -25 Cut Sweden -0.25% 0 0 25 Neutral Thailand 1.25% -50 -50 -25 Cut Turkey 14.00% -1000 -1000 -1000 Cut U.A.E. 2.00% -50 -75 -50 Cut Ukraine 15.50% -150 -200 -250 Cut U.S. 1.75% -50 -75 -50 Cut Venezuela 20.12% -338 -66 -93 Cut Source: Bloomberg, Edelweiss Professional Investor Research 2019 has been a year that has been characterized by most global central banks easing their monetary policies. The primary objective was to revive growth and, more importantly, to prevent the adverse impact of global trade uncertainties. Notice in the table above that the number of red bars (rate cuts) clearly outweighs the number of green bars (rate hikes). This trend is likely to continue in the foreseeable future, which we expect to underpin risk assets, primarily equities. 5 Edelweiss Professional Investor Research – Trading Desk Fed Balance Sheet expansion and US, world market capitalization are closely linked Expansion in Fed B/s is leading to an expansion in US & World market capitalization as well Source: Bloomberg, Edelweiss Professional Investor Research Note above that the Fed B/s expansion and the US/world market capitalization are closely linked. Observe that the 135% Fed B/s expansion from 2009 to 2014 was accompanied by the US and world market cap increasing by a similar percentage during this period. Now, a 10+% increase in the Fed’s B/s in 2019 has again caused market cap to gain 10+%. This chart highlights that liquidity has played a key role in driving US markets higher. We expect the current rally to continue for as long as the Fed’s expansionary policies remain in place. Once this support from the Fed ends, the US markets are likely to attract selling pressure. Despite the recent yield curve steepening, recession risks still prevail 6 Edelweiss Professional Investor Research – Trading Desk Looking at history, the odds of US slipping into recession in 2H20 still prevail Source: Bloomberg, Edelweiss Professional Investor Research After having inverted in the 3QCY19, the US yield curve has since steepened quite a bit. History shows that the prior three recessions of 1990, 2000, and 2008 were each preceded by a yield curve inversion.
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