"The risk-on rally has run into a resistance. So unless we close above the 10,640 mark, hold your horses. Now that we know the views of Powell expect him to repeat the same at his Senate Banking Committee testimony," says VK Sharma, Head PCG & Capital Market Strategy, HDFC Securities.
By VK Sharma
HDFC Securities
Jerome H. Powell, the newly minted Chairman of the US Federal Reserve came out as a clear hawk in his first testimony before the Congress on Tuesday.
Powell said that his expectations for domestic economic growth have increased since the beginning of the year, citing the passage of the USD 1.5 trillion tax cut, lifting of the debt ceiling and stronger global growth.
Our take on his testimony
1. Clearly hawkish
His talons became visible when he answered a Democrat’s question as to what would cause the Federal Reserve to hike more than three times that the central bank’s guidance currently calls for?
Powell said that each of the FOMC members would take the developments since the December meeting into account and write down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.
2. Personal views take front seat
When the Fed Chair testifies, he speaks for the Federal Reserve, not for himself. But, Powell gave his personal views many times. This is a big break from the past like Janet Yellen, Ben Bernanke or Alan Greenspan.
3. Why is he doing so?
By voicing personal views publicly and that too several times, he is sending a message to the other voting members of the FOMC to align their views more to his.
4. Deviation from the Policy
The Fed Chairman has not stuck to the semi-annual monetary policy communique to the Congress and has sounded more hawkish than assumed. This has roiled the markets in the US and will do the damage here as well.
5. Chance to make amends
Powell has another chance tomorrow, to make amends if Tuesday's testimony to the Congress was a faux pas. On Thursday he is scheduled to testify before the Senate Banking Committee.
Our markets:
On Tuesday, ahead of the testimony, we had asked traders to protect their profits, as positives of the policy were already discounted, whereas if the testimony did not go as expected, these profits could vanish.
How our market is technically placed?
The Nifty slipped after reaching 10,631 in the morning and closed at 10,554. The Nifty after making a series of higher lows has also made a higher high on Tuesday. Despite the lower close, this jinx has been broken.
The Nifty will open lower in the morning and close the upward gap - between 10,499 and 10,520 created on the way up on February 26. The next meaningful support is more than 100 points further lower at 10,390.
Current view:
The risk-on rally has run into a resistance. So unless we close above the 10,640 mark, hold your horses. Now that we know the views of Powell expect him to repeat the same at his Senate Banking Committee testimony.
If he changes tack... it will be great for a bounce back. But if does not, no issues. It won’t result in renewed weakness. Fundamentally speaking, the Fed will have to tow the GDP growth. If the economy grows at 3 percent and the inflation even at 2.5 percent it’s not an issue.
So we get back to Fed watching again. The solace is that despite a clear hawkish stance the 10-years bond yields have not crossed 2.9 percent mark, not to talk of 2.96 percent earlier this month.
Domestically, the Bank Nifty is the weakest and only when it makes higher bottoms first and then higher highs, should we consider that it is out of the woods.
Life Insurance continues to be the best bet where the demographics and the current abysmally low penetration of 2.7 percent will stir up a heady concoction.
Disclaimer: The author is Head PCG & Capital Market Strategy, HDFC Securities. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
