outlook 2013

Outlook for 2013

Period of uncertainties and mixed cues....miles to go for bullish confidence

Little bandwidth for financial/monetary support to spur growth

The set up of gloom and doom in the Global economy since 2009 is diluted but cues do not signal early turnaround for better! The authorities in the developed western economies have done their best to prevent global economic crisis through very accommodative financial and monetary regime; huge amount of money has been pumped into the system to maintain excess liquidity in the financial market while keeping interest rates at near zero levels to encourage investment and consumption. More importantly, the political system and monetary authorities are seen together with the Government to arrest downside risks on the economy and to get it back on track to the pre 2009 period. The asset markets in the Western economies have recovered sharply from the low of 2009 but way to go to scale the highs of 2007-2008. It would need quick turnaround in growth momentum while managing the side effects from severe pressure on fiscal deficit and public productive expenditure. The Government exchequer is already dried up to prevent financial and sovereign crisis and now find it difficult to make both ends meet. There is severe pressure on growth across US, UK, and the Euro zone exerting strain on fiscal health; measures are already on to cut costs (and public expenditure) and increase revenues through tax hikes. The agenda is to tax the “rich” (and affordable) without causing hurt to the middle/lower income class. Having come a long way since pre 2008 golden era, it will be prudent to assume that the worst is behind but the best is distant away given the longer lag time for recovery. Investors have moved into “risk-on” mode with shift in appetite from developed economies to emerging markets. There is no incentive to stay in cash or in low yield sovereign assets when downside risks on the western economies are significantly diluted. The resultant flow of liquidity into emerging markets will complement growth momentum in the western markets. Over all, there is nothing to fear but need patience to allow gradual improvement into 2007-2008 levels and thereafter to build bullish momentum. There is confirmation from the monetary authorities of Western economies to maintain very accommodative monetary policy till 2015 to support growth, investments and consumption.

The India story is unique and peculiar. While emerging markets have maintained their financial and monetary system in pro-growth stance since 2009, Indian economy shifted into anti-inflation stance through high interest rates and deficit system liquidity. Since then, macroeconomic fundamentals have turned worse with severe pressure on growth momentum (down below 5.5%) and high fiscal deficit (up above 5.5%). To make things worse, external dynamics (through high commodity prices, reduced exports and weak rupee) put pressure on current account deficit (up above 3.5%) and fuel subsidy (up from 1.2% to 2.5% of GDP despite regular fuel price hikes). Over all, the positive impact on inflation from tight monetary policy was significantly diluted by high twin deficits and supply side bottlenecks from low investments and poor demand for credit. The conflicts in growth-inflation dynamics pushed the system into “drift” mode with hope of “manna from the blue” for resolution management. The concerns are from (a) lack of co-ordinated efforts from political system, the monetary authority and the Government, raising concerns on policy paralysis, fiscal consolidation and growth; (b) absence of credible plans to protect economic interest from commodity price risks and lower external demand for India’s goods and services; (c) inability to provide resolutions to structural current account deficit issue, adding to pressure on exchange rate and (d) lack of vision to ramp up domestic capacity. Indian economy is the worst hit despite limited “globalisation” and it would need serious efforts to provide resolutions (to these concerns) to protect Indian economy from adverse external forces. Till then, macroeconomic fundamentals of the Indian economy will stay volatile and out of control being at the extreme ends, either very bullish or extremely weak.

Equity market

2012 was good for equity assets despite weak economic fundamentals. The triggers for bullish momentum was excess liquidity (and near zero interest rates) in western markets, limited downside risks and resultant shift to “risk-on” mode. The beneficiaries were the emerging markets (and off-shore investors). Indian stock indices posted gain of over 26% while DJIA was up by meagre 5.9%. The participation from domestic investors was limited while FIIs rode the rally really well pumping in over $24 billion in 2012. Most sectors including BFSI, Consumer Durables, FMCG, Health Care, Auto and Capital Goods outperformed the index while the worst hit was IT and Technology sectors.

The undertone into 2013 is bullish for Equity assets. DJIA will get its focus at 2007-2008 high of 13279/14198 while NIFTY will sets its target at 2008 high of 6357 (and SENSEX at 21206) and beyond. While FII interest will stay intact, bullish momentum will be from participation by domestic institutional (and retail) investors. The shift into interest rate reversal cycle will improve macroeconomic fundamentals; FY14 GDP growth momentum into higher end of 5.5-6.5%, fiscal deficit into lower end of 5.0-6.0% and headline WPI inflation into lower end of 6.5-7.5% tolerance zones. There is huge upside potential for the Indian economy if the Government could address reforms relating to capacity expansion in core sectors including infrastructure, commodities, agriculture, manufacturing etc. The only risk factor at this stage is the political risk and lack of political consensus on reforms. The intra-2013 target for NIFTY is at 6338-6357 (and SENSEX at 21108-21206); any intra-year reversal should stay above 5625-5425 (and SENSEX above 18550-17900). If FIIs continue to stay invested into 2014, new highs will be on cards for NIFTY at 6750/7000/7250 (SENSEX at 22500/23400/24100). The icing on the cake will be on establishment of bearish trend in commodity assets (Crude Oil and Gold) to cut conflicts in growth-inflation dynamics. The trading range for NIFTY in 2013 is seen at 5625-6750/7000 with bias into higher end. 

Currency market

Rupee has been the worst performer in 2012 posting intra-year loss of 18% (against 7% loss in the USD Index). However, Rupee is marginally down by 3% on yearly closing basis against 0.6% loss in the USD Index. So, while dollar was weak against most global currencies, it maintained firm grip on the rupee. What is the problem? There is no solution to the impact on Current Account Deficit (CAD) from higher commodity prices. BRENT Crude is up from $36 and Gold is up from $ 680 since 2008. The CAD of $18-20 Billion a month cannot be bridged through sustained monthly inflows of similar amount into debt/capital market. The other major risk factor is the high dependence on short term/hot money inflows from FIIs/shift of short term rupee debt into foreign currency by Indian companies. It is critical to maintain the forward market in supply-driven mode to remove pressure on rupee. It is important to establish short/medium term bullish trend for rupee to “lead” supplies from exporters (in fear of sustained rupee appreciation) and “lag” demand from importers (in greed to buy weak dollar at later date). Till rupee bullish sentiment is not established, there is risk of rupee weakness into 55.88/56.43/57.32 (lows seen in 2012). On the other hand, it would need sharp reversal in commodity prices (to cut CAD) to extend rupee gains beyond 2012 high of 51.35/48.60. Given the current market dynamics (and expectation in 2013), worst case for rupee is seen at 55.88-56.43 and it would be good for RBI to arrest rupee gains beyond 51.35 to retain export competitiveness and to ramp up dollar reserves. RBI is seen in weak wicket holding less than $300 Billion of reserves in its balance sheet and do not have “fire power” to prevent excessive weakness on rupee. Taking all these together, 2013 range for USD/INR is seen at 51-56; break either-way will be seen as excessive. If the Government could work on reducing the dependence on essential imports, cut non-essential imports and boost exports, resultant bullish sentiment will extend rupee gains into 48.60 in 2014. It will be good for exporters to cover 3M exports at/above 56.00, 12M exports at/above 58.50 and over 1Y exports above 60.00. On the other hand, importers can absorb intra-month rally in rupee to cover 15-30 day dollar payables and extend coverage to 1-3 months on excessive rally if seen unsustainable.

USD Index is expected to retain its bearish undertone on general “risk-on” investor sentiment with immediate focus on 2012 lows at 78.60/78.10. Having said this, Euro zone continues to stay vulnerable to downside risks with less potential to deliver surprise bullish factors. On the other hand, resolution to fiscal cliff in the US and signs of growth potential will limit dollar weakness against major currencies; intra-year range for the USD Index is expected to be at 78.00-81.50 while any surprise package from the Euro zone will trigger break-down in the index into 74.50-76.00. In the meanwhile EUR/USD posted strong intra-2012 recovery from 1.2040 into 1.3486 and looks bullish to take out 1.3486 for 1.38-1.43 while 1.27 stays firm to set up intra-2013 trading range of 1.27-1.38/1.43. Importers can look to cover short term Euro payables at 1.3150-1.2700 while it may be prudent to cover medium/long term receivables at 1.38-1.43.

USD/JPY was volatile in 2012 trading back-and-forth within 76-86; cues into 2013 are mixed. The QE kind of financial support by BOJ will retain bearish undertone on JPY into 2013, seen good for Japanese exports and the economy. The rally in USD/JPY can extend to 2010 high of 94.98 while 80-83 stays firm to set up intra-year trading range of 80/83-92/95. It is good to cover JPY exports at 80-83 while prudent to cover JPY liabilities at 92-95.

Interest rate market

Bond market was rather steady in 2012; 10Y Bond yield traded end-to-end of 8.0-8.25% (low of 7.97 and high of 8.28) before yearly close around 8.10%. The end-to-end move was largely triggered by bullish momentum into policy (on rate cut expectation) and bearish momentum post policy on non-delivery of expectation. Now, there is better clarity into 2013; reversal into rate cut cycle is matter of months not beyond January-March 2013 but extent of rate cut is not clear at this stage. While there is consensus on 50 bps rate cut, beyond there is dependent on sharp reversal in headline WPI (and retail) inflation print. RBI will have close track on real interest rate to arrest diversion of house hold savings into Gold and real estate. Other factors that would influence price action in 2013 are (a) timing of shift of system liquidity from deficit to surplus; (b) extent of fiscal deficit and market borrowing for FY14 and (c) timing of cut in HTM retention limit at par with SLR. While there is clarity on strong (and rock-solid) support for 10Y Bond at 8.15-8.25%, what is not clear is the best case scenario beyond 8.0-7.97% which can extend to 7.65% till operative policy rate is administered at higher end of LAF corridor. It would be very bullish for Bond market on shift of overnight rate into lower end of LAF corridor to extend bullish rally into 7.25-7.0%. The strategy is to stay invested in 10Y Bond yield at 8.10-8.25% for minimum 50 bps intra-year rally.

OIS rates will stay soft into 2013 but extent of reversal from 7.67-7.70% (1Y) and 7.17-7.20% (5Y) is not clear. The average overnight MIBOR for 2013 is expected to be between 7.0-7.50% taking into account shift of policy rate from higher end to lower end of LAF corridor during second half of 2013 (assuming LAF corridor at 6.50-7.50% on shift into FY14). On shift into growth supportive monetary stance, it may not provide desired impact if system liquidity is in deficit mode but how this would be achieved is not clear. Taking all these together, 1Y OIS rate can extend to 6.65-7.15% by end of 2013. On the other hand, 5Y OIS rate will find strong resistance at 7.17-7.20% on cut in “carry” post rate cut action. But shift of operating policy rate from higher end to lower end of LAF corridor will squeeze the 1X5 negative spread to par, thus providing strong support at 6.85-7.0%. Given these factors in play, 2013 range is seen at 6.65/7.15-7.70% (1Y) and 6.85/7.0-7.20% (5Y) with bias into lower end. The strategy is to stay “received” for this move but not considered prudent to stay received in 5Y at 6.85-7.0%.

Commodity market

Gold was relatively steady in 2012; intra-year rally from 1527 to 1795 met with strong resistance for close around 1660. There are signs of short/medium term trend reversal post sharp correction from 2011 high of 1920, unable to retain strong 3 year rally from 680.80 since October 2008. Gold has now lost its traction with USD Index losing its safe-haven/risk-off status. There is little appetite from risk-on investors at current high valuation. The intra-year objective is now at 1525 (ahead of 1450-1300) while 1725-1800 stays firm. The trading range for Gold in 2013 is seen at 1450/1525-1725/1800 with bias into lower end.

NYMEX Crude after sharp rally from 32.40 (December 2008) to 114.83 (April 2011) was in consolidation mode in 2012 at 77.28-110.55 for close around 90. The expectation of sharp rally post QE3 did not materialise exhibiting signs of set up of bearish trend into short/medium term. The demand for imported energy (and dependence on Crude) is on decline. Crude Oil price needs to stabilise at a fair value considered good for the global economy and oil producers. There is high possibility of extension of bearish momentum below 2011-2012 low of 77.28/74.95 into 64.00 while 95-100 stays firm. The trading range for NYMEX Crude in 2013 is seen at 65/75-95/100 with bias into lower end.

Wish you have a very profitable 2013...........................Moses Harding

Weekly report for 31/12/12 - 04/01/2013

MARKET PULSE: Weekly report for 31^st December – 04^th January 2013

Currency market

Rupee held nicely despite bunched up month/year end dollar demand for smart recovery from low of 55.26 for weekly close at 54.76. MARKET PULSE has set near/short term trading range of 53.85/54.10-55.10/55.35 and considered good to cover 3-12M exports at 55.10-55.35 and hedge 15-45 days imports at 54.10-53.85. As trading strategy, it was urged not to stay “short” dollars below 54.10 and avoid “long” dollars above 55.10. Since then, recovery in rupee from recent low of 55.88 held at 54.04 for sharp reversal into 55.26. What next? The strategy is unchanged and there is no strong momentum either-way to break out of 54.10-55.10 consolidation within set short term USD/INR range play at 53.50-55.50. This range is expected to hold till March 2013 when more clarity would emerge from FY14 Union Budget and impact of US “fiscal cliff” on asset markets (and USD Index). Rupee derives good comfort from strong off-shore inflows into debt/equity capital market but not seen good enough to set up rupee bullish undertone (beyond 54.10-53.85) given the mixed signals in the Indian economy. For the week, let us watch consolidation at 54.35-55.00 with bias into lower end; extension if any to stay limited to 54.10-55.25. The strategy is to retain “short” dollar book entered for March 2013 at 55.85-56.00 (current 55.65) and 12M dollars entered at/above 58.50 (current 57.89); add on spot weakness into 55.00-55.25 and stay prepared to close the book on spot gains into 54.10-53.85. The short term range for 3M dollars is seen at 54.75/54.90-55.85/56.00 and for 12M dollars at 57.00/57.25-58.50/58.75.

USD Index traded end-to-end of 79-80, posting strong recovery from low of 79.01 to high of 79.93 before close of week at 79.65. USD Index is struck between weak JPY and steady (to strong) Euro. In the meanwhile, EUR/USD traded end-to-end of set buy zone of 1.3140-1.3165 (low of 1.3166) and strong resistance at 1.3285-1.3310 (high of 1.3284) before close of week at 1.3220. What next? The short/medium undertone for the US Dollar is bearish but needs confirmation from resolution to fiscal cliff. There may not be either “shock” or “awe” feeling to trigger major move either-way. For the week, let us continue to watch consolidation at 1.3100/1.3150-1.3300/1.3350. It is good risk-reward to trade end-to-end by buying at 1.3150-1.3100 and selling at 1.3300-1.3350 with tight stop on break thereof.

USD/JPY took out strong resistance zone at 84.32-84.61 easily on aggressive QE from BOJ. The extended weakness of JPY above 85.50 has now opened up further extension into 88-91 in the immediate/near term. The short term range is seen to be shifted to 85-90/95 with bias into higher end. For the week, let us watch 84.80/85.50-87.20/87.90 with bias into higher end. The strategy is to stay “long” on correction below 85.50 for 90.50-91.00.

Interest rate market

10Y Bond/OIS market traded to the script; 10Y yield is down from 8.18% to 8.10%, 1Y OIS rate down from 7.68 to 7.62% and 5Y OIS rate down from 7.18% to 7.13%. In the intra-week update, MARKET PULSE urged to unwind “long” bond book entered at 8.18-8.23% and advised not to chase gains beyond 8.10% for correction into 8.13-8.15% for re-entry. What next? Bond market derives good support from aggressive OMO bond purchases by RBI for twin objective of trimming excess SLR holding in the system and cut draw-down from LAF counter. RBI continues to stay concerned on low real interest rate that would discourage savings and divert funds to Gold and real estate. It would be period of consolidation till more clarity emerges from headline inflation print and quantum of additional market borrowing. There may not be enough demand (and appetite) for bonds at lower yields to absorb pipe-line supplies from RBI. The upside risk to inflation will come into play on proposed fuel price hike and higher MSP for agro products. For the week, let us watch consolidation in 10Y Bond at 8.08/8.10-8.13/8.15, 1Y OIS rate at 7.58-7.67% and 5Y OIS rate at 7.08-7.17%. The strategy is to trade end-to-end of set ranges as test/break either-way not expected to sustain. Strategic players can reinstate “long” bond book at 8.13-8.15% (keeping appetite for 8.17-8.19%) for March 2013 target at 8.03-8.0%. RBI may need to maintain 10Y Bond yield at 8.08-8.18%. Banks can trim excess SLR at 8.10-8.08% (and book profit on sale of investments) while weakness into 8.16-8.18% will keep investor appetite intact to absorb RBI’s bond supplies. RBI can accelerate bond supplies at 8.10-8.08% and push OMOs at 8.16-8.18% to administer consolidation play within 8.08-8.18%.

FX premium traded end-to-end of set ranges of 6.60-7.0% (3M) and 5.70-6.10% (12M); initial move into higher end met with strong support for sharp push back into the lower end. Over all, FX premium has traded end-to-end of set near/short term ranges of 6.15-7.15% (3M) and 5.40-6.10% (12M) and now seen in consolidation mode at “inner ring” of 6.40-6.90% in 3M and 5.55-5.95% in 12M. For the week, let us watch 6.40-6.90% (3M) and 5.55-5.95% (12M). The strategy is to trade end-to-end as test/break either-way not expected to sustain. Strategy players can retain “received book” entered at 6.05-6.15% and add at 5.85-5.95% for 5.50-5.40%.

Equity market

NIFTY is boxed between strong short term support zone of 5840-5790 and immediate term resistance at 5930-5980; posted intra-week low of 5844 and high of 5930 before close at 5908. What next? It will be period of consolidation as domestic cues are mixed (to negative) while FIIs continue to show strong appetite ahead of rate reversal cycle. FIIs are seen to have good comfort (and confidence) on policy reforms; fiscal consolidation and shift into growth supportive monetary policy while domestic investors are suspect on growth, inflation and fiscal deficit. FIIs do not seem to have many alternate options in their domestic markets and cannot afford to stay in cash with near zero short term interest rate/yield. For the week, let us watch 5840/5865-5965/5990; there may not be strong momentum for break-out either way. It would be good for traders to play end-to-end with tight stop on break thereof while strategic investors to retain “long” entered at 5880/5840 for 6060 (and thereafter into 6181).

Commodity market

Gold is struck in the “inner ring” of set immediate term range play at 1635/1650-1670/1685 range posting intra-week low of 1651.60 and high of 1667.50. The current consolidation phase (ahead of resolution to the US fiscal cliff) after sharp $160 drop from 1795 to 1635 is in order. For the week, let us continue to watch consolidation at 1635/1650-1670/1685 while there may not be strong momentum for break out of 1635-1685 range. The strategy for traders is to play end-to-end with tight stop on break thereof. Strategic investors who chased the move from 1795 to 1635 can look to reinstate “shorts” at 1675-1690 with stop at 1705 for 1590-1600.

NYMEX Crude traded end-to-end of 88.50-91.50 range (low of 88.20 and high of 91.49) before close of week at 90.60. The reversal from recent low of 85.21 into 91.49 is sharp. The near/short term undertone is bearish to take out 85.21 and prepare momentum for extension into 2012 low of 77.28. For the week, let us watch 88.25-91.50/93.00; bullish momentum into 91.50-93.00 will be difficult to sustain and prepare momentum for test/break of lower end into 85.20. The strategy is to stay “short” at 91.50-93.00 with tight stop for 85.25-83.75.

Have a great week ahead..........................................Moses Harding     

Merry Christmas

Dear friends,

I am glad to hear from most of you the value derived from these research reports. I am happy to respond to any specific queries that you may have. You can reach me at mosespeaks@gmail.com or  my official mail id moses.harding@indusind.com

There will not be weekly research report for 24-28 December 2012 but will upload outlook for 2013 before 31st December 2012. Will try my best to stay in touch on the twitter (@mosesharding) during this holiday/festive season. Markets will be erratic with excessive swings, advise to stay safe and light. Better to give it a break on trading and focus only on hedging activities to encash excessive, unsustainable swings.

Wish you all a merry Christmas and a very profitable 2013. Good luck and God bless!

Moses Harding

balancing impression and expectation...RBI did its best!

Balancing act of RBI.....win-win proposition

The expectation into December mid quarter review of monetary policy was mixed. While most expected 25 bps cut in CRR, the need was felt that RBI kick-start the rate reversal cycle with baby-step approach of 25 bps cut in Repo rate, if not in Reverse Repo rate. The expectation of CRR cut was based on RBI’s previous stance of easing CRR to cover lumpy advance tax outflows, and not as monetary guidance. A no-change stance was seen as extreme step of caution and lack of optimism (and confidence) to bite the bullet. On the other hand, “big daddy” of the market, SBI expected an aggressive 50 bps cut both in CRR and policy rates. It is obvious that all market participants look up to SBI and keep close watch on their views and actions. It sends mixed (and discomforting) signals to market stake holders when the decision of the RBI is on the “other extreme” to that of expectations from SBI, the “market-maker” and “lender-of-the last resort” to the borrowing community.

There would have been twin benefits to commercial banks from SBI’s expectations. The banking system needs ramp-up in revenues to cover higher NPA provisions before end of FY13. The ramp-up (in revenues) can happen through sharp increase in Net Interest Income driven by significant fall in the shorter end of the deposit rate curve and huge mark-to-market gains in the SLR (and excess SLR) portfolio; combination of higher NII and profit on sale of investments (other income) will adequately meet higher NPA provision coverage without impact on the profitability of commercial banks. Most PSU Banks will like this scenario. There is also need to build the loan book. The excess SLR held by PSU Banks are funded out of their deposits; being provider of liquidity in call/over-night market, the need to refinance excess SLR from Repo counter is limited. A sharp fall in lending rates (driven by cut in policy rates) will enable PSU Banks for better deployment of funds at higher yield. This is seen as valid (and logical) expectation of PSU Banks (from RBI) as they are seen to be on-tap to the rescue of the Government (and RBI) when in need.

RBI’s position is also not an enviable one having to fight against all odds. It will be difficult to explain rate cut action after setting the benchmarks linked to elevated headline (wholesale and retail) inflation and low real interest rates. The off-shore investors would have read “rate cut” action as “pressure” from “the above” and the autonomy (and independence) of RBI would have come to doubt. RBI had to balance between impression of off-shore investors and expectation of SBI/PSU Banks. While delivering to off-shore investors, RBI has pleased SBI through strong guidance statement – “In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth, thereby preparing the ground for further shifting the policy stance to support growth”. This strong statement should provide comfort to SBI that their expectation of 50 bps rate cut is not far behind. Till then, their excess SLR investment book will be protected through OMO bond purchases. The impact from OMOs will be of beneficial to the investment book while CRR cut may hurt bond yields, thereby cutting the market-to-market gains.

So, it is a win-win stance of RBI to protect the interests of two large stake holders, off-shore investors and the SBI. The Government (and the borrowing community) can afford to take this disappointment when there is optimism little ahead.

Moses Harding

reaction to RBI's policy (in)action!

Unchanged cautious and risk-aversion stance of RBI....

RBI had to choose between delaying the rate cut (to January-March 2013) maintaining its earlier stance of ruling out rate actions till headline (wholesale and retail) inflation stays at elevated levels keeping real interest rates low, and delivering the rate cut to support growth and to be seen with the Government during this crisis time. The choice was between reversal from its earlier stance and biting the bullet! The “baby step” approach of delivering 25 bps CRR cut is not seen as firm monetary policy stance of RBI and highlights its cautious and indecisive stance, unable to choose between the cup and the lip! RBI has strong reasons to delay rate cut action; elevated inflation seen as major risk to growth, low real interest rates not hurting consumption and investments and downside risks to growth from supply side constraints. On the other side, while the downtrend in headline inflation is seen as sustainable with good momentum into end of FY13, there is serious headwind to growth momentum in the absence of external support. The tight monetary policy since March 2009 is seen as extended one and it is time for reversal into pro-growth monetary stance. RBI can keep the system liquidity in deficit mode while delivering baby-step rate cut of 25 bps and move the operating policy rate from Repo to Reverse Repo rate on squeeze in the negative spread between Growth and headline inflation.

RBI firmly stayed with stated earlier stance and kept rates unchanged but with very positive guidance of being in preparedness for shift into growth supportive monetary stance. If inflation print continues to trend down into the next couple of months, there is high probability of rate action in January 2013. The preference of liquidity injection through OMO bond purchases (instead of delivering CRR cut) is seen as positive. When the system is holding above 5% of NDTL as excess SLR investments (net of drawdown from LAF/Repo counter), CRR cut will not be seen as monetary measure to support growth. Over all, RBI did not opt to deliver pleasant surprise to the market through rate cut this time, and seen as disappointment to most stake holders including the Government. However, strong signals have emerged for rate reversal cycle starting from January 2013; risk factor to this expectation will be from elevated headline inflation. There is no guarantee of rate cut in January but the expectation in January-March 2013 is retained. The disappointment of the market reflected in post-policy price action driving the NIFTY down below 5840 and 10Y Bond yield into 8.15-8.18%. The bullish undertone and resultant rally is seen to be delayed but not denied!

Moses Harding

What to expect from RBI on 18th December 2012?

Choice is between 25 bps cut in CRR or policy rates

The stake holders await RBI’s action on its quarter review of monetary policy with feel-good sentiment and confidence on the way forward. There is plenty of action on policy reforms from the Government since September 2012 despite its minority status in the Parliament. There is strong commitment on fiscal consolidation to contain FY13 fiscal deficit at 5.3%. The Government has succeeded in getting political consensus on its reforms agenda and now keenly awaits RBI to walk in the same direction by starting the rate reversal cycle. The other stake holders of the economy are keen to see the political system, the Government and RBI to walk together to get the economy back on its feet. The macroeconomic fundamentals are weak and it would need strong growth-supportive monetary environment for quick revival. Given these factors in play, RBI has reasons to deliver rate cut now rather than delaying it to January-March 2013 when signals provide greater confidence on downtrend in inflation and strong headwinds to growth momentum.

The recent economic data on IIP and WPI caught the economists/analysts on the wrong foot. The October IIP numbers are strongly up and November headline WPI inflation firmly down against expectations. It was pleasant surprise and sent awe feeling for many. The concerns for RBI will be from upward revision in September headline WPI inflation above 8%, sticky headline CPI close to 10% and elevated food price inflation. However, expectation and trend in headline WPI inflation is firmly down while confidence on turnaround in growth momentum is sticky. RBI may need to shift its bias from inflation to growth this time but may find it tough to defend rate cut delivery against its firm stance of caution against elevated inflation and low real interest rates.  While it will be easy and straight-forward for RBI to deliver 25 bps CRR cut to cover advance tax outflows and maintain dovish stance on the way forward, RBI may also consider the other option of delivering 25 bps rate cut with caution on inflation.

There are four options before RBI: (a) unchanged stance by addressing liquidity concerns through OMO bond purchases and dollar purchases and await confirmation on reversal in headline inflation before shifting into rate cut mode; (b) 25 bps CRR cut maintaining the same indecisive and cautious stance; (c) 25 bps rate cut to be seen as being with the Government on revival of Indian economy and (d) 25 bps cut in CRR and policy rates as reward for the aggressive stance of the Government in addressing fiscal consolidation and its hyper-action on policy reforms. There will be feeling of shock on unchanged stance and awe sensation on delivery of 25 bps cut both in CRR and policy rates. The choice therefore is between 25 bps cut either in CRR or policy rates and it is tough to choose between the two. The Governor has always chosen to surprise the market on policy day by delivering the unexpected; stake holders are unanimous in expectation of shift into rate cut mode in January-March 2013; so delivery of 25 bps cut in policy rates will be a surprise, pleasant one for sure! The bullish undertone of the Interest rate market will be maintained irrespective of 25 bps cut in CRR or policy rates. 10Y Bond is expected to get into consolidation mode at 8.0-8.10%; at higher end on CRR cut and at lower end on rate cut.

Moses Harding    

 

Weekly report for 17-21 December 2012

MARKET PULSE: Weekly report for 17-21 December 2012

Bearish momentum on commodity assets will trigger bullish revival for Indian economy

The evils of the Indian economy from high inflation, high trade deficit, high fiscal deficit and weak rupee exchange rate are largely linked to movement in commodity prices. The sharp (and sustained) rally, since 2008-2009 financial crisis, on essential imported commodities of Crude Oil and Gold exerted severe pressure on the efficiency of the Indian economy opening up concerns over fiscal consolidation and inflation; resultant shift into hawkish monetary policy stance exerted pressure on growth. The rally in NYMEX Crude from January 2009 low of 32.40 to May 2011 high at 114.83 was sharp at an annualised rate of 33%. During this period, Gold rallied from 680 to 1920 at an annualised rate of 60%. The combined strength of these two forces pushed the twin-deficits and inflation into elevated trajectory. The resultant shift into rate hike cycle and deficit system liquidity pushed growth momentum from above 9% to below 6%. On the other side, off-shore investors had party time; shift of liquidity and investment appetite into emerging markets drove NIFTY up from October 2008 low of 2252 to November 2010 high of 6338 at an annualised rate of 90%; followed by post Euro zone crisis low of 4531 in December 2011 at an annualised rate of 28%. The swings in FII appetite (and flows) brought volatility in rupee exchange rate up from 52.17 to 44.18 at an annualised rate of 15% (against 90% rally in NIFTY) and down from 44.18 to 54.30 at an annualised rate of 22% (against 28% fall in NIFTY). There are two lessons to be learnt: vulnerability of the Indian economy to uptrend in commodity prices and over-dependence on short term capital flows and resultant excessive volatility in rupee exchange rate from mood-swings of FIIs. The Government and RBI (in consultations with other related stake holders) should work towards building fire-wall to insulate the Indian economy (and its asset markets) from these external forces. The system cannot afford to assume that Government/RBI has no control over the movement in commodity prices or over the timing of entry and exit of short term capital flows. The good thing is that the bullish momentum on commodity assets is seen to be behind. NYMEX Crude is down from May 2011 high of 114.83 to below 87 at an annualised rate of 18%. Gold is also down from September 2011 high of 1920 to below 1700 at an annualised rate of 11%. The fear of extended rally in commodity assets (post QE3 and recent QE4) did not materialise despite very loose (and liberal) monetary policy in western economies. Commodity assets are seen to have lost the “risk-off” appetite and “protection-against-inflation” advantage at current elevated prices. The risk-reward is not seen to be favourable staying invested at these high levels due to current higher valuation, causing shift of appetite to other asset classes and thereby losing the “risk-on” advantage. If this momentum extends into medium/long term, the bearish trend of commodity assets should extend into 2010 low of 65 in NYMEX Crude and 1050 in Gold. The positive impact on the Indian economy will be significant; fear (and risk) on inflation and twin-deficits will be irrelevant leading to low interest rate and surplus system liquidity regime driving all asset markets (equity,  fixed income and currency) into bullish undertone. There will not be any concerns over investments and consumption, pushing the growth momentum back into 7.5-9.0% trajectory leading to upgrade in sovereign rating. Such is the “grip” of commodity price movements on the Indian economy! The cyclical reversal in commodity prices should bring cheer in the years ahead!

Currency market

MARKET PULSE in its weekly report identified 54.25-54.10 to cover up to 1M imports and 54.70-54.85 to cover up to 3M exports; rupee traded 54.10-54.69 before close of week at 54.48 with most trades within 54.25-54.45 zone (midpoint of set 54.10-54.60 consolidation range). In the intra-week update, it was also urged to buy end December 2012 dollars at/below 54.35 (spot at/below 54.10) and to sell 3M dollars at 55.35-55.50 (spot at 54.45-54.60) given the expectation of near term trading range for spot rupee at 53.50-55.50 with bias into lower end. What next? The external forces are strongly in favour of rupee. There will be regular flow of off-shore liquidity into debt and equity market. FIIs are seen to be interested in staying invested through rest of FY12 given the near zero interest rate returns on dollar cash. There is no risk of run-away weakness either in Bond or Equity markets. The risk-reward is clearly in favour of staying invested in anticipation of decent rally in 2013. The domestic cues are turning favourable. The Government is in over-drive on reforms after the hard fought battle to clear FDI – multi brand retail. They have not given up on next round of reforms and preparing the stake holders of the economy for bitter dose of medicine in the short term for long term well-being. The only risk factor is from lumpy dollar demand into the month/year end which would bring sudden bouts of excessive volatility as seen on late Friday; rupee was down from 54.28 to 54.69 in short time and back again into 54.40-54.60 for weekly close at 54.48. It is essential for RBI to monitor such large ticket flows in the thin/illiquid December market. MARKET PULSE continue to consider 55.35-55.50 (spot at 54.45-54.60) as good to sell 3M FC assets; on the other side, end December 2012 dollars at 54.25-54.10 (spot at 54.10-53.95) is good to cover FC liabilities having exited “long dollar” book at 55.65-55.90. For the week, let us continue to watch consolidation at 54.10-54.60; test/break either-way will be excessive. The near term outlook on shift into 2013 will be for extension into 53.85-53.60 which should hold. We will retain 12M dollars sold at 55.65-55.90 (at forward rate above 58.50) and 3M dollars (at forward rate of 55.35-55.50) for this move. On the other side, importers need to stay covered on 15-30 days dollar payables on spot rupee gains into 54.25-54.10 and look to extend coverage on move below 54.10-53.85. There will be need for RBI to shift into surplus system liquidity soon for momentum pick-up in growth and investments. RBI will use FX route to pump rupees into the system and also to replenish its dollar reserves.

EUR/USD met the set objective at 1.3155-1.3170 (high of 1.3173) to complete the rally from 1.2865-1.2880 (low of 1.2878); 300 pip rally in 5 trading sessions and 500 pip rally from 1.2660 within a month is rather sharp. Nevertheless, bullish undertone within the set near term range of 1.29-1.34 is intact. In the meanwhile USD Index is down from 80.60 into 79.60 (low so far at 79.50). What next? The immediate term trading range is seen at 1.3050-1.3350 with bias into higher end. The immediate support is at 1.3095-1.3115 which is expected to hold for 1.3350-1.3400. Watch USD Index heavy ahead of 79.85-80.00 for 78.60-78.40.

USD/JPY met the set objective at 83.85-84.35 (high of 83.96) from above 81.65 (low of 81.69). In the process it has also completed end-to-end of set near term range of 79-84; rally from 79.06 to 83.96. The intra-week update urged to unwind “long dollar” book above 83.85 and to turn “short” for correction back into 83.20-82.95 which is almost met. What next? The undertone for USD/JPY is bearish at higher end of 79-84. The weak undertone in the USD Index will exert downward pressure on this pair. MARKET PULSE would continue to see 83.85-84.35 as heavy for near term objective at 81.65-80.65. The strategy is to retain “short” book entered above 83.85 with stop above 84.35 for 81.65-81.50 (or USD Index at 78.60-78.40).

Interest rate market

10Y Bond traded end-to-end of set weekly range of 8.13-8.18% before close at 8.14%. OIS rates traded mixed; 1Y into the lower end of set receive zone of 7.63-7.68 and 5Y into higher end of 7.08-7.13%. The fear of shift into surplus system liquidity ahead of expectation has triggered the 1X5 play. What next? The undertone is bullish irrespective of delivery of rate cut this week or in January/March 2013. It is also possible that operating policy rate will shift to Reverse Repo rate before mid 2013. There will be plentiful of OMO bond purchase action from RBI to cut the 5-7% excess SLR in the system. The only risk factor at this stage is cut in HTM retention limit from current 25% at par with SLR limit of 23%. For now, 10Y Bond will be heavy at 8.15-8.17% for 8.10-8.0% into near term. The strategy is to hold on to “long” book entered at 8.18-8.22%, add at 8.15-8.17% for 8.10%. Let us continue to stay with “receive” strategy in 1Y at 7.63-7.68% (for 7.55-7.50%) and in 5Y at 7.08-7.13% (for 7.01-6.96%). The combination of rate cut action now and shift of overnight MIBOR into lower end of LAF corridor soon will retain the downward pressure on Bond yields/OIS rates.

FX premium held at the higher end of set immediate term range of 6.60-6.85% (3M) and 5.85-6.10% (12M) before close of week at 6.65% and 5.95% respectively.  The strategy was to stay received at higher end for eventual move into consolidation play at 6.15-6.65% and 5.40-5.65% post rate cut action. The trade recommendation was to stay received in December/November (11M period) at/above 3 bucks which closed at 296. For now, let us watch 6.35-6.85% in 3M and 5.70-6.05% in 12M, bias into lower end. The momentum will be mixed; interest rate “play” setting up bearish momentum while strong rupee into 54.10-53.85 will limit weakness. Over all, undertone will be bearish on accelerated supplies in the forward market.

Equity market

NIFTY traded end-to-end between set sell zone of 5930-5980 (high of 5965) and buy zone of 5880-5840 (low of 5839) before close of week at 5879. The trading range into end of month is seen to be firmly set; strong resistance at 5960-6010 and support at 5840-5790. The external support is solid with very good FII appetite. The shift into rate cut cycle will also bring domestic institutional and retail investors. The risk factor from weak macroeconomic fundamentals is diluted with build up of feel-good sentiments into 2013. Strategic investors can retain long entered in 2 lots at 5880 and 5840; watch 5800 for the final lot with stop below 5780. It will be good risk-reward to build trading book in two lots at 5960/5990 with stop/double reverse above 6015. We continue to retain near/short term focus at 2011 high of 6181 and 2010 high of 6338. For the week, let us watch consolidation at 5840-5960 with extension limited to 5790-6010 with bias into higher end.

Commodity market

Gold lost its shine ahead of set resistance at 1730 (high of 1723) for gradual reversal into set short term support zone of 1685-1660 (low of 1688) before close of week at 1695. The immediate term undertone is bearish for extension into 1660, break of which will set up bearish momentum into near/short term, opening up gradual weakness into 2012 low of 1527. For now, let us watch 1660-1710 with bias into lower end. The strategy is to stay “short” with tight stop for eventual break of 1660 for near term consolidation at 1590-1640.

NYMEX lost steam at higher end of set near term range of 82.50-87.50 (high at 87.68) before close of week at 85.80. The strategy was to sell spike into 87.50-88.50 for 82.50-77.50. The undertone is bearish and we retain the 82.50-87.50 range for the week with bias for break-down into 2012 low of 77.28.

Have a great week ahead.........................................Moses Harding         

     

Weekly report for 10-14 December 2012

MARKET PULSE: Weekly report for 10-14 December 2012

Focus now shifts to RBI’s stance on policy rates from Government’s policy reforms

It was rough sail-through for FDI – multi brand retail in the Parliament; related financial (and tax related) reforms are also expected to go through, thanks to the support (and magnanimity!) of BSP and SP. The fear is from the bottom-line reality; no further reforms can go through without the blessings of Ms.Mayawati and Mr.Mulayam Singh. It can be safely assumed that it is consolidation phase for reforms and pipe-line plans if any will be shelved for 2014 and beyond! It is now to feel the impact on the ground from effective implementation and execution of reforms for tangible improvement in growth, inflation and twin-deficits. The focus now shifts on RBI and its action on 18^th December mid-quarter review of monetary policy. RBI has been vocal in considering elevated headline WPI & CPI inflation as major risk to growth and low real interest rates not hurting growth momentum and capacity expansion. RBI is also seen to stay suspect on policy reforms and fiscal consolidation. If this stance is retained, there is no case for rate cut this time. The trending in growth, inflation and fiscal deficit will be the key factor for rate decision; it is two out of three against rate cut. The downtrend in growth momentum below 5.5% would need monetary support through low interest rate regime and surplus system liquidity; but elevated inflation and fiscal deficit would put RBI in defensive mode and delay rate cut action. There is no confidence at this stage for downtrend in headline WPI inflation below 7% (and CPI below 9%). There is also serious concern on fiscal deficit with risk of slippage beyond the tolerance zone of 5.3-5.8%. Till RBI gets good comfort on inflation and fiscal deficit, it could only support growth through guidance on rates and not through action. The concern is on liquidity; drawdown from RBI’s LAF/Repo counter is high with average of close to Rs.1 Trillion against its tolerance level of Rs.65K Crores. The comfort however is from the 2% “gap” between SLR and HTM retention limit which is funded/financed at Repo counter. The drawdown from LAF counter is at 1.0-1.5% of NDTL as against 4% excess SLR holding by Banks. So, there is sufficient system liquidity but in the wrong hands; lenders are content with low risk-low reward Government bond asset and stay reluctant to divert funds into high risk corporate credit (while there is limited demand from low risk credit). RBI has already cut CRR by 175 bps to cover this “gap” and would continue to conduct OMO bond purchases to reduce the excess SLR holding by Banks. There is no strong case to cut CRR given the comfortable system liquidity but the need is to continue its OMO bond purchases to cut the excess SLR in the system. It does make sense for RBI to wait till February 2013 budget session for rate cut action; by then better clarity on inflation and fiscal deficit would emerge to either kick-start the rate reversal cycle or to hold on for some more time. The expectation from RBI on 18^th December will be either 25 bps CRR cut to neutralise advance tax outflow or maintain status-quo if the plan is to conduct week-on-week (or fortnightly) OMO Bond purchases. A 25 bps rate cut will be a pleasant surprise while status-quo will signal a harsh stance. It is prudent to deliver 25 bps CRR cut to retain the hope and confidence of the stake holders and to ensure post-policy price stability with mildly bullish undertone.

Interest rate market

10Y Bond traded steady at 8.15-8.18% before close of week at 8.17%. There has been significant release of pressure as 10Y bond yield has nicely trended down from set buy zone of 8.22-8.25% into strong resistance zone of 8.17-8.15%. RBI’s OMO bond purchases and expectation of shift into rate cut cycle in January-March 2013 have helped to ease pressure despite the significant risk from cut in HTM limit. There will be price stability now at 8.13-8.18% with extension limited to 8.10-8.20%. The strategy is to retain investments entered at 8.22-8.23% and add at 8.18-8.20% for post policy rally into 8.13-8.10%. This move may not be triggered by rate cut action but the guidance into the next policy review is expected to stay dovish. It is also possible that the Governor may surprise the market by delivering 25 bps rate cut when none expects it from RBI. It is good risk-reward to stay “overweight” on bond investments (with positive “carry” from Repo/CBLO counter) given the rate cut expectations in the near/short term and continuation of OMO Bond purchases by RBI.

OIS rates have gradually unwound its recent gains for move into 7.65-7.60% (1Y) and 7.10-7.05% (5Y) from recent peak level of 7.80% and 7.20% respectively before close of week at 7.64% and 7.06%. What next? It would be period of consolidation above 7.60% in 1Y and 7.0% in 5Y. Having chased the move from 7.80% and 7.20%, it is prudent to unwind “received book” and stay aside for correction back into 7.70-7.72% and 7.10-7.12%. For now, we watch consolidation at 7.60-7.70% in 1Y and 7.02-7.12% in 5Y; extension either-way will be difficult to sustain. The strategy is to trade from “received” side as near/short term trend is bearish. The only risk in 5Y is from squeeze in 1X5 spread when operating policy rate gets shifted from Repo rate to Reverse Repo rate which is not relevant for the next 3-6 months. However, it is long overdue for sharp down move in shorter end to build tenor premium into the rate curve. The strategy is to reinstate “received book” in 5Y OIS at 7.08-7.13% (with stop at 7.15%) for 6.96-7.01; this support zone is considered good for corporate borrowers to hedge long term floating rate rupee loans. There is not much of reward in the 1Y OIS play given the steady 1X5 spread and negative “carry”. Banks who have large Call/overnight borrowing exposure can look to pay 1Y OIS at 7.60-7.50%; fixing 1Y cost at this level is not bad at all.

FX premium met the set objective at 6.50-6.65% (3M) and 5.95-6.05% (12M) to complete the sharp rally from 6% and 5.4% respectively. It gave opportunity to unwind “paid book” and switch sides to build “received book” for correction back into 6.35% and 5.65%. The interest rate play is in favour of reversal in premium while mixed on exchange rate play. The reversal from current level will be sharp if spot rupee holds above 54 for weakness into 55 and beyond. For now, let us watch 6.25-6.65% (3M) and 5.65-6.05% (12M). The strategy is to retain the “received book” entered at 6.55-6.65% and 5.95-6.05% with tight stop for 6.15% and 5.4%. There is no case for sustainability of 3M premium below 6.15-6.0% and 12M below 5.4-5.35% till system liquidity is shifted from deficit to surplus to guide the operating policy rate into lower end of the LAF corridor, the Reverse Repo rate; hence the strong “call” to initiate “paid book” in 3M at 6.15-6.0% and in 12M at 5.40-5.35% which also coincided with expectation of sharp reversal in spot rupee from 55.88 to 54.04 to guide swift rally into 6.65% and 6.05% in quick time. The near term outlook is for stability at 6.15-6.40% (3M) and 5.40-5.65% (12M).

Currency market

Rupee weakness above 54.80 was short-lived as rupee gained sharply from intra-week low of 54.96 into 54.04 before consolidation at 54.10-54.60 for close of week at 54.47. Over all, rupee has traded end-to-end of set short term support zone of 55.65-55.90 (low of 55.88) and resistance zone of 54.10-53.85 (high of 54.04), thus pushing the 12M forward dollar rate from high of 58.90 to low of 57.30 (current 57.65). The strategy to stay “overweight” on short dollar book at 55.65-55.90 for move below 54.60 into 54.10-53.60 has worked well. Importers were also urged to unwind import hedge “long dollar” book at 55.65-55.90 for re-entry below 54.60 into 54.10/53.60. What next? We are into December market known for volatility in illiquid market conditions. Having got the move from 55.65-55.90 to 54.10-53.85, it is time to have a fresh look on the way forward. The cues into the near term are at best mixed. The bullish cues from reforms are now out of the way. The attention will now be on implementation and execution of reforms (and its impact on macro fundamentals); pipe-line bunched up demand into month/year end, sustainability in FII flows ahead of their financial year end etc.  Rupee might get into consolidation at 54.05-54.95 with extension limited to 53.80-55.20. There is no clarity at this stage for directional break-out beyond 53.60-55.20. So, it is prudent to cover imports in two lots at 54.25-54.10 and 53.85-53.70 with trail stop above 55.20 while exporters look to cover dollar receivables in two lots at 54.70-54.85 and 55.10-55.25. The landing from 55.65-55.90 into 54.10-53.85 has been smooth and swift and it is possible that rupee has already shifted into new near term trading range of 53.50-55.50 from earlier 54-56. If all goes well on reforms (attracting stable FDI flows) and resolution to “fiscal cliff” (shifting investors into risk-on mode and bearish set up on the USD), rupee should get into bullish undertone for short/medium term stability at 50-53. The extension of bearish momentum in Crude and Gold prices will support rupee recovery. So, importers need to be more dynamic in hedging activity to avoid getting locked into wrong side of the exchange rate while exporters should not miss out unsustainable rupee weakness. 12M forward dollar at 58.50-59.00 is seen attractive for exporters which should provide support in spot rupee at 55.25-55.50. On the other hand, the risk of rupee weakness into 56.03-57.32 into the near term is not out of the way, thus providing strong support in 12M dollars at 57.00 limiting spot rupee strength beyond 53.75-53.50; hence the expectation of near term spot rupee consolidation at 53.50-55.50 (and 12M dollars at 56.75-58.75; test/break either-way will be difficult to sustain).  

Euro failed ahead of set strong resistance at 1.3140-1.3170 (high of 1.3126) and posted strong reversal into set objective at 1.2905-1.2880 (low at 1.2878) before close of week at 1.2924. MARKET PULSE was prepared for minimum 150 pip reversal from below 1.3140 but ended up with deep 250 pip extension. The sharp reversal was triggered by expectation of rate cut from ECB in early 2013 taking comfort from low inflationary expectation in the Euro zone and better than expected economic data from the US. The dollar is also expected to get support till “fiscal cliff” is out of the way. What next? EUR/USD should hold at strong support of 1.2865-1.2890 to retain its bullish undertone for extension of gains beyond 1.3140-1.3170; else risk is for deeper correction into 1.2665-1.2640 before up. The immediate resistance is at 1.2965-1.2990 ahead of 1.3015-1.3040. For now, let us watch 1.2865-1.3015 and stay neutral on break-out direction; break either-way will be good for minimum 150 pips. The strategy is to trade end-to-end with stop/double reverse on break thereof.   

USD/JPY traded to the script between set buy zone of 81.80-81.65 (low of 81.69) and sell zone of 82.65-82.80 (high of 82.82) before close of week at 82.46. The undertone is bearish into the near term but would allow extension into 83.25-84.00 to gain momentum for sharp move below 81.65-81.50 into 80-79 within the set near/short term range of 79-84. This should complete back-and-forth move since the rally from 79.06. For now, let us watch consolidation at 81.85-83.35 and await cues for extension into 80.65-80.00. This move will be supported by lower break-out in USD Index range of 79.60-80.60 which posted strong rally from intra-week low of 79.57 into 80.65 before close of week at 80.40. The strategy is to buy in two lots at 82.15-82.00 and 81.75-81.60 (with stop at 81.45) and sell in two lots at 82.85-83.00 and 83.25-83.40 (with stop at 83.55). Strategic players who chased the move from above 79 to below 83 can now look to sell at 83.25-84.00 with stop above 84.25 for 81.65-80.65.

Equity market

The sharp rally in NIFTY from 5580-5550 (low of 5549) has now met its set objective at 5930-5980 (high of 5949) before close of week at 5907. The immediate term outlook is mixed with weekly close at neutral zone of 5880-5930. The inability to retain gains above 5930 and good demand below 5880 highlights a period of consolidation ahead. The passage of FDI Retail bill and pipe-line reforms will bring cheer to FIIs but the liquidity flow from them is expected to be limited ahead of financial year end and Christmas/New Year holidays. FIIs will stand to gain from the sharp rally in underlying equity asset and also from the exchange rate, thus building incentive to realise profit. There is not enough appetite from domestic investors to support the market. There is risk of deep correction into 5800-5750; hence urged to unwind strategic investments entered at 5610-5580 on rally into 5930-5980. It is prudent to re-enter on clear break of 5980-6000 rather than exposing the book to sharp sell-off. For now, let us watch consolidation at 5800-6000; break either-way may not have the desired momentum to sustain. It is normal in December market that trading range will be minimum 500 points; so far we have seen 5838-5949. We need to stay prepared for either sharp rally into 6338 or sharp reversal into 5548? The sharp reversal into 5548 will be on unwinding of investments by FIIs and the rally into 6338 will need FIIs increasing the book size and stay invested into 2013. NIFTY’s directional guidance into end December is at the hands of fair-weather friends while domestic cues (and support) is neutral. The strategy is to trade end-to-end of 5800-6000 with stop/double reverse on break thereof which should be good for 250-350 points. It is difficult to read the pulse of FIIs ahead of their financial year end to get a clear view on the direction; gut feel is that it may be good risk-reward to stay invested on correction below 5880 for 6330 with stop below 5780.

Commodity market

NYMEX Crude nicely traded end-to-end between set sell zone of 90.00-91.50 (high of 90.33) and buy zone of 86.50-85.00 (low of 85.68) before close of week at 85.93. The near/short term undertone is bearish; hence we shift into new trading range at 82.50-87.50 with bias into lower end. The strategy is to sell spike into 87.50-88.50 with tight stop for 82.50-82.00 ahead of 77.75-77.25 for 100% reversal of recent rally from 77.28 to 100.42. The short/medium term undertone is bearish. The sharp rally from 32.40 (since December 2008) lost its steam from the high of 114.83 (May 2011) and the reversal process is steady and has already taken out first support at 95.37 and looks set for taking out the next one at 83.34 followed by 73.62. If this trend continues, there is strong story in waiting for the Indian economy and its asset markets.

Gold is losing its shine; inability to take out resistance at 1750-1765 (high at 1754) for reversal back into strong support at 1670-1685 (low at 1683) is a concern. There has been repeated failure at 1735-1760 resistance which shifts the undertone to neutral. The high seen at 1795 (in October 2012) and 1920 (in September 2011) is seen to be safe and focus now shifts to strong support at 1660 while 1730 stays firm. The positive developments in the US and Euro zones and resultant shift of investors sentiment into risk-on mode will continue to keep the tone bearish into the near term. The trading range for now is at 1660-1730. The strategy is to trade end-to-end with tight stop and stay neutral on break-out direction; however test/break of 1660 will quickly expose 1527 (seen in May 2012) which triggered sharp rally into 1795 (by October 2012). The bearish momentum in commodities (Crude Oil and Gold) will set up bullish momentum in rupee exchange rate diluting the fear from widening trade (and current) account deficit.

Have a great week ahead....................................................Moses Harding  

Weekly report for 3-7 December 2012

MARKET PULSE: Weekly report for 3-7 December 2012

Relief rally in Indian asset markets.....can it sustain? Yes, into the near term!

It was an eventful week; dilution in political risk on reforms, conclusion of bail-out packages in the Euro zone and hope of resolution to “fiscal cliff” in the US; combination of these factors triggered a strong intra-week rally across all asset classes. The western bourses posted decent gains since mid November as investors are back into “risk-on” mode driving the USD Index down. On the domestic front, NIFTY regained its recent high of 5815 with strong weekly close at 5880, rupee posted strong reversal from 55.88 into 54.20 and Bond market maintained its bullish undertone with 10Y Bond yield down from 8.23% into 8.17%. The developments in the US and Euro zone have improved the investor sentiment and consumer confidence into the near term. The western economies are under severe growth pressure; while there are signals of recovery in the US zone, Euro zone is vulnerable and China seen outperforming rest of the World. Indian economy continues to reel under pressure. The macroeconomic fundamentals for FY13 continue to remain suspect; risk of slippage in GDP growth below 5.5%, fear of overshoot in fiscal deficit above 5.8%, rupee impact on inflation to maintain headline inflation above 7.5%, higher trade gap at over $20 Billion per month, uncertainty on sustainability of capital account flows to bridge current account gap; risk of delay in rate cut action from RBI; all these factors have severely cut appetite for investment and consumption. The lack of political consensus on reforms and delay in financial support to core sectors of the economy are major factors to delay the recovery process. The current relief rally is driven by the belief that the worst is behind and the turnaround will be in sight. The rally will lose steam if improvements in macroeconomic fundamentals are not sighted soon; first to exit will be the off-shore investors. The next couple of months into the Budget session will be crucial; till such time there is high probability of extension of this relief rally into the near term. There are no strong cues to look for extension of bullish rally into short/medium term while there are no clues whatsoever on what is in store into the long term. What is the near term impact on markets?

Currency market

The big relief is the end of rupee bear run from 51.35 at 55.88, just ahead of 55.90-56.10 seen as the worst case for rupee. MARKET PULSE urged stake holders not to stay “long dollars” at 55.65-55.90 resistance zone and to be overweight on “short dollar” book for reversal into immediate objective at 54.10-53.60. The expected reversal in USD/INR from 55.90 to 54.60 during the week was bang on with extension into solid support zone at 54.20-54.35 before close of week at 54.27. The trigger for the reversal was from signs of smooth passage of financial reforms in the Parliament, diluting the significant risk on trade (and current) account gap. Till then, rupee was completely insensitive to gains in the EUR/USD and NIFTY. What next? It is not that rupee has gone into bullish undertone; concerns from weak macroeconomic fundamentals stay valid. It would need strong political consensus on reforms and RBI’s growth supportive monetary policy to get into bullish mode. The comfort is from reforms that would attract off-shore liquidity and capital to bridge the widening gap in trade and current account; enhancement in investment limit in debt market for off-shore investors by $5-10 billion is positive but need big-bang measures that would give permanent solution to the severe strain on trade and current account. It is possible that rupee will extend its gains into 53.60-53.10 in the immediate term while finding strong support at 54.50-54.80; extension either-way will be excessive at this stage. If the theory of “worst is behind and the best is ahead” comes true, then we get into 50-53 consolidation before fiscal year end; there is limited risk of rupee weakness into 56.03-57.32 during rest of FY13. The hedging strategy is to cover long term exports at 54.50-54.80 and short term imports at 53.60-53.10. It may not be good risk-reward to stay “long dollars” at 54.70-55.20 and may not be prudent to stay “short dollars” at 53.60-53.10 till clarity emerges on improvement in macroeconomic fundamentals. For the week, let us watch 53.60-54.50 with extension limited to 53.10-54.80; bias into lower end. It would be good time for RBI to absorb excessive supplies to shore up its dollar reserves and to supply rupees into the system to cut drawdown from its LAF counter. The overweight “short dollar” book can be retained with trail stop above 54.80 while we await 53.60-53.10 to open up “long dollar” book (watch this space and intra-week updates on Twitter handle: mosesharding).

EUR/USD weakness below the set support zone of 1.2910-1.2885 could not sustain for sharp rally to take out first objective at 1.2990-1.3015; thereafter, it was consolidation mode at 1.2940-1.3040 with Euro cooling its heels post the recent sharp rally from 1.2650. In the meanwhile USD Index was steady at 80.00-80.60 (after sharp fall from below 81.50) finding good support at 80. What next? The resolutions to fiscal issues in the Euro zone are in place which has set up bullish undertone on the Euro into the near/short term. If this is followed by resolutions to the fiscal cliff in the US, the index is set for major fall into 78.60-76.50. It is possible that EUR/USD has already shifted into near term trading range of 1.29-1.35 with pit stops at 1.3070-1.3085, 1.3155-1.3170, 1.3270-1.3285, 1.3370-1.3385 and the chequered flag at 1.3475-1.3490. The bullish undertone is valid till 1.2885-1.2860 stays firm. The strategy for importers is to stay covered on short term imports (if not already done on its recent visit into 1.2660) while exporters to stay aside for covering short term exports at 1.34-1.35 (with stop below 1.2850). For the week, let us watch 1.2940-1.3170 not ruling out extension into 1.3285. Let us have close watch on immediate support at 1.2940-1.2915 and resistance at 1.3015-1.3040; break either-way will set up 100 pip move before consolidation.

USD/JPY held well at set support/buy zone of 81.90-81.65 (low of 81.67); reversal from there failed short of set weekly objective at 82.85-83.35 (hi at 82.74) before close of week at 82.50. The expected back and forth move from 82.85 to 81.65 is now done. What next? USD/JPY may not have the steam to extend gains beyond 82.85-83.35; there is risk of another steep reversal into 81.65 not ruling out further extension into 80.65, pulling the USD index along with it below 79.60. For the week, let us watch 81.65-82.85 not ruling out extended weakness into 81.15-80.65 while 82.85-83.25 stays firm. The trading strategy is to trade end-to-end with tight stop on break thereof.

Interest rate market

10Y Bond found solid support at 8.23-8.25% for back into 8.17-8.15% before close at 8.18%. OIS rates too eased from 7.78-7.80% (1Y) and 7.18-7.20% (5Y) into 7.72-7.70% and 7.12-7.10% respectively. What next? RBI’s concern is now more on liquidity; LAF drawdown is consistently above Rs.1 Trillion and it would be worse on shift into mid December. It is good that now RBI has three routes to pump in liquidity; OMO Bond purchases, CRR cut and USD purchases in FX market. The signal on rate move is mixed; rupee impact on inflation will be seen in November/December headline print, expected to be above 7.5%. RBI may decide to wait for the Budget session before rate actions. So, there is no clarity on timing of rate cut although it is long overdue. RBI also has the agenda to cut the HTM limit from 25% to 23% or shift the liquidity deficit tolerance level to 2% of NDTL as the “gap” between SLR and HTM retention limit is funded by RBI in its Repo counter. For the week, let us watch 10Y bond yield at 8.15-8.20%; 1Y OIS rate at 7.70-7.75% and 5Y OIS at 7.10-7.15%. The strategy is to trade end-to-end; having exited long bonds at/below 8.17%, reinstate at 8.19-8.21% for eventual break below 8.15% into March 2013 objective at 8.05-8.0%. It is also good risk-reward to reinstate “received book” in OIS at 7.75-7.77 and 7.15-7.17%; OIS rates is seen to be under pressure tracking higher LAF drawn down and resultant impact on call money rate.

FX premium nicely bounced from 6.0% into 6.35% in 3M and from 5.40% into 5.75% in 12M; in the process completed back-and-forth move between the set short term ranges of 6.0-7.0% and 5.35-5.85%. There is strong support at the lower end from interest rate play despite bearish pressure from exchange rate play (weak rupee). The favourable exchange rate play (strong reversal in rupee) has now pushed premium into higher end. What next? The exchange rate play will continue to exert upward pressure while tight near term money market rates into December will add momentum. For the week, let us watch 6.15-6.65% in 3M and 5.50-5.85% in 12M with bias into higher end. The strategy is to retain “paid book” entered at 6.10-6.0% and 5.40-5.35%; add on any correction into lower end and exit close to higher end and stay aside for the next trigger.

Equity market

Indian bourse (SENSEX and NIFTY) has been the star performer in the recent weeks. NIFTY has not only recovered its recent fall from 5777 to 5549 but surpassed recent high at 5815 to punch high at 5885 before posting a very strong weekly close at 5879. The credit for this strong rally is entirely to off-shore investors. FIIs are seen to have very strong investor appetite despite pressure on weak economic fundamentals and political tensions on reforms. The GDP number for Q2/FY13 at 5.3% is disappointing with high risk of slippage below 5.5% for FY13. There is little optimism on sharp decline in headline WPI inflation below 7.5-7.0% driven by weak rupee and elevated commodity prices. There may not be rate cut trigger in the near term to add momentum to current rally. During this time, there may not be clarity on fiscal cliff. So, from now to February (budget session and decision on fiscal cliff), the market is expected to stay volatile. Taking all these together, NIFTY might lose steam at 5950-6000 for consolidation mode finding strong support at 5780-5830. This will complete end-to-end move of set short term range of 5500-6000. While MARKET PULSE is confident of further extended gains into 6338 in the short term, need to stay cautious and prudent to exit “long” positions at 5950-6000 and reassess the situation after close watch on price action there. For the week, let us watch consolidation at 5830-5950 with extension limited to 5780-6000. Strategic investors who reinstated “longs” at 5610-5550 can look to unwind at 5950-6000 (with trail stop below 5830) while traders can play end-to-end with tight stop on break thereof.

Commodity market

God is in consolidation mode between strong support zone of 1705-1690 and immediate resistance zone of 1750-1765 (low of 1706 and high of 1752) before close of week at 1728. There is no change in view and retain bullish undertone for Gold into short term. It is not going to be run-away rally till resolutions to fiscal cliff is sighted. Till then, let us allow consolidation play within the broad range of 1695-1765 with extension limited to 1670-1790. For the week, let us continue to watch 1705-1750 with extension limited to 1695-1765. The strategy is to trade end-to-end with tight stop on break thereof. Strategic players can look to stay invested in two lots at 1710-1700 and 1685-1675 with stop below 1665 for 1790-1805.

NYMEX Crude traded end-to-end of set near term range of 85-90 (low of 85.36 and high of 88.99) before close of week at 88.91. The bearish undertone is now lost triggered by political crisis in the West Asia and sharp reversal in the USD Index from below 81.50. Now, there is risk of bullish extension beyond 89-90 into 91.50-95.00 while 86.50-85.0 stays firm. However, short/medium term outlook is bearish for 82.50-77.50. For the week, let us watch consolidation at 86.50-91.50 and be fleet-footed to trade end-to-end. The strategy is to trade end-to-end between 86.50-85.00 and 90.00-91.50 with tight stop on break thereof.

Have a great week ahead..........................................................Moses Harding