US FED meeting was one of the major events that majority have been tracking.
The reason was obvious that an increase in interest rates by FED would have resulted into negative repercussions across global equity markets. However, we beg to differ on this and believe that the government or central bank actions are lagging indicators to equity markets. After the event on 17th September 2015, US major index – DJIA entered into red territory on the same very day even when FED did not hike interest rates!
Now below is the excerpt from our daily research report “The Financial Waves short term update”published on 16th September morning.
Nifty had a subdued opening and prices traded in red throughout the day. There was no momentum even on the downside and majority of the stocks are also stuck in a range. It seems most of the Global markets and not only India are waiting for some trigger probably US Fed meeting which is due this week. We are not waiting to see what FED announces but the reaction of global equity markets to the FED decision is going to be important. Looking at the sharp selloff in last week of August even in DJIA – US there is high likelihood that the status quo will be maintained and there is not going to be any rate hike. An uptick on this news will be in sync whereas a sharp selloff will result into news that the economy is still not out of the woods and so FED did not hike the rates. Case in point: News will change based on the market reaction post the event! For us a negative close on a positive outcome will be bearish and vice-versa.
Will RBI cut interest rates in its policy meeting on 29th September 2015?
Looking at the performance of Indian equity markets over past few weeks and given the sharp selloff on 24thAugust until first week of September, we think there is very high likelihood for RBI to cut repo rates by atleast 25 bps! We will not be surprised to see if RBI tweaks other key rates as well to increase the supply of money in economy. As mentioned earlier Equity markets are leading government actions and central bank actions are lagging indicators.
Nifty daily chart:
The above chart shows that the cut in interest rates by RBI in Feb 2015 created a medium term top on same day at 9119 levels. Later the rate cut was done in June and markets continued to move lower even after that. So irrespective of the RBI cut in interest rates equity markets continued to drift lower.
We strongly think that the underperformance in equity markets will put pressure on RBI to cut interest rates in upcoming meeting on 29th September but we have our doubts if Nifty will move higher after the cut. Recent past shows markets reacting lower on rate cuts. Let us see if history repeats again this time!
We do not rely only on one aspect of history to base our decisions but there are lot of other indicators – Elliott wave pattern, Indicators, Moving averages which are slowly getting aligned again! We will highlight in our daily research report when is the time to pull the trigger…