Weekly report for 01-05 October 2012

MARKET PULSE: Weekly report for 01-05 October 2012

Worst is behind but best seen to be distant away.....markets into consolidation phase

There has been sense of relief in Indian markets; fear of the worst that drove markets down since February 2012 is out of the way but bullish confidence into the future is suspect. Stake holders keenly watch developments in political, economic and monetary dynamics to set directional guidance on asset markets. The signals from external sector are bullish; political and monetary dynamics are put to work to get the economy back on track. The liquidity support and zero interest rate regime till 2015 will divert funds into Indian debt and equity capital market. The concerns are however from the economic dynamics. There is little hope of economic revival in the US and Euro zone in the short/medium term; economic revival in Western markets are critical to set up bullish mode in emerging markets. Euro zone continues to remain a big risk factor to global markets. However, recent developments in Western markets are supportive to Indian equity and currency assets and would continue to remain so into short/medium term. On the other hand, domestic cues are mixed. The political dynamics have improved with strong political actions to address issues relating to policy inaction and fiscal deficit. The deficit in the Current Account is driven by external factors; widening CAD is from high commodity prices and lower consumption in western economies. But, the impact of CAD on Rupee exchange rate has been diluted by opening up flows into Capital Account to maintain surplus Balance of Payment. There is now better clarity on economic dynamics. A range has been set for GDP growth and fiscal deficit; trending of which will provide directional guidance to asset markets. Global rating agencies and most economists predict FY13 growth around 5.5% and fiscal deficit around 5.8% while the Government is confident on its target at 6.5% and 5.1% respectively. The trending of GDP growth into 6.5% and fiscal deficit into 5.1% will be closely watched by investors. The concern on inflation is diluted on stable commodity prices post QE3 and rupee appreciation while more measures are awaited to address supply side bottlenecks. The expectation on RBI to shift into growth supportive monetary stance is high. While Government is doing its bit to attract long term investments from foreign investors, downtrend in interest rates and surplus system liquidity are essential to spur domestic investments. The major issue here is the over dependence on private investment while public investments are into consumption. The stake holders are keenly watching public disinvestment and sale of idle (unproductive) public assets to get out of this trap. Over all, there is hope that improvement in political and monetary dynamics will support macroeconomic dynamics of the Indian economy. These expectations have already set up bullish mode in the equity and currency market while Money (Fixed Income) market is in consolidation mode awaiting RBI’s monetary actions. To sum up, Indian markets are clearly out of the bear trap but there are no strong signals as yet to provide sustainable bullish momentum in the near/short term, hence likely to get into consolidation mode. The directional guidance will be from RBI’s rate action in October and trending in GDP growth, fiscal deficit and headline inflation. The expectation into the near term is neutral with good signs of bullish set up into short/medium term. It is very difficult at this stage to take a long term view on markets.

Currency market

Rupee has been the best performing asset in September for sharp recovery from 56.03 to 52.49 before close at 52.85. The rally in USD Index from 78.60 to 80.00 did not have any impact on the rupee on strong domestic cues and FII supplies into equity market. What next? Rupee should now get into consolidation mode; momentum in rupee gains into near term objective at 52.20-51.95 is seen as excessive at this stage without much resistance at immediate term objective at 52.90-53.15. We also need to see FII appetite while NIFTY trades above 5700. Ideally, rupee should get into consolidation mode at 52.20-53.15 in the immediate term and would see better traction with moves in USD Index (and EUR/USD). The reversal in USD Index from strong resistance at 80 finds solid support at 79.30 (EUR/USD at 1.2825-1.2975). The break-out 79.30-80.00 range will set the directional trend for rupee. Having said these, short/medium term outlook for rupee is bullish and MARKET PULSE stay with set short term range of 49-54. The long term rupee bullish expectation into 48.60-43.85 is valid subject to positive cues from political, economic and monetary dynamics. For the week, let us watch consolidation at 52.20-53.15 and need to watch failure in USD Index at 80 to retain immediate term rupee bullish outlook; else risk of extension into 53.60 while dollar index stays below 80.70; hence the caution to importers to cover 7-15 days imports around 52.60. MARKET PULSE revised its trailing stop for strategic “short dollar” position from 54.20 to 53.20 in the intra-week update. For better hedging/trading results, please stay tuned to intra-week updates on twitter (handle: mosesharding).

EUR/USD traded end-to-end of set buy zone at 1.2840-1.2825 (low of 1.2827) and sell zone at 1.2850-1.2865 (high of 1.2859) in tune with consolidation in USD Index at 79.30-80.00. We continue to watch this range but bring in the risk factor of move into 1.2700 if USD Index extends its gains above 80 into next objective at 80.70 while reversal into 79.30 will bring the focus into 1.2950. For the week, let us watch consolidation at 1.2800-1.2950 and let us watch intra-week play in USD Index to set up directional break-out into either 1.2700 or 1.3050. Stay tuned to intra-week/intra-day updates on twitter.

USD/JPY into consolidation mode at 77.40-78.20 and is struck in cross-play between USD Index and the EUR/USD. For the week, let us watch consolidation at 77.40-78.40 not ruling out break higher for extended dollar gains into 79.25. The strategy is to buy dips into 77.65-77.40 for 79.00-79.25.

Interest rate market

Bond/OIS market traded to the script; 10Y Bond attracted good investor appetite at 8.17-8.20% while OIS rates eased from 7.70% (1Y) and 7.15% (5Y) into set weekly objectives at 7.60% and 7.05% respectively. The undertone continues to stay bullish on strong expectation of monetary easing by the RBI in its October quarterly review. The outlook on liquidity and interest rates favours strong rally in bond market into short/medium term. For the week, let us watch 10Y Bond at 8.07-8.17%; 1Y OIS at 7.50-7.65% and 5Y OIS at 6.95-7.10% with bias into lower end. The strategy is to hold on to longs entered at 8.17-8.18% and add at 8.18-8.20% if seen for near term objective at 8.05% and stay received in OIS at set higher end for lower end which should hold in the immediate term.

It was 3X12M action in FX premium; remained bid in the shorter end ahead of half-yearend balance sheet play while 6-12M attracted good supplies from exporters. The near/short term outlook is bearish on easing interest rates and supply driven mode in the forward market. For the week, let us watch 3M at 6.5-7.0% and 12M at 5.75-6.0%; test of higher end will set up receiving opportunity for gradual move into the lower end.

Equity market

It was bullish undertone in NIFTY within the set near term range of 5630-5980; saw intra-week low of 5638 and reversal from there met immediate objective at 5740 and close of week above 5700 is bullish into the short term. There will be good appetite from FIIs while domestic investors likely to join the party on confirmation of RBI’s dovish monetary policy stance. For the week, let us watch consolidation at 5630-5830 and look for build up of momentum for extension into 5950-6000. The strategy is to stay invested at 5660-5630 for test/break of 5740-5750 for 5830.

Commodity market

Gold held well at the set buy zone of 1750-1735 (low of 1737.50) and rally from there met immediate objective at 1785 (high of 1783); weekly close above 1765 is positive. The short/medium term outlook for Gold is bullish having replaced USD as safe-haven asset. It is matter of time for taking out strong resistance at 1790-1805 for extended rally into September 2011 high of 1920 to complete the set short term rally from 1535-1485 (low of 1521). Strategic players can look to buy dips into 1760-1735 and await test/break of 1810-1835 for 1920. For the week, let us watch 1755-1805 with test/break either-way to attract.

The reversal from 100 got solid support below 89.50 before consolidation around 92. Let us continue to maintain the bullish stance below 90 and bearish tone above 100 into short term. The near term outlook is mildly bearish for 89-93 consolidation with test/break either way difficult to sustain. The movement in crude oil price has lost traction with USD Index and preparing for extended reversal of its rally from 77.28 to 110.55 into short/medium term; hence prefer 84-94 consolidation into the near term. The bearish outlook on CRUDE is good for the Indian economy. For the week, let us watch 89-94 with test/break either-way not expected to sustain.

Moses Harding       

Weekly report for 24-28 September 2012

MARKET PULSE : Weekly report for 24-28 September 2012

Currency market

Rupee has out-performed its peers since June 2012 with 6.76% recovery from the recent low of 57.33. The recovery is not significant compared to strong two wave attack on rupee; first from the Euro zone in July 2011 pushing rupee down from 43.85 and the next from post Budget FY13 jitters in February 2012 driving rupee down from 48.60. It was a mix of both domestic and external cues which drove rupee down by over 30% from 43.85 to 57.33 from July 2011 to June 2012; recovery of 6.76% against fall of over 30% is not enough.  Now factors that drove rupee down have turned supportive. There are strong tailwinds from external sector post roll-out of QE3 and affirmation of loose monetary policy till 2015. On the domestic front, there have been decisive actions from the Government to address twin deficits through appropriate policy actions despite opposition. Clearly, there is turnaround in sentiments and confidence across all fronts, be it investments or capacity creation or consumption. The only risk factor is seen from higher commodity prices which could stroke inflation to dilute RBI’s growth supportive stance. But, sharp reversal in crude oil price post QE3 announcement provides great comfort. It is also possible that higher commodity prices may well be off-set by rupee appreciation. Over all, most factors (if not all) favour strong bullish undertone for rupee. If there would be action from global rating agencies to reinstate positive outlook ahead of upgrade, it would be extended bull-run for rupee.

The focus is now on to the extent of reversal into 48.60 or 43.85 from the recent low of 57.33; at current level (of 53.45), rupee has recovered 25% of its fall from 43.85 to 57.33. Rupee bullish forces are so strong that moves in USD/INR have lost its traction with movements in USD Index and EUR/USD; strong dollar against major currencies has less impact on rupee and accelerated rupee gains on weak dollar. NDF dollar is trading at good discount tracking strong off-shore appetite for Indian assets. At this stage, there is no single negative factor for rupee to look for reversal of recent gains. The immediate target for USD/INR is at 53.00-52.95 ahead of 52.20-51.95. If all goes well thereafter, rupee should extend its bullish momentum into 50.60-50.45 ahead of 49.00. It will be very low probability for rupee to fall beyond 54.00-54.15 and would be safe to hold on to “short dollar” positions with stop loss above 54.15 for the set objectives. MARKET PULSE was a dollar bull from 48 to 57; shifted stance to rupee bull from 57 for 52 asking exporters to sell 1-10Y receivables and borrowers to shift rupee liabilities to USD at 56-57.50. Now, the set objective at 52 is reviewed to 49 with trail stop above 54.15. This sets up a short/medium term range play at 49-54 with bias into lower end. For the week, let us watch 52-54 and retain rupee bullish undertone into the first objective at 52.20-51.95; any mild correction from gains in USD Index should attract good supplies at 53.55-53.65 and 53.90-54.05. The strategy is to add to “shorts” at these levels for set objectives into 52-49 with stop above 54.15.

QE3 driven rally in EUR/USD from 1.2040 to 1.3169 is losing steam; steep fall in USD Index from 84.10 found solid support at 78.60 for decent bounce into strong resistance at 79.60-79.90 (pushing EUR/USD down into 1.2910) and now seen to be in consolidation mode at 78.90-79.60 with extension limited to 78.60-79.90. This expectation sets up consolidation play in EUR/USD in the immediate term within 1.2945-1.3060 with extension limited to 1.2895-1.3110. The strategy is to play end-to-end of 1.29-1.31 range. Over all, consolidation in USD Index at 78.60-79.90 is seen as correction process before extending its bearish momentum into 77.00 (EUR/USD at 1.3350-1.3375) ahead of 76.00 (EUR/USD at 1.3500-1.3525). This move should complete the reversal process that we looked for from 1.2150-1.2250 into 1.32-1.35.

The BOJ driven rally in USD/JPY from 77.25-77.00 lost steam at 79.00-79.25 and now into consolidation mode around 78.00. The moves are in tune with the expected consolidation at 77-79. The near/short term bias is for test/break of recent high at 79.22 to get back into 80-85 consolidation. While keeping this in mind, let us watch 77.25-79.25 consolidation during this week. The strategy is to buy on dips in two lots at 77.85-77.60 and 77.35-77.10 with stop at 76.85 for 79.10-79.25 and 80.45-80.60.

Interest rate market

There is clarity on the way forward; Government has addressed issues relating to fiscal deficit and supply side concerns through subsidy cut and creating favourable investment environment. The risk on inflation from higher commodity prices is diluted as post QE3 rally in Crude Oil price met with stiff resistance. The sharp appreciation in rupee is not yet factored in. The impact of CAD on exchange rate is also relevant given the opening up of flood gate for flows into debt/equity capital market; favourable Balance of Payment and supply driven mode in the FX forward market would arrest uptrend in inflation. There is now confidence that inflation will trend down below 7% into RBI’s comfort level of 6% by end of FY13. RBI has already taken a mild dovish monetary policy stance; in due course, operative policy rate will move down from 8% (into 7%) either through rate cut or shift of system liquidity from deficit to surplus. RBI has lot of options to infuse liquidity either through OMO bond purchases in Money Market or USD purchases in FX Market or CRR cut. There is now stability in 1Y OIS rate above 7.70%; 5Y OIS rate above 7.15% and 10Y Bond yield above 8.15%. It is positive that Bond market is not into bearish set up despite no rate cut (and OMOs), spike in LAF draw-down and pipe-line auctions in H2. Taking all these bullish conditions into account, short/medium term targets are set at 7.50-7.45% (1Y OIS); 7.0-6.95% (5Y OIS) and 7.90-7.75% (10Y Bond). For the week, let us watch 7.60-7.75% (1Y OIS); 7.05-7.20% (5Y OIS) and 8.05-8.20% (10Y Bond). The strategy is to stay invested in 10Y Bond at 8.17-8.20% and received in 5Y OIS at 7.17-7.20% for set objectives.

Equity market

NIFTY has not only recovered its post Budget FY13 losses from 5630 to 4770 but has extended its gains into 5700 for strong weekly close at 5691. The close above 2012 high of 5630 is very bullish into short/medium term. Having unwound post FY13 Budget jitters, now focus is shifted to recover pre Euro zone crisis high of 6338 (seen in November 2010) and pre Lehman Brothers crisis high of 6357 (January 2008). It is huge relief for strategic investors who stay invested through 2008-2010 for recovery of the capital if not the time value. The immediate hurdle for the bulls is at 5740-5750 but momentum is strong for extension into 5835/5960 and 6000-6015 to complete end-to-end move of set near term range of 5500-6000. For the week, let us watch 5630-5980; test/break either-way to attract. The strategy is to hold on to investments and add on correction into 5630-5550 for 6000.

Commodity market

Gold has gained the most from QE3 with gain of over 17% from 1527 to 1787. MARKET PULSE rode the sharp fall from 1920 (September 2011) to 1525 and back to current levels by identifying 1535-1485 as strong long term support zone for the Gold. The party is not yet over for Gold as it would continue to stay with the shine into short/medium term. The weak undertone of the dollar and inflationary expectations in the Western economies (triggered by lose monetary policy) has made Gold as safe-haven asset (replacing the US dollar). The focus now is on the September 2011 high of 1920 with immediate objective at 1835; test/break here would extend bullish momentum into 1920. For the week, let us watch 1765-1835 with bias into higher end. The strategy is to add on to “longs” at 1765-1750 for set objectives.

QE3 driven rally in NYMEX Crude failed at strong resistance at 100 and reversal from there found support at 90 to complete its back-and-forth move between set near/short term range of 90-100. It is good comfort for the Global economy that impact of weak dollar is not factored into the crude oil price. Let us continue to look for near/short term consolidation at 90-100; test/break either-way would set up low risk-high reward trade opportunities. For the week, let us watch 90-94 not ruling out test/break of higher end into 97.50-100.00.

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

better late than never....

Cheers to Mr. Chidambaram for igniting the spark in the markets

The bearish set up in asset markets since February 2012 is now reversed. The outlook post Budget FY13 was bearish and confidence was weak driven by policy paralysis and poor fiscal conditions. The ability to roll-out next generation reforms and to cut subsidies was in doubt with strong opposition within and outside UPA. There was build up of fear of sovereign rating downgrade by global rating agencies. The external environment also was weak both in the Euro and US zones. It was no surprise that markets fell; NIFTY down from 5630 to 4770; rupee down from 48.60 to 57.33 and 10Y Bond yield rose to 8.79%.  

Come September2012, roll-out of QE3 by FED provided energy into asset markets. The external cues turned favourable. There is confirmation of appetite for India investments and availability of liquidity into Indian markets till 2014-2015. The new FM decided to take the bull by its horns with sudden announcement of reforms and fuel price hike. The resultant opposition is now met firmly with no fear of roll-back of announcements. There is also hope for follow-on reforms with start of cut in withholding tax on external borrowings. Markets responded swiftly, NIFTY is already above February high of 5630 and Rupee is up at 53.35. Bond market is also in bullish mode on expectation of RBI’s shift into growth supportive stance sooner than later.

The recent market actions since February 2012 would have hurt many. The single point factor to this turn-around story is the shift of Government stance from near paralysis to action, come what may. It was a “perform or perish” case for the Government (which MARKET PULSE discussed in its 21^st March 2012 research report) and it needed crisis kind of situation for the Government to get into action before it is too late!

What next? All negative factors have turned positive and favourable. The strong tail wind from external sector is there to stay for long. There will be regular and continuous flow of liquidity and investments into India. The economic improvement in western countries will be good to increase demand for India’s goods and services. On the domestic front, it is safe to assume that fear relating to policy paralysis and fiscal consolidation is out of the way. Global rating agencies will reinstate the outlook to positive and improvement in fiscal condition will lead to possible upgrade in sovereign rating. There will be no case for RBI to delay shift into growth supportive monetary stance and into very dovish stance on inflation inching into its comfort level. The combination of favourable cues from both domestic and external sectors can only lead to bullish expectation on asset markets. NIFTY will regain its November 2010 high of 6338; Rupee will extend its gains into 50 and easing interest rates will drive 10Y Bond yield into 7.75%. MARKET PULSE advised to stay invested and those who are not, it is time to catch the next leg of the rally. It is unwise to stay in cash or low yielding low risk assets.

Moses Harding

MARKET PULSE: 20 September 2012

MARKET PULSE: 20 September 2012

Currency market

Currency market is now into sideways consolidation mode after sharp rally since last week of July. Since then USD Index is down from 84.10 to 78.60; EUR/USD up from 1.2040 to 1.3169 and USD/INR down from 56.43 to 53.65. After this sharp reversal in USD driven by QE3 expectations, delivery of the same would obviously result in correction and consolidation. What next? Couple of questions are thrown up; where the correction process will end before USD getting into bearish trend? and/or, the bearish set up on the USD is over done? It is also obvious that very weak dollar and very strong Euro are not considered good when US and Euro zones are struggling to arrest recessionary trend. The immediate term range for the USD Index is seen to be at 78.60-79.90 (EUR/USD at 1.2850-1.3150 and USD/INR at 53.65-54.65).

The trend for Rupee is bullish given the positive cues both from domestic and external sectors. While the CAD issues continue to stay valid, flows into capital account will cover gap in Balance of Payment. The bullish sentiment will also trigger lead-lag play to keep forward market in supply driven mode. Taking all these together, correction process in USD/INR should lose steam ahead of either 54.70 or 55.05 as worst case scenario. For now, let us stay tuned to consolidation play within 53.65-54.65, test/break either-way not expected to sustain. The strategy is for exporters to sell 3M dollars around 54.50; 6M dollars around 54.75 and 12M dollars around 55.00. On the other hand, importers need to cover short term payables, say 1-2M on rupee gains into 53.65. Traders to stay tuned to twitter@mosesharding.com for views and trade recommendations.

EUR/USD met the correction target at 1.3025-1.3000 but the momentum is strong for further extension into 1.2925-1.2850 before getting into the bull trend. Having chased the move from 1.2150 to 1.3150, let us reinstate longs at 1.2950-1.2850. However, let us continue to stay with set short term range of 1.22-1.35; test/break either-way would attract strategic investors.

USD/JPY failed below 79 to retain the set short term range of 77-79. BOJ intervention fears continue to support USD/JPY which can risk one more touch of 80 before down. The strategy is to play end-to-end of this range.

Interest rate market

Midterm review of monetary policy is out of the way. The sensible and intelligent act of RBI has provided consolidation in rate market. The change in RBI’s stance is sighted; its concern on growth is visible now despite possible uptrend in headline inflation. However, way forward into the short/medium term is clear now. RBI will shift into growth supportive monetary stance soon. The timing of rate cut can be either in Q3 or Q4 of FY13, definitely not beyond. This expectation should provide relief to Bonds in the longer end causing temporary spread squeeze between 1-10Y Bond yields. Now, combination of positive expectations and supply side concerns will provide stability in 10Y Bond yield at 8.10-8.20%; while extended weakness into 8.20-8.25% is possible driven by pipe-line auctions, weak data on growth or downtrend in headline inflation can quickly push the 10Y Bond yield into 8%. It is time to stay invested on weakness into 8.18-8.23% (funded at 8% from RBI).

OIS rates are also into consolidation mode around 7.70% in 1Y and 7.20% in 5Y. The expectation of rate cut in Q3 or Q4 is already factored in. The immediate concern is on the extent of liquidity squeeze post advance tax outflows and higher demand for funds ahead of festive season. OIS rates will be under pressure in the near term tracking mild surge in call money rate and stability in bond yields. For now, let us watch 7.65-7.80% in 1Y and 7.10-7.25% in 5Y; test/break either-way is not expected to sustain. The strategy is to play end-to-end but good to stay received in the longer end (5Y at 7.22-7.27%) for 7.05-6.90%.

FX Premium has nicely traded end-to-end of 5.75-6% (12M) and 6.5-7% (3M). Let us continue to watch this range as test/break either-way will attract.

Equity market

NIFTY is also into consolidation mode after smart rally from 5032 to 5652 since last week of July. The correction process should ideally stay above 5505 driven by positive cues both from domestic and external sectors. In all probability NIFTY should regain the high of 6338 seen on last week of November 2010 by November 2012 or before end of FY13. The immediate hurdle is the 5630-5655 resistance zone which should be taken out for next objective at 5950-6000. For now, let us stay tuned to near/short term range of 5500-6000 with bias into higher end. The strategy is to buy on correction into 5530-5480 for next bout of 500-600 point rally.

Commodity market

NYMEX Crude reversed nicely from 100 to 90 to complete back-and-forth move between 90-100. Let us continue to watch this range and test/break either-way not expected to sustain.

The correction phase in Gold into 1735-1725 is very much valid (low so far at 1752) which should set up good buying opportunity for 1790-1805. For now, let us watch 1735-1790; test/break either-way not expected to sustain.

Moses Harding

Dr.Subba Rao's master stroke

Why 25 bps CRR cut?

None expected 25 bps CRR cut; it was either status-quo or 25 bps rate cut. Though I was also with the crowd, I expected Reverse Repo rate to remain unchaned at 7% with squeeze in the LAF spread from 1% to 75 bps to retain RBI's priority on inflation over growth. But, the Governor was step ahead of others - delivering 25 bps CRR cut which means nothing when operating policy rate is already at Repo rate with system deficit expected to rise above 1% of NDTL in the coming days. Infusion of Rs.17K Crores liquidity is a very small monetary policy step (less than 2 rounds of OMO). But, Dr.Rao has got kudos from all by giving nothing into the market. That's why he is there with ability to balance expectations of politicians, business leaders and market participants.

• Governor has addressed the recent confrontation between the Chairman of SBI and one of the Deputy Governor on CRR cut. I am sure SBI Chairman will be pleased as the Governor has taken his side
• RBI's status-quo would have hurt the new FM who has shown his guts to bite the bullet despite stiff opposition from within and outside UPA. Now, Mr.Chidambaram would be happy that RBI has taken his side (as subsititute if not as active player). The take-away is that the substitute can be forced in at any point of time
• Business Leaders would be happy that RBI has considered growth pressures as a serious issue despite elevated inflation. Earlier, 100% focus was on inflation; now it can be seen as 80:20 priorty which is good for starters.
• Financial intermediaries (Banks) would be happy with CRR cut; small improvement in the bottom-line and lead-lag impact on interst cost over interest revenue. It would do good on the margins.

Kudos to Dr.Subba Rao for thinking out of the box; creating a "great feel" by serving "very little on the table". There can not be a better option given the complexities on hand.

Moses Harding

Balancing act...no disappointment

Balancing act with positive undertone

It would have been difficult for RBI to explain rate cut action. The recent stance was clearly anti-inflation; headline WPI print is stubbornly above 7.5% and expectations are not positive. But, there is need to respond to sudden (and unexpected) bold measures from the Government to address issues related to fiscal consolidation and policy paralysis. Even die-hard optimists did not expect such bold steps from the Government at this stage. RBI responded with token 25 bps CRR cut to mark its appreciation over Government action but the underlying message is that there is dilution in RBI’s stance on inflation and shift towards pro-growth is sighted.

This should not be seen as disappointment. The post-policy sell-off was not deep and should be seen as buying opportunity for those who missed the recent rally. The external cues are supportive of Indian assets till 2015 and there has been significant improvement in domestic cues. It is time to buy stocks; bonds and Rupee for significant appreciation by end of 2012. RBI’s action is seen as fair and pro-market given its tough task to balance growth-inflation dynamics.

What is the impact on the market? The shorter end of the rate curve will ease while maintaining stability in the medium to longer end. It would be good to invest in 10Y Bond on weakness into 8.15-8.25% (for 8.0-7.90%) and stay received in 5Y OIS at 7.20-7.25% (for 7.0-6.90%). USD/INR will find it hard to take out strong resistance at 54.15-54.25 (for 53.05-52.95) on strong downward pressure on USD Index to fall below strong support zone at 78.60-78.10 (for 74.75-72.75). Over all, there is nothing to get disappointed but to be seen as good opportunity to stay invested. It is party time for India despite suspect macroeconomic fundamentals, supported by strong tail winds from off-shore market. There is also certainty that momentum of the tail wind will stay into 2013-2014.

Moses Harding

RBI's mid term review: Expectations

Will RBI respond to Government’s bold steps with 25 bps rate cut?

The expectation post headline WPI inflation print above 7.5% was for RBI to stay focussed on elevated headline inflation and maintain status-quo in mid-term monetary policy review. But then, Government acted in a hurry by delivering price hike in diesel and removal of subsidy in LPG beyond 6 cylinders per year. This was also followed by other policy measures relating to FDI. Government has acted to address issues relating to fiscal consolidation and policy paralysis to push the ball into RBI’s Court. Is this good enough for RBI to act? The answer to this is just round the corner.

RBI is facing strong headwinds and rough weather in its efforts to get headline inflation into its comfort level of 6% from current level of over 7.5%. The immediate risk is of further upward pressure into 8% driven by impact of diesel price hike, bullish commodity prices, not-so-good monsoon, and supply side concerns. There seems to be no linkage between growth and inflation. The downtrend in growth momentum into 5% should have eased pressure on inflation. When it has not, RBI may stay hesitant to take growth supportive stance which could hurt inflation. RBI has already taken strong position that it would not get into growth supportive stance till inflationary expectations turn favourable. Unfortunately, it is not at this stage.

RBI may also be compelled to act to maintain the positive (and bullish) sentiments post QE3 and Government’s measures. The liquidity position is now comfortable. It will be now easy for RBI to maintain deficit system liquidity below 1% NDTL through OMO bond purchases (in the Money market) and USD purchases (in the FX market), thus ruling out CRR/SLR cut. RBI may not opt for shift of system liquidity from deficit to surplus, in which case operative policy rate (and overnight call money rate) will fall sharply from 8% to 7% (without rate cut). This move will spur demand and would hurt inflation. The next option for RBI is to deliver 25 bps cut in Repo rate to retain current bullish market sentiment and as reward for bold steps from the Government despite stiff opposition within and outside UPA. It is a 50:50 probability between status-quo and 25 bps cut in Repo rate. If forced to choose one, MARKET PULSE will bet small money on 25 bps cut in Repo rate. It is considered good to retain Reverse Repo rate unchanged at 7% as signal to retain its priority on inflation.

Moses Harding

   

MARKET PULSE: Weekly report for 17-21 September 2012

MARKET PULSE: 17^th SEPTEMBER 2012

It is nice to be back; previous report was in the first week of August and it feels good that most of the near term expectations (and objectives) are met:

·       USD/INR lost steam at sell zone of 56.00-56.25 for sharp reversal into the set near term objective at 54.17

·       EUR/USD rallied sharply from buy zone of 1.2150-1.2050 to meet the set objective at 1.30-1.32

·       NIFTY rallied from buy zone of 5200-5175 to meet the set objective at 5600

·       Gold rallied from buy zone of 1560-1585 to run past set objective at 1735

·       NYMEX Crude rallied to meet the set objective at 100

·       10Y Bond yield traded end-to-end of set near term range of 8.10-8.25%, more than once

·       5Y OIS rate moved up from the pay zone of 7.0-6.90% to set objective at 7.25% while 1Y OIS rate traded end-to-end of 7.70-7.85%. The strategy to receive 1Y at 7.80-7.85% and pay 5Y at 7.0-6.90% has paid rich dividend.

MARKET PULSE, in its start of 2012 research report predicted delivery of QE3 in September 2012 and FED has now delivered more than expectation. It is an aggressive $40 Billion a month financial support; extension of “Operation TWIST” and affirmation of near zero interest rate policy till mid 2015. The loose monetary policy (low interest rates and aggressive liquidity support) of FED and ECB provides strong support to asset markets. The aggressive stance to restore economic growth and arrest growing unemployment provides comfort to shift from low risk/low yield assets to other high risk/high reward asset classes. The investment strategy of MARKET PULSE for 2012 is to maintain good leverage (borrow and invest) and it has turned out to be profitable so far.

What next?

Currency market

USD Index failed to hold on to gains above strong resistance at 82.60 (high of 82.72) and reversal from there has met strong support at 78.60. It is important for USD Index to hold above 78.10 (low of 2012) to prevent extended weakness into 74.75/72.70. The immediate (and near term) risk is for extended losses for the greenback against the Euro and Rupee. The Indian Government has taken bold steps to address fiscal consolidation and Balance of Payment. While it is too early to estimate quantum of off-shore dollar supplies into India (through debt and equity capital markets), there will be significant improvement in sentiment and confidence. Now, there will be pressure on RBI to get into growth supportive monetary stance. All these are good news for rupee bulls to extend rally beyond 54.17-53.99 into next objective at 53. USD/INR is now into near term range of 53-55 with bias into lower end. The rally in rupee is considered good for the Indian economy when commodity prices are in bullish mode. It would also set up opportunity for RBI to pump rupee liquidity without use of CRR cut and OMO bond purchases. The strategy of MARKET PULSE was to sell 1-10Y dollars on rupee weakness into 56.00-57.50 while providing comfort to importers not to panic on dollar payables beyond 1-2 months. Now, both global and domestic cues are strongly in favour of rupee for extended gains into 53 (not ruling out further extension into 52.00-51.90) where it would be prudent to unwind part of short dollar positions. Let us also watch out for aggressive RBI presence at 53-52 to protect exporters’ interest and to release rupees into the system to meet advance tax outflows.

EUR/USD is set to extend its rally beyond 1.3250 (on USD Index below 78.10) for minimum 1.3475-1.3500 to complete back-and-forth move between the set strategic sell zone of 1.32-1.35 and buy zone of 1.22-1.19. The strategy is to hold on to long EUR/USD position with trail stop below 1.3000/1.2850 for 1.3450-1.3500. The expectation thereafter is for further extension into 1.3850-1.4150 and to bring the focus into 1.4939.

Interest rate market

It is not clear at this stage whether RBI will get into growth supportive monetary stance despite some bold measures from the Government to address issues related to fiscal consolidation and policy paralysis. There seems to be no concerns over liquidity, thus ruling out CRR cuts and OMO bond purchases. RBI can now pump in liquidity through USD purchases. It is now time for 10Y Bond yield to break out of familiar 8.10-8.25% range to set up a new near/short term trading range with objective at 8.02-7.97 while weakness into 8.10-8.15% is considered good to invest. Strategic investors who are already invested on recent weakness into 8.25% can add at 8.15% for exit at 8.02-7.97%. Let us watch near term trading range at 8.0-8.15% with bias into lower end.

It is matter of time for benchmark overnight MIBOR to ease below 8%. It is to be seen whether it is done through rate cut or shift of system liquidity from deficit to surplus. The sudden shift of operative policy rate from 8% to 7% may be seen as risk to inflation by RBI, hence RBI may choose to maintain operative policy rate at Repo rate (with deficit system liquidity of 1% of NDTL) and provide 25-50 bps rate cut. The possibility of overnight MIBOR at 7.75-7.50% in the near/short term would drive 1Y OIS rate into 7.50 and 5Y OIS rate into 7.0%. The near/short term trading range is now set at 7.50-7.75% (1Y) and 7.0-7.25% (5Y) with bias into lower end.

Equity market

It is party time for Indian equity market despite suspect macroeconomic fundamentals. The sovereign rating downgrade fear is out of the way now. The loose monetary policy in western economies till 2015, some bold steps from the Government to open up FDI and shift into growth supportive monetary stance (sooner than later) will act as boosters for extended rally. It may not be difficult to take out immediate strong resistance at 5630 for extended rally into 5700-5740 to get the focus into 5944. We have now shifted into new near/short term range of 5500-6000 and it is prudent to make way for the bulls into the street.

Commodity market

MARKET PULSE looked for rally in Gold into 1735 on release of QE3. FED delivered beyond expectation to get the focus now into 1790-1802 in the immediate term. Beyond there, 1920 will be at risk. Let us set our focus at test/break of 1802 for gradual extension into 1920.

NYMEX Crude has hit the set target at 100 to complete back-and-forth move between 75-100. MARKET PULSE asked OMCs to hedge near/short term liabilities on move into 75. The risk now is for extended rally into 106.43 and 110.55 driven by easy global liquidity and tensions in the Middle East. The near term range is now set at 95-110 with bias into higher end.

Moses Harding