Market to be volatile as investors digest RBI guv's resignation, state election results

After exit polls showed a close contest between BJP and Congress in state elections, the market on Monday saw sharp cuts. The Sensex fell more than 700 points and the Nifty50 closed below the psychological 10,500-mark in addition to 1.7 percent fall seen last week.

The exit polls indicate that there could be mixed results on December 11.

So the market reaction will completely depend on the outcome of the elections in the three crucial states of Chhattisgarh, Madhya Pradesh and Rajasthan.

Various exit polls released on December 7 suggest that the BJP (1) will likely lose Rajasthan to the INC (Congress) and (2) may lose or win Chhattisgarh and Madhya Pradesh by slender margins; the exit polls show mixed outcomes in the latter two states, Kotak Institutional Equities said.

The research house said if the BJP wins Chhattisgarh, Madhya Pradesh and Rajasthan (3-0) or Chhattisgarh and Madhya Pradesh (2-1) then there could be a moderate market rally, subject to global and local developments with the market ascribing a higher probability of the BJP winning the national elections in April-May 2019.

However, if BJP loses all the three states (0-3) or loses Madhya Pradesh and Rajasthan (1-2) then there may be a sharp market correction as the market will likely take a dim view of the BJP's prospects in the next national elections given the large contribution of these three states to the BJP's 2014 win, according to Kotak.

Exit polls further indicated that TRS is likely to keep Telangana and Mizoram is seen going to Mizo National Front.

Exit poll predictions for Madhya Pradesh, Rajasthan, Chhattisgarh

Another key development that markets will react to is the resignation of RBI governor. His resignation comes after months of strain in relations between the central bank and the government. The market is expected to fall sharply on the back of this news.

In addition, Kotak said oil and China-US trade issues would act as overhangs for the market with (1) OPEC & its allies announcing production cuts of 1.2 million barrels per day on December 7, and (2) Canada arresting the CFO of Huawei on the request of the US.

The research house expects global oil markets to become more balanced over the next few months following OPEC and its allies' decision to cut oil production from January 1, 2019 for six months.

But it noted, continued large uncertainty in crude oil markets and crude oil prices in 2019 given the low clarity on the extent of Iran’s oil production once the exemptions granted by the US to eight oil importing countries from Iran expire in early May 2019. Iran is probably exporting around 1 million barrels per day of oil currently.

According to Kotak, the recent arrest of the CFO of Huawei may impede the efforts being made by China and US to find amicable solutions for their longstanding trade disputes over the next few weeks.

The leaders of China and the US formally decided to suspend trade hostilities on the sidelines of the G20 meeting on December 1, 2018. However, the US has only deferred its decision to increase import duty on $200 billion of Chinese imports to March 1, 2019 from January 1, 2019.

"Any failure of the two countries to arrive at acceptable solutions to perceived and actual issues will further escalate trade hostilities," Kotak said.