MARKET PULSE: Weekly report for 25 February – 1 March 2013
Tough to play ball between Global rating agencies and “aam aadhmi”
The Finance Minister (FM) is in tight spot managing expectations of all stake holders of the Indian economy at the same time, and it is more difficult when the economy is in serious conflict of play among growth, inflation and twin-deficits. The Global rating agencies have close watch on fiscal consolidation and policy reforms to spur investments, consumption and growth for capacity expansion of the economy. FM cannot afford to ignore them as sovereign investment rating to junk grade will be an economic, fiscal and monetary disaster. The “aam aadhmi” (at bottom of the pyramid) are worried about their survival during this tough period and do not want the Government to cut into the ‘entitled’ subsidies on essential items, and want more to cover elevated retail inflation. FM cannot ignore UPA’s political ambition when the next general election is round the corner. The middle class (at the middle of the pyramid) wants more money in the purse to retain consumption and maintain the standard-of-living. This is the class worst hit from sub-optimal capacity usage and wish for early turnaround for creation of employment and wealth. It is a very important agenda for the FM as the middle class is the strength of the Indian economy. The upper class (at the top of the pyramid) hope for return into over 9% GDP growth momentum for wealth creation, and also looks for better investment opportunities. This is the segment which locks wealth in unproductive assets such as Gold and real estate. FM has the agenda to get the money out and improve the savings and investment rate. The super-rich resident investors and off-shore entities are seen to have risk appetite for investments but do not see viable opportunities struck by political and regulatory bottle-necks. FM has the agenda to remove this fear and perception by rolling out measures to improve investor confidence and sentiment. The business community is under severe top-line pressure; percentage of fixed expenses against total revenues has moved high, squeezing the margin and the bottom-line. They wish the growth momentum to be revived at the cost of everything else. This also has direct impact on the revenue of the exchequer. FM has the need to give top priority to this agenda. RBI, while staying concerned on fiscal consolidation and twin-deficits, is not seen to have the confidence on the ability to spur growth (and revenues) without desired policy reforms. FM has the agenda to remove this fear to enable RBI to shift from moderate to more dovish monetary policy stance.
Given these multiple and complex agenda, FM has chosen to take “bottom-up” approach. The starting point of Budget FY14 is the fiscal deficit number at 4.8% of GDP. The cost and public investment management comes first, followed by revenue projection to meet the fiscal deficit target and then to project the growth momentum needed to get desired revenues. FM will have the option to sell public assets to fix large gaps, if any. On the cost side, interest pay-out continues to stay high while efforts are on to cut subsidy cost. There may not be significant impact on subsidies in FY14 as cut in fuel subsidy will be largely off-set by food security. The expenses relating to interest and subsidies to the percentage of GDP are expected to remain steady. FM has little leverage in controlling the cost excluding interest and subsidy with the need to stay on business-as-usual mode on administrative and management expenses. FM will be forced to cut fund allocation for productive expansion of Public assets/enterprise. To meet all these agenda while retaining steady revenue to GDP percentage, the growth projection for FY14 will obviously be very high, expected to be not lower than 6.50-7.0%. Will there be aggressive policy (and administrative) actions to achieve significantly higher sequential growth from March 2013 end-date print of around 5%? The stake holders are curious to get answers to all these queries and are seen to be in disbelief at this moment. It is important for the FM to prepare the Budget FY14 which will not end up either as a “shock” or “ambitious” or “disbelief”; either of these will set up bearish outlook on the Indian economy and asset markets.
Exchange rate market:
USD/INR traded back-and-forth within the set weekly range of 53.90-54.40/54.55; initial recovery from 54.44 to 54.02 was followed by sharp rally into 54.59 (driven by weak Euro and NIFTY) but could not sustain there (on strong supplies from exporters) for sharp reversal into 54.15 before close of week at 54.18. MARKET PULSE (in the intra-week update on Twitter) advised strategic traders to establish short-dollar book at/above 54.55 and urged exporters to cover 3M receivables at/above 55.60 (high of 55.66) and 12M receivables at/above 58.10 (high of 58.20) while asking importers to stay aside for post-budget rupee rally below 53.60. What next? The weekly close below 54.20/54.35 is rupee bullish into the near term. Rupee is strongly supported by pipe-line dollar supplies and elevated FX premium of 6.5-8.0% (across 1-12M) driving forward market into supply-driven mode. These strong factors have diluted bearish impact on the rupee from huge Current Account Deficit with added comfort from softening stance on commodity prices. The major trigger for now will be from Budget FY14. It is possible that sharp fall in rupee from 52.88 has already ended at 54.59 posting lower “low’s” in 2013 down from 55.38 and 54.89. The immediate support for the dollar is at 53.95-54.05 followed by 53.70-53.75 with post-budget target at 53.22-53.47 while rupee finds solid support at 54.35-54.60. The hedging activity has to be based on the outlook of near/short term stability at 53-55, hence consider not prudent to stay “long dollars” at 54.50-55.00 and high risk to stay “short dollars” at 53.00-53.50. For the week, let us watch 53.45/53.70-54.35/54.60 with bias into lower end while extension into outer corridor will attract strong interest. The trading strategy is to retain “short dollar” book entered at/above 54.55, add at 54.35-54.60 with stop at 54.65 for 53.40-53.55. Exporters who sold 3M dollars at/above 55.60 and 12M dollars at/above 58.10 can add 3M at 55.40-55.65 and 12M at 57.95-58.20 for 54.45-54.60 (3M) and 57.00-57.15 (12M) while enjoying the “carry” and “time-decay”. Short term traders can look to sell in two lots at 54.25-54.35 and 54.50-54.60 with stop at 54.65 for 53.70-53.80 (stay tuned to intra-week amendments and review on the Twitter).
EUR/USD fell sharply post FOMC from 1.3433 to 1.3144 and into consolidation mode at 1.3150-1.3250 before close of week at 1.3191. MARKET PULSE has set reversal objective at 1.3075-1.3150 before gaining steam for taking out 1.3440 for 1.3710. In the meanwhile USD Index completely unwound its recent fall from 81.50 to 79.00 and had bullish weekly close at 81.45. The expected bearish undertone on the dollar driven by loose monetary policy is now diluted on fear of bit of tightness and early end to QE3 liquidity support. What next? The economic data out of the US and Euro zones are not encouraging and monetary support is expected to stay through 2013 but the fear (and risk) is from not extending through 2014-2015 as committed earlier. It would be period of consolidation without excessive moves either-way with possible near/short term trading range at 1.30-1.37. For the week, let us watch consolidation at 1.3075/1.3150-1.3375/1.3450; move into outer corridor is expected to hold. The strategy is to trade end-to-end with stop/reverse for extended objective into 1.30 or 1.37.
USD/JPY stayed in consolidation mode within set near term range of 92.25/92.75-94.25/94.75; posted intra-week high of 94.20 and low of 92.76 before close of week at 93.38. What next? JPY continues to maintain its bearish undertone with limited resistance from G20 on current excessive weakness on the JPY. We retain the set near term play at 92-95 before extension into 96-97 ahead of 100. Continue to favour formation of short term base at 92-93 for 99-100. For the week, let us continue to watch 92.25/92.75-94.25/94.75 and prepare steam for extension into 96-97 in the near term. The strategy is trade end-to-end and track intra-week updates for break-out signals for extended bullish run into 97-100.
Interest rate market:
10Y Bond posted a strong intra-week rally from 7.85% to 7.78% but found strong resistance there for marginal pull back into 7.82% before close of week at 7.80%. The rally since end November 2012 from 8.24% to 7.78% is strong, hence consolidation around 7.80% will be in order given the mixed cues from now on. 3M return on 10Y Bond is at whopping 26.5% on annualised basis which would attract profit-booking. The strategy of MARKET PULSE is to unwind long tenure bonds (over 10 years) on extended rally below 7.80% and shift to shorter end (up to 5 years) with objectives to cut duration of the portfolio (maintaining the portfolio yield) while staying invested and realise profit ahead of FY end. The undertone is mildly bullish but major gains from now on will be in the shorter end. What next? Bond yields have already priced-in 25 bps rate cut on 19th March with or without 25-50 bps CRR cut. Beyond there, if operating policy rate stays steady at 7.5% for next 6-12 months, it is difficult for 10Y Bond to sustain its extended gains into 7.65-7.75% on huge supplies from fresh issuance from RBI in FY14, unwinding of excess SLR from AFS/HFT ahead of FY13 end and sale from HTM in April 2013. It is also in order to build minimum 25 bps tenor premium over the operating policy rate. For the week, let us watch consolidation at 7.78-7.83; test/break either-way to attract. The strategy is to trade end-to-end by buying at 7.83-7.85% and selling at 7.76-7.78% with tight stop. Strategic players to retain “long book” and gradually switch tenor from over 10 years to below 5 years on extended gains below 7.78%.
OIS rates in consolidation mode at 7.60-7.65% (1Y) and 7.22-7.27% (5Y) and back-and-forth trading within these ranges is traders’ delight. What next? The benchmark overnight MIBOR will be under pressure on shift into March with risk of draw-down from LAF counter inching into/over Rs.2 Trillion in second fortnight of March. It will be attractive for Banks to tap funds from Repo counter at 7.75% and invest in high-yielding shorter end CD/CPs (expected to move into double-digit for 1-3M tenure in the second fortnight of March). Given the expectation of extended pause in operating policy rate at 7.5% (overnight MIBOR at 7.55-7.65%), 1Y OIS rate will find strong support at 7.58-7.60% with strong resistance at/above 7.65%. This factor along with signs of formation of base close by in the 5-10Y Bond yield, 5Y OIS will find support at 7.18-7.20% with resistance at 7.27-7.30% not ruling out extension into 7.35% in the short term. For the week, let us watch consolidation at 7.60-7.65% (1Y) and 7.20-7.27% (5Y); test/break either-way to attract. The strategy is to initiate “pay” in 1Y at 7.58-7.60% and in 5Y at 7.18-7.20% for a 5-7 bps trade.
FX Premium stayed firm in shorter end with 3M premium up into set objective at 7.85-8% while 12M in consolidation mode at 6.60-6.75%. What next? It is mixed cues; strong upside momentum from interest rate play with good supplies from exporters across 1-12 months. It makes sense for exporters to receive 1-3M premium at 7.85-8% by availing export finance in rupees (at say 10%) for a zero cost export funding with 2% interest subvention. On the other hand, higher spot and high premium attracts export supplies in 3-12M tenor. For the week, let us watch consolidation in 3M at 7.75-8% and 6.60-6.75% in 12M; there is risk of break higher as Banks swap dollar liabilities into rupees for double-digit yield in shorter end Fixed Income. The strategy is to retain the “paid book” entered at 7.5% (3M) and 6.5% (12M), add at 7.65% and 6.6% respectively for over 8% and 6.75%.
Equity market:
NIFTY traded perfect to the script; triggered sell levels at 5920-5935 and 5960-5985 (high at 5971) and met the set profit objective at 5820-5845 (low at 5836) before close of week at 5850. In the process, it also triggered the strategic play of re-open of the investment book (post exit at/above 6100) with first lot at 5825-5840. What next? The undertone is mixed and the comfort is from FIIs staying invested despite sharp reversal from above 6100 to below 5850. Domestic investors continue to favour fixed income and not yet prepared for shift into equity assets. MARKET PULSE retains mildly bullish undertone on the belief that no unpleasant surprises will be in store in the Budget FY14 and domestic investors are expected to see value in equity assets at current levels with limited gains in Fixed Income from now on. But shift of domestic investor appetite from fixed income into equity may not happen in March given the very attractive 1-3M yield in CP/CDs. For the week, let us watch 5825-5975 with bias into higher end, but not ruling out extended weakness into 5750-5765 for set up of strong post-budget rally. The strategy is to retain long entered at 5825-5840 with tight stop/reverse at 5820 for 5750-5765 and buy here for sharp reversal. Strategic investors who have reinvested first lot at 5825-5840 can add second lot at 5750-5765 and watch this space on twitter for intra-week review.
Commodity market
Gold met the set near term objective at 1530-1565 (low at 1554) ending our recent chase from 1685 and correction from 1554 lost steam at set intra-week resistance at 1585-1590 before close of week at 1580. What next? The undertone is bearish for extended weakness to take out 1555, and thereafter into strong support at 1520-1535. This support needs to hold to prevent start of unwind of sustained three year rally in Gold from 680 (October 2008) to 1920 (September 2011) and 1790 (October 2012). Gold at current value is over-priced with risk of tightening in the loose monetary policy in western economies. The kind of dream returns seen till 2011-2012 are no more available in Gold and has clearly lost its shine. For the week, let us watch 1525-1590/1605 with bias into lower end. The strategy is to re-build “short book” in two lots at 1585-1590 and 1605-1620 with tight stop for 1520-1535 ahead of 1490.
NYMEX Crude traded end-to-end of set weekly range of 93.00-97.50; fell sharply from 97.07 to 92.44 before close of week at 93.13. This also completes our chase from above 98.00 (high at 98.11/98.24) to complete end-to-end of set near term range of 93-98. What next? The undertone is neutral to mildly bearish. The weak economic data from the US and Euro zones and minor change in the monetary policy have triggered the reversal, thus diluting the risk of extended rally beyond 99.00-100.50. It is possible that unwind of recent rally from 84 to 98 is underway. For the week, let us watch 90-95 with bias into lower end. The strategy is to reinstate “short book” at 94.50-95.00 with tight stop for 89.50-90.00 and thereafter further extension into 84 in the near term.
Have a great week ahead.......................Moses Harding
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