Weekly report for 25-29 March 2013

MARKET PULSE: Weekly report for 25-29 March 2013

Political uncertainty and limited monetary support dilutes confidence

The Indian economy (and its asset markets) encounters strong headwinds from all sides, hurting the investor sentiment and confidence. The Euro zone crisis strikes back through Cyprus and there is fear of more in pipe-line. There is absolute lack of confidence in the economic recovery of Euro zone with struggle to stay afloat. On the domestic front, RBI maintains its hawkish monetary stance. The stake-holders anticipated RBI to be more concerned on growth taking comfort from sharp down-trend in headline WPI and core inflation. The hope was built on the presumption that RBI will shift into loose monetary policy stance in recognition of shift into tight fiscal policy stance. It is obvious that sustainability of tight fiscal policy is dependent on quick shift into higher growth trajectory. It is not that it is possible only with favourable monetary conditions (of low interest rates and surplus system liquidity) but it will definitely be a catalyst to the process. The bolt from the blue is the political uncertainty building doubts over the ability of minority UPA to roll-out key reforms covering FDI limit enhancement in select sectors, tax (and land) reforms and more importantly igniting the pick-up of infrastructure (and core) projects. The market is not expected to get into bullish mode unless the fiscal consolidation is achieved through growth pick-up and not through cost compression. Government’s disinvestment process (for one-off revenues) has limited appetite from investors and the bail out from PSU FIs is not seen in good light. All told, dynamics are very complex at this stage with strong cross-winds inhibiting combined strength of political, fiscal and monetary forces come into play for lifting the growth trajectory in FY14. What is the impact on markets?

Exchange rate market:

Rupee derives comfort from good off-shore flows and elevated FX premium despite pressure from high Current Account deficit and weak macroeconomic fundamentals. There is no clear trend at this stage given the cross-winds. USD/INR finds strong support at 53.90-54.05 attracting importers’ interest to cover 1M dollar liabilities (April’13 dollars at/below 54.50) while 54.40-54.55 seen good to cover 3M exports (June’13 dollars at/above 55.50). The down-side risks to rupee (beyond 54.55 into 54.80/55.15) will be from FII pull-out and warning signals from rating agencies if economic data prints do not provide comfort on growth, inflation and twin-deficits. On the other side, it is prudent to arrest extended rupee gains beyond 53.90 (into 53.65) to retain export competitiveness and RBI using this opportunity to build dollar reserves to release pressure on tight system liquidity. The trading range for rest of 2013 is seen firm at 53.65-55.15. USD/INR has been volatile in 2013; 55.38 to 52.88 to 55.15 to 53.89 and now there is risk of move into 54.80-54.95 while 53.90 stays firm. In the absence of favourable trending in macroeconomic indicators, intra-2013 low of Rupee at 55.38 will be at risk, while it would need dramatic turnaround in confidence to trigger rupee gains below 53.89 into intra-2013 high of 52.88. The hedging strategy for 2013 (and FY14) should reflect these expectations. For the week, let us watch consolidation at 53.90/54.05-54.40/54.55. The hedging strategy is to stay covered on imports due till April’13 (end April’13 dollars at/below 54.50) and consider good to sell 3M exports (end June’13 at/above 55.50). Exporters can await higher spot to cover 6M exports (end September’13 at 56.60-56.85) and 12M exports (end April’14 at 58.50-58.75) while importers extend coverage to 1-3M on rupee gains into 53.65-53.90.

EUR/USD sharply down into 1.2850 (from 1.3100-1.3150) post fresh issues from the Euro zone and thereafter got into consolidation mode at 1.2850-1.3000. In the meanwhile USD Index traded in consolidation mode at 82-83. The undertone is weak which can run deep into lower end of set near term range of 1.2650-1.3150 with USD safe-haven preference driving the Index into/above 84. For the week, let us watch consolidation at 1.2850/1.2925-1.3075/1.3150. The strategy is to trade end-to-end while staying neutral on break-out into 1.2650 or 1.3350. The near term trading range is seen at either 1.2650-1.3150 or 1.2850-1.3350.

USD/JPY was in consolidation mode at 94-96 post the sharp recovery from 91 to 96.71. The bullish undertone is retained on BOJ monetary/financial support for eventual move into 100. BOJ will work to retain JPY weakness into short/medium term to support economic recovery.  For the week, let us watch consolidation at 93/94-96/97. The strategy is to trade end-to-end while staying prepared to build strategic “long” book at 93-94 for 99-100.  

Interest rate market:

10Y Bond is down from 7.78-7.80% to 7.96-7.98% despite delivery of expected rate cut and assurances on OMOs (without delivery of CRR cut). It is not very negative per se but the tone of monetary policy and fear of demand-supply mismatch on shift into FY14 triggered the fall. MARKET PULSE strategy was to unwind “long bond” portfolio (10Y and beyond) at 7.78-7.80%, cut duration of the portfolio by shift into 1-3 year tenors in anticipation of sharp reversal for buy back in 3 lots at 7.93-7.95, 7.98-8.0 and 8.03-8.05 which would then complete end-to-end of set short term range of 7.80-8.05%. For the week, let us watch 7.90/7.93-8.0/8.03 with bias into higher end. Strategic players can retain “long book” entered at 7.95-7.98%, and await 8.00-8.05% (for the third and final lot) while enjoying the “carry” of minimum 45 bps against LAF/CBLO. Need to carry this portfolio with patience; it is similar kind of chase that MARKET PULSE made from 8.20-8.25 to 7.78-7.83. This time the chase is expected to be from 8.00-8.05 to 7.65-7.75% building 25-50 bps rate cut in April-June 2013, setting up short/medium term range play at 7.65/7.75-8.0/8.05%.

OIS rates remained firm; 1Y up from 7.50 to 7.55% but 1X5 steepened to push 5Y from set pay zone of 7.10-7.13% into 7.28-7.30% in quick time. We continue to watch the set short term range of 7.35-7.60 (1Y) and 7.10-7.35% (5Y); test/break either-way is not expected to sustain. For the week, let us watch 1Y at 7.53-7.58% and 5Y at 7.22-7.30%. The strategy is to switch sides by initiating “received book” in 1Y at 7.58-7.60% and in 5Y at 7.30-7.35%; there are no major cues to trigger break-out of the set short term trading range of 7.35-7.60% (1Y) and 7.10-7.35% (5Y). The strategy to receive 1Y at 7.57-7.60% and pay 5Y at 7.10-7.13% has worked well and it is time to retain 1Y received book and unwind 5Y paid book at 7.28-7.33%.

FX Premium remained firm to hit 8.0-8.10% (3M) and 6.70-6.75% (12M) to complete the move from 7.60% and 6.40% respectively. The strategy was to unwind “paid” book and switch to “received book” at/above 8% in 3M and at/above 6.7% in 12M. For the week, let us watch 7.75-8.0% (3M) and 6.50-6.75% (12M) with bias into lower end on shift of spot date into April. The strategy is to hold “received book”, add at 7.90-8.0% in 3M and 6.70-6.75% in 12M for near term objective at 7% and 6% respectively.

Equity market:

NIFTY completes end-to-end of 5600-6100 near short term range; down from 6111 to 5631 in less than 2 months and weekly close at 5651 is bearish. The trigger is from combination of weak domestic and global cues with lack of support from domestic investors. Despite this sharp fall of 8% in 2 months, FIIs are seen with patience to stay invested. The undertone is neutral only for the reason that NIFTY is trading at lower end of set short term range of 5600-6100 and can gain steam to set up relief rally into 5850. The strategy of MARKET PULSE was to absorb weakness into 5600-5650 with tight stop for this relief rally but the recovery from 5631 could not take out 5700 which is major worry. For the week, let us watch 5550/5625-5825/5875; extension into outer corridor will attract good interest. It will be very bearish below 5550 which could trigger FIIs exit. All taken, there are no strong cues to build strategic investments till some positive surprises emerge from political, fiscal and monetary dynamics.

Commodity market:

Gold extends its relief rally from 1560 to 1615 getting its shine back from Euro zone worries. The tone is mildly bullish for extension into 1685 to retain set short term range play at 1500/1525-1675/1700. MARKET PULSE preferred formation of short term base above 1500-1525 (low at 1554.50) for consolidation play into 1605-1620 (high at 1616) before getting back to bearish trend for 1300. Gold is down from 1800 since October 2012 to 1550 in 4 months and resultant shorts squeeze with combination of risk-off sentiment from the Euro zone has provided relief rally into set reversal objective. For the week, let us watch consolidation at 1585/1600-1635/1650. Strategic investors can look to sell at 1650-1700 for reversal into 1500-1550.

NYMEX Crude completes end-to-end of set near term range of 89/90-94/95 (low at 89.33 and high at 94.09) and there are no strong cues to suggest break-out of this range. For the week, let us continue to watch consolidation at 91.00/91.50-94.50/95.00. Strategic investors can look to build “short” book in two lots at 94-95 and 97-98 (with stop at 98.50) for 89.50/85.50,

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