Weekly report for 04-08 March 2013

MARKET PULSE: Weekly report for 04-08 March 2013

Not enough stimuli to drive investments and consumption for growth

The agenda (and strategy) into Budget FY14 was to contain fiscal deficit and stoke growth without compromise on social spending. The Budget estimates have fitted well into this agenda with GDP growth estimate pegged at 6.5% to build accelerated revenues to contain fiscal deficit at 4.8%. The net market borrowing at Rs.4.84 lakh Crores (excluding Rs.50K Crores allotted for Buy Back/Switch) is on expected lines of around Rs.5 lakh Crores. The Budget assumes aggressive estimate of over 18% growth in direct taxes, over 20% growth in indirect taxes and one-off revenues at Rs.80K Crores from disinvestment while retaining the expenses at elevated 30% year-on-year growth. The strategic intent is to meet the expectation of the global rating agencies and the vote bank at the same time. While a lot has been discussed on the maths behind Budget FY14, MARKET PULSE evaluates down-side risks to the estimation on the back-drop of severe challenges from both domestic and global cues. While setting up aggressive (and ambitious) budget estimates, the document has not thrown up strong (and aggressive) tactical actions (and measures) to attract investments for growth and solutions to revive (and expand) capacity in core sectors, while crushing demand and consumption of non-essential items, thus opening up execution risks to achieve desired objectives. The Government had no option but to pick up “growth story” for election propaganda instead of throwing “freebies” as before to prevent negative attention from Global rating agencies. The concerns at this stage are from the following:

• There is very high dependency on achieving 6.5% growth (for higher revenues) which looks tough when Q4/FY13 GDP growth is expected to be sub 5%. The H1/FY14 GDP growth has to be at 6% (on higher base of H1/FY13) and H2/FY14 GDP growth of around 7% (on lower base in H2/FY13); this fits well into FY15 GDP growth aspiration at 7.5-8.0%. The risk is from achieving a sequential growth from sub 5% in H2/FY13 to 6% in H1/FY14 and thereafter into 7% in H2/FY14. The budget estimates on revenues is clearly at risk in the absence of big-bang measures to revive growth at this fast pace.
• The tactical measures to stoke growth in infrastructure, agriculture, manufacturing and other core sectors are not seen sufficient to expand capacity when contributions from productive sectors will stay stagnant. The private investors continue to stay on risk-off mode in the absence of opportunities and viable business propositions.
• While the Government recognises the need for accommodative monetary policy to achieve set growth target, there are no efforts to address issues relating to widening current account deficit and elevated food price inflation. The Budget has given up hope on CAD and the efforts are more towards attracting off-shore liquidity to bridge the gap. It is obvious that off-shore liquidity will not be adequate in the absence of robust growth story. There are no measures to remove supply side bottle-necks to contain food price inflation while the intent is to cut demand and consumption!
• While RBI derives comfort from moderation in headline WPI (and core) inflation and recognises the need to support growth through low interest rates and surplus system liquidity, concerns from widening CAD and elevated food price inflation may not provide adequate space for shift to dovish monetary policy stance at this stage. Even if it does, the impact on rates will be muted given the system liquidity squeeze from higher CAD. The pressure on rupee exchange rate will also deter RBI from taking an aggressive growth-supportive stance. Therefore, monetary support to growth is expected to be limited despite ‘managing’ fiscal consolidation.

Over all, the stake-holders of the economy are seen to be appreciative of the presentation and the intent of Budget FY14, but stay with disbelief (and lack of confidence) in achieving the set budgetary targets. At this stage, MARKET PULSE sets its estimate for FY14 GDP growth at 6.0-6.5% and fiscal deficit at 4.8-5.3%, building significant downside risks (from tactical and execution failures) with no expectation build-up for upside surprises! What is the impact on markets?

Exchange rate market:

USD/INR has been volatile since entry into 2013; Rupee rallied from 55.38 to 52.88, reversed into 54.60 before engineering pre-budget rally into 53.60, only to be followed by post-budget weakness into 54.94 before close of week at 54.90. The only comfort is that there were clear signals for such sharp turnaround, providing good opportunity to traders and dynamic hedgers. MARKET PULSE set strong base for USD/INR at 52.85-53.10 (pre/post January monetary policy); at 53.45-53.70 (pre-budget weekly report) and at 54.35-54.50 (post-budget intra-week update on the Twitter) with objective at 55.90-56.05. USD/INR punched pre-budget low of 53.60 and post-budget low of 54.37 before sharp rally into 55. What next? There are not many positive cues for Rupee at this stage. The support to Rupee from high FX premium may not be good given the strong bearish set-up on rupee. There are signs of combined set-up of “greed” (exporters giving up high premium in greed for higher spot) and “fear” (importers willing to pay high premium in fear of sharp spot rupee weakness) factors driving rupee into bearish undertone in the near term. On the other hand, the comfort from strong FII flows may not be relevant now; equity assets are sharply down in 2013; no major gains visible in the Bond market and huge downside risks on currency. All these factors combined will put rupee bulls on the back-foot while dollar bulls take control of the street. Rupee is clearly at risk of posting a new intra-2013 low above 55.38 and thereafter into 55.88 before signs of stability. At this point, prefer to keep 56.43-57.32 out of the radar. For the week, watch USD/INR at 54.35/54.50-55.45/55.60 with near term trading range at 54-56 and bias into higher end. MARKET PULSE readers will now have deep pockets chasing the move from above 55.65 to 53.10; 53.10 to 54.45; 54.45 to 53.70 to 54.55 and now long dollars at 54.35-54.50. The hedging strategy has to be very conservative given the excessive volatility and extended swings; first entry point for exporters will be at 55.80-56.05 (3M dollars at 56.85-57.10 and 12M dollars at 59.40-59.65) while importers to absorb correction into 54.35-54.60 (1-3M dollars at/below 55). Strategic players can trade end-to-end of 54.35-54.60 and 55.80-56.05 with tight stop on break. It would be high risk to stay “long dollars” at/above 56.00 while 53-54 is seen as strong short term base for the dollar. The hedging strategy should be based on expectation of short/medium term consolidation in USD/INR at 53/54-56/57; would see strong arm tactics of RBI to prevent rupee weakness into 56-57 with near zero risk of extended weakness into 58-60. At this stage, widening CAD and weak Rupee are seen as major risks to India growth story.   

EUR/USD reversed sharply from 1.3320 resistance (high at 1.3318) into set near/short term support at 1.2950-1.3000 (low at 1.2965) before close of week at 1.3020. It is possible that the expected reversal from 1.37 (hi at 1.3711 on 1/2/13) into 1.30 is completed. What next? The cues that triggered this move from fear of dilution in QE3 and political confusion in Italy should fade way to provide relief rally above 1.3150-1.3165 into 1.3320/1.3440 in the near term. For the week, let us watch 1.2875/1.2950-1.3250/1.3325 with bias into higher end. In the meanwhile USD Index is expected to end its sharp rally from 78.92 to 82.51 at 82.85-83.00 for sharp reversal into 81.35-79.90. It is good for strategic players to buy in two lots at 1.2965-1.2990 and 1.2875-1.2900 for 1.3150 and thereafter into 1.3325-1.3450 with stop below 1.2850 which would then bring the focus into 1.2660-1.2685 before strongly up.

USD/JPY settled into consolidation at 91.75/92.25-93.75/94.25 post initial sharp fall from 94.76 to 90.92 before close of week at 93.60. What next? USD/JPY is expected to attract good selling interest at 94.50-95.00 with strong base at 90.00-90.50 for consolidation play at 90-95 while retaining short/medium term bullish undertone for extension into 97-100 in due course. For the week, let us watch consolidation at 91.75/92.25-94.25/94.75. The strategy is to trade end-to-end with tight stop on break thereof.

Interest rate market:

10Y Bond fell sharply from pre-budget high of 7.78% to hit post-budget low of 7.92% before close of week at 7.90%. In the process, it completed end-to-end of set “strategic short zone” of 7.78-7.80% and “strategic buy zone” of 7.92-7.95%. MARKET PULSE urged strategic investors to either unwind “long book” at 7.78-7.80% or cut the duration of the investment book through sale of 10-30 year bonds and buy into 1-3/5 years tenor to retain portfolio yield and to take money off-the-table. What next?  The chances of extended gains in 10Y Bond below 7.78% is low with risk of extended weakness beyond 7.92-7.95% into 7.99-8.04%. The best case scenario in the near/short term is not beyond 7.78-7.80% on delivery of 25 bps rate cut in March/April while unwinding of excess SLR book and fresh bond supplies from RBI will exert pressure into 8.0-8.05%, but expected to get support here from RBI through OMO bond purchases. For the week, let us watch 7.85-7.95/8.0% with bias into higher end. It is good risk-reward for traders to stay short at 7.85-7.88% with tight stop for 7.95-8.0%. Strategic investors can look to re-instate long book in two lots at 7.93-7.95% and 7.99-8.01% for 7.78-7.80%.

OIS rates found solid support at the set pay zone of 7.58-7.60% (1Y) and 7.18-7.20% (5Y) for post-policy rally into 7.63% and 7.25% to complete yet another back-and-forth move between 7.58/7.60-7.63/7.65 and 7.18/7.20-7.23/7.25%. What next? The 1X5 play has opened up with 1Y finding strong resistance at 7.63-7.65% while 5Y extending its rally into 7.28-7.30%. For the week, let us watch 1Y at 7.58-7.63/7.65% and 5Y at 7.18/7.20-7.28/7.30. The strategy is to receive 1Y at 7.63-7.65 and pay 5Y OIS at 7.18-7.20% for 7.58-7.60% and 7.28-7.30% respectively.

FX Premium in tight consolidation at 7.65-7.90/8.0% (3M) and 6.50-6.65/6.75% (12M) struck in counter-play between interest and exchange rate momentum. What next? Interest rate play will continue to exert upside pressure tracking higher MM rates in 1-3M tenures. The exchange rate play may also add to upside pressure if exporters withdraw supplies in the forward market in anticipation of higher spot USD/INR and importers rushing into cover near/short term dollar liabilities. For the week, let us continue to watch 7.65-7.90/8.0% in 3M and 6.50-6.75% in 12M with bias into higher end. The strategy is to retain the “paid book” entered at 7.5% in 3M and 6.5% in 12M and add at 7.65% (3M) for over 8% and 6.75% respectively.

Equity market:

NIFTY fell sharply from intra-week pre-budget high of 5878 into pre-budget low of 5672 before close of week at 5719. The inability to take out 5880 for sharp reversal below 5750-5800 highlights set-up of strong near term bearish momentum. What next? There is nothing much to cheer from the Budget FY14. Now, the focus is on the FIIs. Will they stay invested despite over 7% fall since 29^th January monetary policy review and Rupee at risk of extended weakness above 2012 close of 54.99? The consolation for FIIs is from good returns on their Fixed Income/Bond book since November 2012. Domestic Institutional investors are in no mood to shift their appetite from Bonds to Equity while retail investors stay put in high yield short term fixed income and await clarity on the way forward. Taking all these together, there will be more of supplies than demand in the near/short term. It is possible that the 2 month rally from 5548 to 6111 is at risk for complete unwind during this week/month while any kind of relief rally is possible only if FIIs bring more money to add to investments at lower valuation of stocks and weak rupee. But, given the lack of confidence on robust growth momentum, FIIs may prefer to see signs of appetite from domestic investors to get into buy mode. For the week, let us watch 5550-5775/5825 with bias into lower end. Strategic players can look to sell in two lots at 5760-5775 and 5810-5825 with tight stop for 5550-5565. It would need RBI’s strong growth-supportive monetary stance (at the cost of other risk factors) to arrest extended weakness below 5550 into 5000-5300.

Commodity market:

Gold completed its relief rally from 1555 at set resistance/sell zone of 1605-1620 (high at 1619.66) and reversed to hit the first objective at 1565 (low at 1564.44) before close of week at 1575. What next? Gold is already in the process of unwinding its 3 year rally from 680 (October 2008) to 1920 (September 2011) with short term objective at 1300 where it will look good to buy. The immediate objective is at 1520-1535 and thereafter into 1435-1450 while 1615-1630 stays firm. For the week, let us watch 1525-1590/1605 with bias into lower end. The strategy is to sell in two lots at 1585-1595 and 1615-1625 with stop at 1630 for 1520-1535.

NYMEX Crude traded to the script at set weekly range of 90-95; initial rally lost steam at 94.46 for gradual reversal into 90.04 before close of week at 90.68. What next? NYMEX Crude is in the process of unwinding its 3 month rally from 84.05 to 98.24 with near term objective at 84 ahead of 77.25-77.50. For the week, let us watch 87-92/93 with bias into lower end. The strategy is to reinstate “short book” at 91.50-92.50 with stop above 93 for 87.00-87.15.

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