February 25, 2011 Global Markets GroupMoney Market & Government Bonds:Call money rate was steady above 6.75% at fag end of reporting fortnight ending 25/2 with draw down from RBI at Rs.70K Crores. Term money rates inched up with flat 312M rate curve at 10.05-10.15%. Bond market unwound its recent gains for weak close at 8.07% (7Y) and 8.14% (12Y).
It is bad time for the money market with global cues adding to the woes of domestic worries. While there is rally in Bond market in most economies (considered as safehaven asset), India is bit different driven mainly by concerns through trade gap. A combination of inflation worries and exchange rate weakness is not considered good for interest rates/domestic liquidity. We may need to live with high inflation number for extended period of time tracking high crude oil (and commodity prices); pressure on government finances and the resultant pressure on the market will keep interest rates at elevated levels; widening trade gap and resultant pressure on exchange rate may lead to maintaining higher interest rate differential etc. All these factors lead to build-up of more doses of monetary actions than what was considered necessary. The bear grip is expected to stay through the later part of 2011. Taking all the cues from domestic and global forces, it would now be in order to stay tuned to short term range play within 7.60-7.85% (1Y); 8.0-8.25% (5Y) and 8.10-8.35% (10-12Y). The near term outlook is also not good on higher demand for funds on shift into new reporting fortnight starting 26/2; tax outflows in mid March and higher demand for funds ahead of FY end. Call money rate will be back into 6.85-7.0%; draw down from RBI at Rs.1 Trillion and prepare for inversion in 3-12M rate curve at 10.25-10.10%. There is also risk of overshoot in call money rate into 7.0-7.25% in March as Banks pull-back money from Mutual Funds which is providing a yield of over 8%; thus the risk of higher yield in call money asset. Bond market will stay under pressure with gains below 8.05% (7Y) and 8.10% (12Y) will be difficult to sustain attracted by shift of investments from longer end to shorter end. In the given economic/market conditions, it is prudent to keep the duration of the investment book short for higher yield pick up on shift into FY12. For now, let us watch 7Y bond yield at 8.05-8.10% and 12Y at 8.12-8.20% with immediate bias for gradual weakness into higher end. The trade recommendation therefore is to sell 7Y 7.99% 2017 at 8.05-8.03% (with stop at 8.01%) and 12Y
8.13% 2022 at 8.10-8.08% (with stop at 8.06%) for immediate objective at 8.12% and 8.20% respectively. There may not be any pleasant surprise elements in the budget. The priority will be on inflation control and resultant measures will keep the fiscal deficit under pressure leading to higher dependence on market borrowing. This may trigger further weakness in bond market with 12Y bond yield target at 8.25%.Overnight Index Swaps (OIS):
5Y OIS rate hit the set immediate objective at 8.15% before close at 8.12% while 1Y rate was up at 7.51% before close at 7.49% with 1X5 spread up at 0.63%. The bearish mode in the money market with build-up of more than 0.5% hike in policy rates will shift OIS rates into higher range play in the short term on shift into FY12. We may need to stay prepared for 1Y OIS rate moving into 7.50-7.75% and 5Y into 8.25-8.50% by June 2011. For now, let us watch 1Y rate at 7.45-7.60% and 5Y rate at 8.10-8.25% with immediate bias for gradual move into the higher end. The trade recommendation therefore is to stay paid in 1Y at 7.47-7.42% (with stop at 7.40%) and in 5Y at 8.11-8.06% (with stop at 8.04%) for next objective at 7.60% and 8.25% respectively.
USD/INR SPOT:Rupee has traded end-to-end of set range of 45.15-45.50 with low of 45.13 and high of 45.4950 before close at 45.48. The initial gains in rupee halted at the first buy set up at 45.15-45.12 and also gave good opportunity for importers to buy March 2011 dollars at set buy zone of 45.50-45.45 (low of 45.42) before sharp rally into 45.77. 12M dollar traded end-to-end of 47.80-48.30 range for sharp rally from low of 47.87 to 48.26. In the meanwhile domestic stock market collapsed to meet the immediate term objective at 17550/5250 while EUR/USD rallied from 1.3650 to 1.3825; this move prevented sharp weakness into 45.65-45.80. Over all, rupee moves stayed on expected lines to stay within the set range of 45.00-45.50 with low of 44.98 and high of 45.4950; thus giving opportunity for importers to hedge 1-2M payables on move below 45.15.
What next? The weak fundamental factors have come into focus in the absence of support from capital account inflows and shift of one-way supply driven mode in the forward segment into a possible demand driven mode. Capital inflows have dried up with risk of reverse flow on FII pull out. The pressure on trade gap will be more visible tracking higher crude and commodity prices. The change of sentiment would reverse the direction in the forward segment with importers leading import hedge while exporters
shift into wait-and-watch mode. The weak stock market and possible reversal in EUR/USD from 1.3850 back into 1.3650 would add to rupee woes. Taking all these factors, it would be in order to watch range of 45.35-45.85 with immediate resistances at 45.63-45.65 and 45.73-45.78. For today, let us watch rupee at 45.40-45.75 and track EUR/USD at 1.3650-1.3850 and SENSEX at 17300-17800. Given the weak stock market (for extended weakness to post a new intra-2011 low) and correction in EUR/USD from above 1.3850 back into 1.3650-1.3550, rupee should test/break immediate resistance at 45.63-45.65 for closer look at 45.73-45.78. The trade recommendation is to buy in two lots at 45.43-45.40 and 45.35-45.32 (with stop at 45.27) for immediate target at 45.75. Let us watch March 2011 dollars at 45.65-46.00 and 12M forward dollars at 48.15-48.50. The risk of test/break of higher end is valid; hence importers to stay hedged without taking the market for granted. Given the dominance of negative forces in play, there exists risk of extended rupee weakness into 2011 high of 46.01.
USD/INR Premium:Premium was touch higher at shorter end with 3M up at 6.8% (on pressure on shorter end of interest rate curve) while 12M stayed steady at 6.05% (unable to enjoy the benefit of exchange rate play tracking rupee move from 45.00 to 45.50); thus largely guided by interest rate play. There is more clarity on the immediate direction with interest rate play firmly exerting upward pressure and change of sentiment shifting the lead play into importers while exporters stay aside for higher spot rate. In the given bearish mode, it would be in order to track 3M at 6.75-7.0% (S/May at 76.5-79.5); 6M at 6.35-6.50% (S/Aug at 145-148.25) and 12M at 6.05-6.20% (S/Feb at 275.25282) with firm bias for test/break of higher end in due course. The trade recommendation is to pay 12M at 6.05-5.95% (S/Feb at 275.25-270.75) for immediate objective at 6.20-6.25% (282-284.5).Stock Market:
Stock market quickly fell into the set target at 17550-17600 (5250-5265) to post low of 17559/5242 before close at 17632/5262 losing more than 3.6% in two trading days. The end-to-end move within the set near term range of 17500-18700 (5250-5600) was rather swift for fall from 18690/5599 (seen on 18/2) to low of 17559/5242 (seen on 24/2). The sharp increase in two-way volatility would mean that investors should stay dynamic and it is not the time to get wedded into strategic investments.
Now what? It has been volatile since shift into 2011. The off-shore interest in domestic stock market is gone on improved sentiment in western economies with trigger of interest rate reversal earlier than expectation. The domestic cues have worsen on increased pressure on inflation; growth; interest rates; exchange rate; asset prices etc. All these factors would mean that the system will lose its capacity to exert pressure on corporate margins/earnings. In the absence of bull rally, time decay factor will kick in to shift investments from zero yield equity assets to high yield fixed income. There will be pressure to test/break 2011 low of 17295/5177. For today, let us watch 17250-17750 (5150-5300) with immediate bias for test of lower end. It would be prudent to unwind "shorts" at 17350/5180. Over all, the market has traded the initial buy set up at 17300-17350 (5200-5185) for quick rally into sell set up at 18500-18650 (55355550) and back again to starting block. The trade recommendation is to sell in two lots at 17700-17750 (5285-5300) and 17800-17850 (5315-5330) with stop above 17900/5350 for immediate objective at 17300-17350 (5165-5180).
It is bad time for the money market with global cues adding to the woes of domestic worries. While there is rally in Bond market in most economies (considered as safehaven asset), India is bit different driven mainly by concerns through trade gap. A combination of inflation worries and exchange rate weakness is not considered good for interest rates/domestic liquidity. We may need to live with high inflation number for extended period of time tracking high crude oil (and commodity prices); pressure on government finances and the resultant pressure on the market will keep interest rates at elevated levels; widening trade gap and resultant pressure on exchange rate may lead to maintaining higher interest rate differential etc. All these factors lead to build-up of more doses of monetary actions than what was considered necessary. The bear grip is expected to stay through the later part of 2011. Taking all the cues from domestic and global forces, it would now be in order to stay tuned to short term range play within 7.60-7.85% (1Y); 8.0-8.25% (5Y) and 8.10-8.35% (10-12Y). The near term outlook is also not good on higher demand for funds on shift into new reporting fortnight starting 26/2; tax outflows in mid March and higher demand for funds ahead of FY end. Call money rate will be back into 6.85-7.0%; draw down from RBI at Rs.1 Trillion and prepare for inversion in 3-12M rate curve at 10.25-10.10%. There is also risk of overshoot in call money rate into 7.0-7.25% in March as Banks pull-back money from Mutual Funds which is providing a yield of over 8%; thus the risk of higher yield in call money asset. Bond market will stay under pressure with gains below 8.05% (7Y) and 8.10% (12Y) will be difficult to sustain attracted by shift of investments from longer end to shorter end. In the given economic/market conditions, it is prudent to keep the duration of the investment book short for higher yield pick up on shift into FY12. For now, let us watch 7Y bond yield at 8.05-8.10% and 12Y at 8.12-8.20% with immediate bias for gradual weakness into higher end. The trade recommendation therefore is to sell 7Y 7.99% 2017 at 8.05-8.03% (with stop at 8.01%) and 12Y
8.13% 2022 at 8.10-8.08% (with stop at 8.06%) for immediate objective at 8.12% and 8.20% respectively. There may not be any pleasant surprise elements in the budget. The priority will be on inflation control and resultant measures will keep the fiscal deficit under pressure leading to higher dependence on market borrowing. This may trigger further weakness in bond market with 12Y bond yield target at 8.25%.Overnight Index Swaps (OIS):
5Y OIS rate hit the set immediate objective at 8.15% before close at 8.12% while 1Y rate was up at 7.51% before close at 7.49% with 1X5 spread up at 0.63%. The bearish mode in the money market with build-up of more than 0.5% hike in policy rates will shift OIS rates into higher range play in the short term on shift into FY12. We may need to stay prepared for 1Y OIS rate moving into 7.50-7.75% and 5Y into 8.25-8.50% by June 2011. For now, let us watch 1Y rate at 7.45-7.60% and 5Y rate at 8.10-8.25% with immediate bias for gradual move into the higher end. The trade recommendation therefore is to stay paid in 1Y at 7.47-7.42% (with stop at 7.40%) and in 5Y at 8.11-8.06% (with stop at 8.04%) for next objective at 7.60% and 8.25% respectively.
USD/INR SPOT:Rupee has traded end-to-end of set range of 45.15-45.50 with low of 45.13 and high of 45.4950 before close at 45.48. The initial gains in rupee halted at the first buy set up at 45.15-45.12 and also gave good opportunity for importers to buy March 2011 dollars at set buy zone of 45.50-45.45 (low of 45.42) before sharp rally into 45.77. 12M dollar traded end-to-end of 47.80-48.30 range for sharp rally from low of 47.87 to 48.26. In the meanwhile domestic stock market collapsed to meet the immediate term objective at 17550/5250 while EUR/USD rallied from 1.3650 to 1.3825; this move prevented sharp weakness into 45.65-45.80. Over all, rupee moves stayed on expected lines to stay within the set range of 45.00-45.50 with low of 44.98 and high of 45.4950; thus giving opportunity for importers to hedge 1-2M payables on move below 45.15.
What next? The weak fundamental factors have come into focus in the absence of support from capital account inflows and shift of one-way supply driven mode in the forward segment into a possible demand driven mode. Capital inflows have dried up with risk of reverse flow on FII pull out. The pressure on trade gap will be more visible tracking higher crude and commodity prices. The change of sentiment would reverse the direction in the forward segment with importers leading import hedge while exporters
shift into wait-and-watch mode. The weak stock market and possible reversal in EUR/USD from 1.3850 back into 1.3650 would add to rupee woes. Taking all these factors, it would be in order to watch range of 45.35-45.85 with immediate resistances at 45.63-45.65 and 45.73-45.78. For today, let us watch rupee at 45.40-45.75 and track EUR/USD at 1.3650-1.3850 and SENSEX at 17300-17800. Given the weak stock market (for extended weakness to post a new intra-2011 low) and correction in EUR/USD from above 1.3850 back into 1.3650-1.3550, rupee should test/break immediate resistance at 45.63-45.65 for closer look at 45.73-45.78. The trade recommendation is to buy in two lots at 45.43-45.40 and 45.35-45.32 (with stop at 45.27) for immediate target at 45.75. Let us watch March 2011 dollars at 45.65-46.00 and 12M forward dollars at 48.15-48.50. The risk of test/break of higher end is valid; hence importers to stay hedged without taking the market for granted. Given the dominance of negative forces in play, there exists risk of extended rupee weakness into 2011 high of 46.01.
USD/INR Premium:Premium was touch higher at shorter end with 3M up at 6.8% (on pressure on shorter end of interest rate curve) while 12M stayed steady at 6.05% (unable to enjoy the benefit of exchange rate play tracking rupee move from 45.00 to 45.50); thus largely guided by interest rate play. There is more clarity on the immediate direction with interest rate play firmly exerting upward pressure and change of sentiment shifting the lead play into importers while exporters stay aside for higher spot rate. In the given bearish mode, it would be in order to track 3M at 6.75-7.0% (S/May at 76.5-79.5); 6M at 6.35-6.50% (S/Aug at 145-148.25) and 12M at 6.05-6.20% (S/Feb at 275.25282) with firm bias for test/break of higher end in due course. The trade recommendation is to pay 12M at 6.05-5.95% (S/Feb at 275.25-270.75) for immediate objective at 6.20-6.25% (282-284.5).Stock Market:
Stock market quickly fell into the set target at 17550-17600 (5250-5265) to post low of 17559/5242 before close at 17632/5262 losing more than 3.6% in two trading days. The end-to-end move within the set near term range of 17500-18700 (5250-5600) was rather swift for fall from 18690/5599 (seen on 18/2) to low of 17559/5242 (seen on 24/2). The sharp increase in two-way volatility would mean that investors should stay dynamic and it is not the time to get wedded into strategic investments.
Now what? It has been volatile since shift into 2011. The off-shore interest in domestic stock market is gone on improved sentiment in western economies with trigger of interest rate reversal earlier than expectation. The domestic cues have worsen on increased pressure on inflation; growth; interest rates; exchange rate; asset prices etc. All these factors would mean that the system will lose its capacity to exert pressure on corporate margins/earnings. In the absence of bull rally, time decay factor will kick in to shift investments from zero yield equity assets to high yield fixed income. There will be pressure to test/break 2011 low of 17295/5177. For today, let us watch 17250-17750 (5150-5300) with immediate bias for test of lower end. It would be prudent to unwind "shorts" at 17350/5180. Over all, the market has traded the initial buy set up at 17300-17350 (5200-5185) for quick rally into sell set up at 18500-18650 (55355550) and back again to starting block. The trade recommendation is to sell in two lots at 17700-17750 (5285-5300) and 17800-17850 (5315-5330) with stop above 17900/5350 for immediate objective at 17300-17350 (5165-5180).
