The Federal Open Markets Committee (FOMC) meeting released a dovish policy statement which ties in with the market expectations of "bad news is good news". The Fed expects US growth to moderate and it is cutting estimates of both America's GDP growth and of its inflation expectations. As a result, it is less likely to raise the dollar policy rate, the so-called Fed Fund rate- several times in 2016. Instead of earlier expectations of three or four hikes, the market is now discounting only two hikes of minimal dimensions in 2016.
The FOMC issues expectations for the next three years in terms of US GDP, employment rate, US inflation and for the fund rate (that it will impose itself). The growth rate is slightly lower for 2016 and 2017, while it remains unchanged for 2018. The US employment expectations have not changed. The inflation expectations are lower and the expected Fed Funds rates are lower. The negative implications of slower growth and lower inflation are being ignored for now by a market dominated by traders who are relieved that liquidity will see less constraints in 2016.
The Fed meeting follows on the heels of two key central bank meetings. First, the European Central Bank indicated that it will not implement any further rates cuts (one key policy rate is already negative) but it would continue with its bond-buying QE programme. Then the Bank of Japan (BoJ) decided it would not impart further stimulus either through an expanded QE programme or via policy rate cuts (the BoJ also has a negative policy rate). In both cases, markets responded negatively.
The immediate impact of the FOMC statement has been "risk-on" or bullish for most currencies and for most equity markets. The dollar has fallen sharply against every major currency, including the rupee. This has both its positives and negatives.
On the positive side, it seems to have sustained the bull run that started on Budget-day. The market was running into resistance above Nifty 7,500 levels. There are now chances that the rally will be sustained until the Reserve Bank of India (RBI) policy meet on April 5, at least.
In technical terms, a positional trader using trend following methods would have gone long after the Budget and such a trader would continue to be long in the Nifty futures, with a trailing stop-loss at say, two per cent (150 points) or so below current levels. Target expectations are very difficult to conceptualise given the breakneck pace of trading in this zone. But, if the uptrend does sustain, it could test the 200-Day Moving Average (200-DMA), which is the zone of 7,900.
The optimists would expect RBI to come up with a big rate cut, or a small rate cut and a strongly positive statement on April 5. If that happens, the market could climb above the 200-DMA, indicating that the market is going bullish again. There is a good chance that RBI will oblige with a rate cut. The IIP (negative for January 2016) indicates weaker manufacturing and inflation, as indicated by both consumer price index (5.18 per cent in February) and Wholesale Price (-0.9 in February) is down.
The financials, and rate-sensitive stocks, are likely to outperform other stocks while the market waits for RBI policy. Exporters including both information technology stocks and Pharmaceutical stocks could underperform until the dollar-rupee relationship settles down. The first surge of the rupee against the dollar will probably be over soon. But, if FII buying continues or increases in quantity, the rupee could gain steadily. And yes, an incipient bull run in gold looks to be sustainable if the dollar stays weak.
The author is a technical and equity analyst
