Advantage India from Brent & Gold : Outlook 2015

Significant relief for India

The dream run for Oil producers since 2009 has come to an end, unwinding most of the advantage from rally from 36.20 to 128.40 during this period, before consolidation at 100-115. The worst hit period is from June 2014 driving the Brent Crude sharply down from 115.71 to below 58.50 by over 50% in 6 month period. The positive take-away is the loss of traction of Brent Crude value from geo-political tensions (in Russia and Middle East region), thereby shifting demand-supply equilibrium advantage from suppliers to buyers. The equilibrium shift is largely from move to alternate energy products and demand destruction from low global economic growth. The major beneficiary is India bringing resolution to structural woes on high CAD and elevated inflation. This blog urged suppliers for strategic hedge at/above $115 (seen as hot-to-hold valuation) and considered as prudent for importer-buyers for gradual long term hedge at $35-65.

Gold also lost its safe-haven advantage since 2011 to unwind most of the 2010-2011 rally from 1096.25 to 1920.30. In 2014, Gold lost its Q1/2014 rally from 1209.80 to 1391.76 for March - November weakness into 1131.85 before stability at 1160-1240. The advantage for India is from marginal benefit on the CAD and bandwidth to remove the restrictions on Gold imports. This blog urged to chase the bearish set up with end of weakness zone at 1110-1135 for consolidation at 1135/1160-1235/1260.

Will the advantage stay valid through 2015?

The demand-supply supply equilibrium continue to stay in favour of extended bearish undertone; but how far it could go before shifting the dynamics to cost-revenue? The immediate support is at 55.00-56.50, seen as cheap-to-acquire valuation zone for pull-back correction into 65-75. The only major relief for the Brent would be from growth-push higher demand and/or supply-squeeze from Oil producers, who may not see sense in top-line growth at $35-55 price band. The strategy is to stay tuned on Brent Crude at 35/55-65/85 through 2015 with bias for intra-2015 recovery into 65-75/85.

Gold outlook for 2015 is retained at 1110/1135-1235/1260; break-out bias is mixed with overshoot target at either 950 or 1320. Given the optimism on growth recovery in developed economies and resultant risk-on investor appetite, Gold will continue to lose its shine as safe-haven and also as hedge against inflation. The trading mode will stay in sell-on-recovery mode for pass-through of 1131.85 into 950-1000 before price stability at 950-1150.

The bearish consolidation momentum both on the Brent Crude and Gold is relief to RBI and cheer to Indian economy for extended relief on the CAD, inflation and Rupee exchange rate.

Wish you all a great & profitable 2015!

Cheers!

Moses Harding

India Money Market : Outlook 2015

Easy liquidity despite tight RBI administration

Domestic Rupee liquidity is in administered regime with agenda to retain effective operating policy rate between Repo and MSF rate. Accordingly,  restriction was imposed at availability of liquidity at overnight Repo counter with introduction of term Repo counter; all taken refinance window is now split across overnight Repo, term Repo and balance at MSF rate. Despite this tight liquidity administration, overnight call money rate remained around Repo rate with occasional pressure into higher end of 8-9% administered range. The reasons for this scenario (against RBI's agenda) is largely from lack of credit pick-up, risk aversion of lenders and excessive FC inflows diverted into the system through RBI dollar purchases. In the absence of demand from the Government, squeeze out of liquidity through bond issuance is muted. All taken, large chunk of bank deposits lie idle with RBI in the form of excess SLR against mandatory 22% of NDTL.

Gilts volatile on mixed cues

10Y Gilt has been volatile since July 2013; yield up from above 7% to over 9% (during July 2013 to August 2014). The weakness is from combination of domestic cues (inflation risks, rating downgrade fear and threat on Rupee) and global cues (FED threat of monetary tightening and risk of FII reverse flow). Since August 2014, most cues turned in favour; luck from external factors (sharp reversal in imported commodity prices, extended ultra-dovish monetary stance by BOE/ECB/BOJ/BOC, and FED patience on rate-hike shift) and hope from domestic cues (sharp reversal in inflation, signs of turnaround in macroeconomic fundamentals, shift in rating downgrade risk to upgrade optimism and pressure from most stake holders on RBI to cut rates) drove the 10Y yield down from over 9% to below 8%. It is great satisfaction to chase the new 10Y benchmark (8.40% 2024) both ways; got bulls-eye hit on the coupon at 8.40%, chased the weakness from 8.35% into 8.60-8.85% to switch sides for bullish chase below 8% into 7.75-8.0%. In the process, also chased the India-US bond spread from over 6.5% to 5.60% tracking the back-and-forth volatility in US 10Y Treasury yield at 1.90/2.0-3.0/3.10%.

Bullish consolidation in 2015

Domestic cues are mixed; RBI's concerns are from inflation stability within its comfort zone (CPI at 4-6% and WPI at 2-4%), structural risks on inflation from twin-deficits, low interest rate impact on Rupee exchange rate and permanent resolution to supply side bottlenecks. RBI is in wait-and-watch mode to see sustainability of base effect impact and commodity price support on inflation, resolution on fiscal prudence and achievement of demand-supply equilibrium before trigger of demand-push monetary support. It can be safely assumed that beneficial impact on the CAD from sharp reversal in Crude Oil price is there to stay through 2015; stability in twin-deficits at comfort zone of 2.0-4.0% will be relief for RBI to prepare for shift to accommodative, growth supportive monetary policy stance, and into lower end of said comfort zone will lead to shift of operating policy rate from Repo to Reverse Repo rate. The external cues largely depend on timing and extent of FED shift (and speed) into rate-hike mode and the extent of FII/FDI flows into the system.

All taken, it would be consolidation phase in H1/2015 for 10Y Gilt yield at 7.75/7.85-8.0/8.10% in traction with US 10Y Treasury yield at 2.0/2.10-2.25/2.35% with the spread of 5.50/5.60-5.85/5.95%. If FED shifts into rate-hike mode by mid 2015, it would be extended stability in H2/2015 subject to inflation stability at lower end of set comfort (and tolerance) zone; CPI stability at lower end of 4-6% will squeeze India-US 10Y bond spread to sub 5% for India 10Y bond stability at 7.75-8.0% despite spike in US 10Y Treasury yield over 3%. The downside risk for India 10Y bond is also from structural demand-supply dynamics, being not in favour against lower demand from the Government and excess SLR held by Banks (which will be used for incremental need or exit on improvement in credit risk appetite). There is also need to maintain India-US bond spread attractive for FII carry-trade play adjusting for 2-3% Rupee depreciation.

The investment strategy therefore is to play end-to-end by buying at 8.0-8.10% and staying light (or short) at 7.75-7.85% till we get better clarity from Budget 2015, FED monetary policy stance and trends in inflation and twin-deficits into 2015. The comfort is that there may not be repeat of prices volatility seen in 2013-2014 and would be tight range price-stability. It would be good opportunity for passive retail investors for yield pick-up over Bank liability/investment products, while aggressive investors shift focus to high-risk/high-reward equity assets.

Wish you all a profitable 2015!

Cheers!

Moses Harding

Global Currency market : What next in 2015?

Rupee value play between FIIs & RBI

It was predictable roller-coaster ride on Rupee, hence was an enjoyable one with occasional shock and awe feeling! The satisfaction is from prediction of end of Rupee relief rally at 57.85-58.35 (on administered recovery from all-time low of 68.85) and the follow-on chase from 58.35 to 63.85-63.90 (to be precise from 58.33 to 63.89). Nothing fundamental or technical analysis worked; it is the feel of the pulse (and mood) of FIIs and RBI. Given the strong play between these two giants, traction with USD behaviour against global currencies was diluted. While FIIs were shipping in money in plenty for investment in equity & debt assets, RBI was absorbing the excess money to maintain demand-supply equilibrium and adjusting Rupee value to as close to REER. All taken, it was party-time for RBI to shore up its foreign currency reserves (and assets) to dilute structural risk from huge external debt of the system.

Rupee cues mixed between huge RBI appetite against diluted FII supply

2015 play will not be between FIIs and RBI; it is either end of party or at last round of the lap for FIIs as leveraged hot money chase will stay diluted or look at other attractive options elsewhere. The upside seen in 2014 is not there in 2015 both in debt and equity market, when Rupee may be at risk against USD strength in the absence of FII supply support. While there is comfort on India growth momentum, domestic structural woes continue to stay as headwinds. During the course of 2014, the strategic base for USD/INR was gradually lifted up from 57.85-58.35, now set at 62.85-63.35. On the other hand, there is no confidence as yet to set up strategic "cap" for the dollar given the lack of clarity on the dynamics in play and RBI's limited band-width to act on the other side for Rupee protection. At this stage, it is prudent to set the short term "cap" for USD/INR at 64.85-65.35; however, taking note of some opinions as high as 70, let us not rule out extended weakness in 2015 into 66.50-68.00, while seeing no case for new all-time low for Rupee beyond 68.85. All taken, will prefer 2015 USD/INR trading range not beyond 62.85/63.35-67.85/68.35. Given this outlook, it is good for importers to stay risk-off on short term (3-6 months) $ liabilities at forward rate below 64.50 (3M) and exporters to cover long-term $ assets at forward rate 67.00 (6M) and 68.50 (12M); hence set up of 12M $ range at 67.00/67.25-68.25/68.50 for hedge/carry-trade strategy.

USD retains bullish advantage against global currencies

2014 is the year for the USD against economic woes of UK/Euro zone and Japan, thus handing over the interest rate advantage to the USD. DXY has already posted sharp intra-2014 gains from 78.90 to 90.40 driving the Euro down from 1.40 to 1.21, GBP down from 1.72 to 1.55 and JPY down from 101 to 122. What next? The US economic and monetary dominance stay valid into 2015; US GDP growth momentum is firm (against subdued inflation) while other major economies are in struggle to get their economies back on growth track. On the other hand, while US prepare for shift to rate-hike mode, others are seen to be in extended QE and NIRP mode. All taken, DXY is seen ready to shift its short term trading range into 90.50-92.50 ahead of 95.85-96.00 and beyond. It is good to be in $ buy-dips mode to be with 2015 bullish trend.

Wish you all a happy & profitable 2015!

Cheers!

Moses Harding

Global Equity market : What next in 2015?

Dream-run in 2014 despite economic gloom & doom!

2014 is great relief for global equity market to compensate for the lean patch of 2010-2013; it is also not surprise to see significant gains in Emerging markets on shift of appetite from developed economies to select high growth emerging economies, with India getting preferred advantage. While DJIA index is up by over 70% in 5 year 2010-2014 period (from 10430 to 18000), gain in 2014 is low at 8.6% (from 16572 to 18000) with intra-2014 rally of 17% from February low of 15340. The intra-2014 fall and swift recovery was from rate-hike jitters from FED with start of QE unwind, countered by ultra-dovish monetary policy stance by UK/Euro zone, Japan and China which pushed FED to stay in wait-and-watch mode and be patient on rate-hike.  The excess liquidity at Zero (Negative) Interest Rate was boon to emerging markets on higher allocation of FII investments into EMs. It is evident from sharp gains in NIFTY in 2014 by 30% (against intra-2014 rally by 38% from February low of 5933) as against 5 year 2010-2014 gains of 57%. It is more significant in Bank NIFTY posting gain of 62% in 2014 (intra-2014 at 86%) against 5 year 2010-2014 gain of 105%. India equity bullish momentum was from combination of external and domestic factors; luck from external forces of ample liquidity and sharp reversal in prices of imported commodity assets and hope (and optimism) from Narendra Modi. All combined, there was overnight change in sentiment (and expectation) from rating downgrade threat to upgrade optimism (and euophoria). The kind of external liquidity driven equity valuation in 2014 does not give permanent relief unless backed by macroeconomic fundamentals, as improved outlook in developed economies can trigger FII reverse flow!

2015 is consolidation phase driven by development in macroeconomic fundamentals:

Will the 2014 euophoria stay valid for India equity market? It depends on sustainability of luck factor (from external cues) and transformation of hope (from domestic cues) into ground reality. It is safe to assume that the Tsunami kind of external tailwind support may not be there; an "as-is-where-is" position is the best to look for! The external risks are from churn in FII investment allocation from emerging to developed markets, FED rate-hike shift in 2015, value normalisation in commodity assets unwinding part of 2014 extended weakness and USD strength against EM currencies. It is also safe to assume that geo-political risks stay diluted when trouble shooters are in deep economic and financial turmoil. On the domestic front, the Government is indeed serious (and committed) to script the economic turnaround and efforts are visible despite limited political support. The worry is that India equity valuation has already been re-rated in 2014 absorbing most of domestic euophoria. The expectation has to now get reflected in macroeconomic fundamentals. While inflation worries are seen to be irrelevant and with optimism on growth momentum, serious concerns remain valid on twin-deficits which would add to structural pressure on growth-inflation dynamics. So, lot to be done by the Government to arrest dilution in hope (and optimism), absence of which will reverse the euophoria driven 2014 re-rating!

What is the trading range in 2015?

Combination of all cues in play (domestic and external), it does not take us anywhere (to set up directional bias on way forward) to fix focus on a parricular trading range with clarity and high confidence level. But, what certain is that there has to pleasant surprises or unpleasant shocks to trigger break-out of 7700/7750-8600/8650 current strategic focus range; at this stage believe that mid-October 2014 low of 7723 and post-2nd December 2014 high of 8626 will stay safe in Q1/2015. Beyond there, it is better to stay neutral and be ready (with fleet-foot) for break-out either-way! Same applies for Bank NIFTY between mid-October low of 15130 and post-policy high of 18923. Having said this, Bank NIFTY is expected to outperform NIFTY taking positive cues from rate-cut, improved credit risk appetite and pipe-line financial sector reforms.

On the external front, DJIA is expected to outperform NIFTY on exchange rate adjusted basis for new high over 18100 with strong support at 15855-17350.

Over all, need to keep attention on FII appetite (and mood-swings), FED rate guidance and domestic macroecomic data trend, not ignoring USD impact on Rupee exchange rate and commodity price impact on the CAD and inflation. All these factors will decide sovereign rating upgrade in 2015 or otherwise!

Wish you all a very profitable 2015! Keep in mind that not losing money is better than making money; it is good to be in credit balance but relief to avoid debit balance in the account!

Cheers!

Moses Harding

Clarification on "make-for-India" and "rate-pause" stance of RBI Governor

Governor Rajan under fire for delay in shift to rate-cut mode, which the Finance Minister consider as major factor for squeeze in IIP (and manufacturing) growth, deliberately avoiding the other impact of WPI at 0%. The FM has also misunderstood the Governor's good intent to extend "Make-in-India" wish to "Make-for-India" ambition! It is time to study the disconnect between the FM and Governor to set matters right and to get better understanding on the cause and effect.

What are the reasons for growth depression in the manufacturing sector? Growth momentum is generated from pick-up in consumption demand and investment appetite to meet resultant supply capacity expansion. It is no rocket science! It is also common sense that investment (and monies) will chase opportunities when demand-push factors emerge strongly to squeeze supply capacity. When such a situation emerge, abundant system liquidity at low interest rates will set up the desired momentum to accelerate investment flow. Is this the case now? Definitely not, the FM would agree! The issues now revolve around squeeze in demand in core manufacturing sectors and absence of public sector consumption appetite; major impact from depressed infrastructure sector and poor fiscal conditions of the Government. The private consumption (in non core sectors) has come in to prevent growth collapse. It is also obvious that rate-cut is not the solution to revive infrastructure and to spur public investment and consumption. All considered, the "cure" is with the Government (and the FM) and not with the RBI (and the Governor). As said before, liquidity (and cost of funds) is not the remedy; the need is to create good opportunities for monies to chase! At this point of time, no investor see investment returns (the IRR) beyond the yield offered by Gilts or top-notch corporate debt, hence the huge appetite for Gilts, Bank deposits and low-risk corporate bonds against alternate high-risk, low-yield private/public investment/lending opportunities.

Why combination of "Make-in-India" and "Make-for-India" India relevant? The lead impact of "Make-in-India" agenda will be felt on the CAD, from higher imports for set up with couple of years lag on boosting exports. The system has also seen many export-led economies going under growth depression when external demand stay diluted. The "Make-for-India" agenda address these two concerns; substituting imported consumption with domestic production and building growth momentum from domestic consumption (and demand). Ideally, "Make-in-India" agenda should be the derivative of "Make-for-India" story, that's what the Governor wish to convey, I believe!

The way forward on rate cut and "Make-in/for-India" agenda are best to be discussed in private, as these themes are most critical (and relevant) for India growth agenda. It is prudent not to act in haste to avoid disappointment (and reversal of stance) and best to take time at strategic planning stage to build workable (and effective) tactics for swift execution!

Thinking aloud from RR perspectives!

Moses Harding

Global markets steady into 2014 year end!

Bullish undertone in equity assets!

DJIA index settles at set year-end focus zone of 17850-18100 with positive undertone, highlighting investor's risk-on mode into 2015. Do not see cues to trigger break-out of the said range into 2014 year end; close above 18000 will be positive for 2015!

Mixed cues on US 10Y Treasury yield

Stability in US 10Y bond around 2.25% is mixed on lack of clarity on the timing of FED rate-hike action against optimism on US economy and lack of it in other major economies. Given this outlook, it is fair to assume near/short term stability at 2.15/2.20-2.35/2.40%; play end-to-end.

USD into bullish stability

DXY in sideways mode at 89.50/89.75-90.50 retaining the built-up bullish undertone. Most cues suggest shift into near/short term stability at 89.50-92.50 into 2015.

EUR/USD now finds near/short term resistance at 1.2250-1.2300 with momentum build-up for extended weakness into 1.2050 ahead of 1.1850 to complete the short term fundamentals driven value-adjustment from 1.30-1.40.

USD/JPY steady above 120 but finds it tough for extended gains into 121.50-122.00; however near/short term trend is firm into 123.50-125 while 118.50-120 stays rock-solid.

Commodities struggle against US optimism

Brent Crude at lower end of 58.50/60-63.50/65 focus zone with bias into 56.00 seen as strong long term support point. At this point, let us retain focus at 55/56.50-62/63.50 into year end and await better clarity on way forward.

Gold failure at 1235-1260 for return of focus into 1160-1210 is not bullish undertone with near-term push-bias into 1120-1135 while 1195-1210 stay firm.

Moses Harding

Stable outlook into 2014 year end!

NIFTY in consolidation mode into year end!

NIFTY held well at lower end of set near-term consolidation range of 8150-8400 finding minor resistance at 8285-8300. Break-out bias however is seen towards 8050/8065 ahead of major short term support at 7950-8000. Good to stay focused at 7950/8150-8300/8400 for now.

Rupee seen steady post the recent value adjustment!

Not surprised to see Rupee in back-and-forth mode at set focus zone of 62.85/63.00-63.85/64.00, between end Dec'14 $ support zone of 63.10-63.35 and end Mar'15 $ resistance zone of 64.85-65.10. No cues at this stage to review the outlook with zoom-in focus at 63.55-63.90 for rest of 2014.

India 10Y bond steady but with downside pressure!

10Y bond steady at 7.90/7.95-8.0/8.05% post push-back from major resistance zone of 7.75-7.80%. No major cues to trigger break-out of big-picture focus at 7.85-8.10% at this stage; minor risk into 8.10-8.25% is not ruled out, but seen as strategic investment opportunity.

Good day ahead!

Moses Harding

Positive take-away in 2014 : Shift of sentiment from "gloom & doom" to "euophoria & exuberance"

Global cues : supportive monetary dynamics to prevent economic collapse

2014 had its twists and turns across political, economic and monetary factors; but all taken, it has its own comfort and fears ahead on way forward! There is relief from geo-political tensions, as economic worries have diluted political risks. The focus is on revival of the economy and averting financial crisis than aspiration for political (or military) dominant position. The monetary conditions remained in favour with overdose of Quantitative Easing at Zero (or Negative) Interest Rate Policy regime. There was more than enough liquidity flow across markets, thus extending more than adequate support to risk-on equity and corporate credit asset markets (not excluding sovereign Gilt assets). The major relief is from sharp value erosion in commodity assets and worry from significant appreciation of US Dollar against global currencies. Economic fundamentals of developed economies continue to stay under pressure, causing demand compression (for goods, services and employment), thus squeezing supply capacity and lack of economic opportunities for fresh (and incremental) investments. The relief however is from the US economy, which is showing signs of turnaround. Most of the global (and external) cues in play will stay relevant through 2015. The risks to watch are from shift to rate-hike cycle by the FED, extent of USD strength against global currencies and sustainability of cheap valuation in commodity assets. At this stage, risks from geo-political tensions and demand-push inflation may be kept out of the radar. All taken, there are cues to expect pleasant surprises from external sector with low probability of emergence of unpleasant shocks to destabilise the global financial markets.

Impact on emerging markets : risks from extent of external liquidity appetite

There are fears on availability of external liquidity appetite for EM financial markets; many relive the fears of 1997-2000 financial crisis. The risks revolve around unwind of all-time high valuation in equity assets, interest rate pressure on Gilts & corporate assets, exchange rate pressure and repayment (and/or refinance) capability of foreign currency debt against currency devaluation. At this point of time (into 2015), do not see major risk from liquidity when UK/Euro zones, Japan and China are expected to stay in extended ultra-dovish monetary policy stance, while FED may not be in favour to trigger financial crisis on emerging markets when developed economies are in economic struggle. The benefit of doubt is valid to delay the liquidity risk into 2016 or beyond!

India : safe-haven for global investors

Indian economy looks different since mid 2014. It is believed by most that this decade (2015-2025) is for India to emerge as the fastest growing economy (ahead of China), thus bridging the top-line GDP capacity gap with the leaders. Growth confidence (and resultant economic and financial valuation upgrade) on India is considered as given. The lack of optimism is on the bottom-line arising from fiscal consolidation (and prudence), export of domestic capital to fund current account deficit and inefficient PSU contribution. Inflation worries stay diluted and dynamics seen ready for shift to growth supportive monetary stance when structural long-term risks on growth is resolved to RBI's comfort zone.

Limited risk from political factors:

Political dynamics are relatively better than what it was in 2013 with majority political mandate and decisive leadership under Narendra Modi, who has also shaken up the bureaucracy and administrative engines from slumber to hyperactive mode. The earlier concerns from policy paralysis, regulatory irritants and administrative bottlenecks are no more relevant, despite risk from lack of majority in the upper house. Taking comfort from BJP gaining ground in many states, this risk from political factor can be safely assumed as short term.

Macroeconomic fundamentals in scale up mode:

The macroeconomic fundamentals have turned good and seen poised for significant improvement going forward with target zone for GDP growth at 5.5-7.5%, CPI inflation at 4-6%, current and fiscal deficit at 2-4%. The trending (and expectation) is seen to be favourable. The Modi mantras of development of skills at good speed and scale, financial inclusion & inclusive growth and replacement of red tape with red carpet, and with good & effective governance sets up the bullish momentum for the way forward. The infrastructure agenda to build economic and social well-being through scale up in manufacturing and agriculture sectors is great to execute the Make-in-India and Make-for-India vision with the twin objective to create domestic demand and boost exports through feeding external demand. The story theme is great to boost India macroeconomic fundamentals; what we need is the strategic script, tactical actionables and ground-level execution. The hope (and confidence) on Narendra Modi is the risk mitigant at this stage. What about the luck factor? Modi is lucky to get strong tailwind support forces from external sector through sharp reversal in commodity prices and availability of liberal dose of external liquidity. While the liberal dose may turn to adequate, there is no major risk for complete unwind of the luck factors. The risk on currency may be seen as blessing in disguise to support exports (and inflows) and stay deterrent to excess consumption of imported essential and non-essential items. All taken, it is safe to assume that there are no major economic risks in play in 2015 and beyond.

Favourable monetary conditions that could go better:

The monetary cues stay in support despite RBI reluctance for rate-cut and shift of operating policy rate from higher to lower end of LAF corridor. Despite this stance, system liquidity is adequate and cost of funds is affordable; issues are from availability of bankable investment opportunities and resultant credit-risk aversion by investors and lenders. It can be assumed that the worst is behind and investor/lender sentiment is seen good for shift in appetite from low risk/low reward to high risk/high reward asset/credit products in 2015 and beyond. The global investor (and lender) community is also in wait-and-watch mode for value-buy opportunities, seen in favour to replace FII dependency with FDI flows.

Good to stay in optimism in 2015:

All taken (from combined impact from external and domestic factors), India is poised (and positioned) for re-rating by global rating agencies with 1 or 2 upgrades in 2015-2017 period. If this period goes as per expectation, then it would be golden era into 2019-2024 to cheer up financial markets for new high's year after year!

What is the outlook on Global and India financial markets in 2015? In next update!

There is nothing against to stay in doubt and good time to be in cheer retaining the hope and optimism to keep the euphoric and exuberance sentiment intact!

Wish you all a great and profitable 2015.

Moses Harding

Is the risk of repeat of 1995-1997 Asian financial crisis real?

Risk from reverse of carry trade flows

There is build-up of worries (and concerns) in Emerging Markets (not excluding India despite domestic euophoria) on the risk of repeat of the severe 1995-1997 Asian financial crisis, the worst memories of which still in mind! The answer to the question is obviously, yes! However, uncertainty is on the extent of downside risks! This is one among other critical factors that made me switch sides while NIFTY at 8585-8635, Rupee at 61.20-61.70 and 10Y bond yield at 7.75-7.85%, calling these levels as hot-to-hold valuation and seen good to unwind exposure risks to cash-out (external, leveraged carry-trade) liquidity driven rally in 2014, thus completing the chase from 7700-7750 and 8.40-8.65%. Since then, there is setup of bearish momentum on the Indian financial markets.

Let us focus on India; the operating environment since 1995-2000 and now is very different. The macroecomic fundamentals are seen good since May 2014. Investor confidence (and appetite) is huge, customer sentiment (and exuberance) is positive, and fear of sovereign rating downgrade has turned to expectation of upgrade in 2015. The issues around policy paralysis, regulatory irritants and administrative bottlenecks are no more relevant. The Modi Government vision to script economic and social well-being is firm; bureaucracy is geared up to build tactics around this vision and the administration is cautioned to step up speed on execution - all combined to realise the dreams into reality at lower end of the pyramid. While execution risks are not completely ruled out, the high confidence on the India Inc CMD & CEO Narendra Modi dilutes the risk in play to set up huge growth (and prosperity) expectation on India in this decade (from 2015 to 2025). At this stage, it is safe to assume that risk from politics and execution is low.

What about economic and monetary risks? While it is safe to assume that the worst is behind on key macroeconomic factors - growth, inflation, fiscal consolidation and current account deficit, there is doubt on momentum build-up into the right side of set target ambitions - GDP growth at 5.5-7.5%, CPI inflation at 4-6% and twin-deficits at 2-4% when growth pressures in developed economies may stay valid for long. The risk mitigant for India is to scale up domestic consumption through infrastructure build, make-in (and for)-India vision, higher contribution to GDP from manufacturing and agriculture sectors. This outlook (and opportunities) will be in India's favour to attract stable long-term FDI flows for investment, and stay less dependent on speculative FII carry-trade, fair-weather flows. The monetary conditions are good, much better to what was there in 1995-1997. RBI's foreign currency reserves is good to give comfort and avoid panic on sharp Rupee weakness, and there is adequate domestic liquidity to replace off-shore lenders and stay less dependent on FC debt. All taken, India was fragile (and weak) in 1995-1997 and now resilient (and strong) to withstand pressures from FII reverse flow (and/or from external liquidity squeeze). This outlook (and comfort) sets up strong support in NIFTY at 7700-7750, 10Y bond at 8.25-8.40% and Rupee at 64.65-65.00, seen as cheap-to-acquire value for consolidation between set hot-to-hold and cheap-to-acquire zones; at this stage, do not see sustainable break-out either-way!

Should EMs ring-fence financial markets from carry-trade risks?

Who are the beneficial stake-holders on carry-trade inflows? The major contributor to carry-trade inflows are FIIs,  long-term ECB borrowers, short term trade finance and Rupee borrowers shifting exposure to USD through FCNR loans or non-funded synthetic derivative products. Needless to say, when it gets in, it is huge. RBI can't stay as silent observer and forced to act; resort to combined acts of $ purchases and sell Gilts to balance system Rupee liquidity. The end result is that the carry-trade advantage (to stakeholders) is paid by the RBI, taken with a pinch of salt as social cost to keep Rupee exchange rate competitive to exports and to maintain demand-supply equilibrium. What is the need to encourage such carry-trade opportunities at the expense of RBI?

When the tide turns and when what goes up comes down, the impact is worse! The unhedged carry-trade exposures emerge as serious threat not only on the financial markets, but on the entire economy shaking out the investor (and consumers) confidence. When the herd instinct turns from inflows to pull-out, RBI has no defence mechanism. If at all, why give cheap dollars to speculators? The resultant one-shot double-digit Rupee depreciation is systemic risk, not only hurting macroeconomic fundamentals but also hurting the P&L of corporate entities and pain for the lenders. The worst hit are the retail investors and SME business enterprises, who do not have financial muscles to manage this crisis, which is unforseen, sudden and big! If all these are put together, should the regulators encourage this carry-trade operations without any ring-fence? There is need to protect small fishes from the sharks in the financial markets?

It is high time for the Government and RBI to find ways and means to control carry-trade operations and ring-fence the system from the sudden shift in direction of carry-trade flows. While globalisation (with cross-border bonding) in trade & services and long term capital market (debt & equity) investments is good and stable, need to review speculative operations from short term carry-trade operations. Till then, sudden burst of excessive market volatility from opening and unwind of carry-trade flows can't be ignored; protection can only be from being prudent, overcoming greed! It is good to stay in caution when markets tend to rally against fundamentals.

Thinking aloud for powers that be to listen and act!

Moses Harding 

What's in markets this Christmas week?

Equity market in consolidation phase!

As scripted in previous update, DJIA index held below set strong resistance zone of 18000-18100 for pass through of 17350-17500 support zone, only to find base above set intermediate support zone at 16900-17000; over all, pre & post FOMC has been volatile and back-and-forth at 17000-18000 with firm close at higher end. FOMC tone (and guidance) is seen as neutral on growth and soft on inflation, going forward! FED is seen prepared for shift to rate-hike mode at baby-steps pace, starting from mid 2015. The positive outlook on macroeconomic fundamentals lends short term support for DJIA at/above 16900-17000, but need more feel-good economic data to trigger extended gains over 18000-18100 with intermediate support zone at 17350-17500. For the week, it could be either quiet (in the absence of flows) or sharp one-way move (on strong bids or offers in the absence of counter participation) to trigger break-out out of 17000-18000. Given the intra-2014 rally and recent recovery from above 17000, break-out bias into/over 18000-18100 is low, while don't see bolt from the blue to trigger sharp reversal into/below 16900-17000. Good to play end-to-end of 16900/17000-18000/18100; stay light and fleet-footed!

NIFTY strategy worked well as per script in previous week update. Reversal from from 8585-8635 long unwind (& short) zone held well at 1st re-entry zone of 7920-8070 (low at 7961) to bounce through revised stop-loss buy at 8085 to hit earlier stop-loss buy level at 8285. Keeping long term strategic base at 7700-7750, the trade was for 5-10% correction from 8625 and got 7.7%. What next? There is better clarity for strategic investors; 7935-8085 as strategic buy zone, 8435-8585 as hot-to-hold zone, 8085-8435 as NT consolidation (and trader's) zone. It is possible that downside risks would emerge from dilution in domestic optimism, while FIIs cut speed on the mad chase for India assets. Having said this, there are no strong reasons for bulls to abandon the street; hence see this as consolidation phase. For the week, good to stay end-to-end at 8085/8100-8435/8450; break-out either-way to attract good flows.

Risk-neutral stance cut appetite for Bonds

US 10Y bond yield (pre-FOMC) reversal from 2.35 to 2.0% got unwound completely (post-FOMC) before fresh buying guided close at lower end of 2.15-2.40% zone. It is also seen that extension into 1.90-2.15% or 2.40-2.65% is unable to hold given the absence of firm clarity from the FED on rate guidance! For the week, retain focus at 2.10-2.35% with firm bias on year-end appetite.

India 10Y bond fell sharply from set sell zone of 7.75-7.80 (scripted as super exit for FIIs) for push-back into 8.0-8.05% (shown as strategic buy zone for DIIs post completion of chase from 8.60-8.65%); thereafter marking time at 7.90-8.0%. What next? The focus range is already reviewed at 7.85/7.90-8.10/8.15% with weak undertone on dilution of rate-cut euophoria. It is now clear that RBI would stay in pause mode till Q2/2015 to await more clarity from influencing factors to act firmly without the worry to shift stance soon. As said, there are more cues against rate-cut now, hence the reluctance from RBI despite loud noises (and plea) for early shift to accommodative monetary policy stance. For the week, stay tuned to 7.90-8.15% with weak undertone on unwind of excess SLR by Banks when appetite is low from DII/FII investors. It is good for traders to track India-US 10Y bond spread at 5.70-5.95% for position guidance.

USD into bullish undertone

It was no surprise to see DXY into bullish mode from set ST base of 87.50-87.75 to pass through 89.50-89.65 resistance zone. With most cues in favour, ST base is lifted up at 88.75-89.00 for 90.50-92.50.

EUR/USD too failed at set end-of-correction zone at 1.2550-1.2600 to gain speed to take out set intermediate support zone of 1.2250-1.2350. The pressure is on the downside with focus range at 1.20/1.2050-1.2350/1.24.

USD/JPY found solid support at/above 115-115.50 for recovery into 120 and looks good for more into 123.50-125 with lift of base at 118-118.50.

USD/INR retain its consolidation mode at 62.85/63.00-63.85/64.00 post the REER value-adjustment from 61.70-61.80 (set USD short-squeeze zone) for 12M $ re-rating from 66.00 to 68.00. What next? Rupee will be under pressure for rest of 2014 from dollar strength, lumpy PSU $ demand, importers (and RBI) hunger below 63.00 and exporters appetite not below 63.85. Watch spot Rupee in traction with 12M USD/INR at 67.00/67.25-68.00/68.25; higher end seen not bad to cover part exports with trail stop below 62.85, as Rupee weakness beyond 63.85-64.00 is not completely ruled out. No comfort as yet to stay over-weight on Rupee.

Cues mixed on Commodities

Brent Crude in nice back-and-forth mode at 58.50-63.50 with NT bias for 65-70 consolidation while 56-57.50 stays rock solid. It is good to allow minor correction of sharp fall from over $115 to 58.50 to dilute worries on growth pick-up, not withstanding demand compression from China. Watch big-picture at 55/56.50-68.50/70 for end-to-end play.

Gold seen in bearish consolidation at 1135/1160-1210/1235; unable to follow through with bullish rhythm at 1235-1260 is concern for the bulls, while NT worst case not beyond 1110/1135.

Wish you all merry Christmas!

Moses Harding

What's in markets this week? extended risk-off?!

Value-adjustment in extended phase?

Lots said and less said the better on the sharp rally in global equity markets since mid October additional liquidity injection by major Central Banks at Zero or negative interest rate. DJIA rallied up from 15850 through 17350 into 18000; so was NIFTY from 7725 through 8175 into 8625, in 2-steps re-rating! While the 1st step (DJIA from 15850 to 17350 and NIFTY from 7725 to 8175) is seen to be in order, the 2nd step rally (DJIA from 17350 to 18000 and NIFTY from 8175 to 8625) is excessive from mad liquidity chase without fundamentals support. It is obvious that such sharp re-rating (in valuation) without strong fundamentals back-up is tough to sustain. What goes up this way, has to come down sharply with greater pace! This is what precisely has happened now, with the unwind of 2nd step (DJIA from 18000 to 17350 and NIFTY from 8625 into 8175) in week's time! Investors were cautioned to exit the chase from cheap-to-acquire level (DJIA at 15850 and NIFTY at 7700-7750) at hot-to-hold valuation (DJIA at 18000-18100 and NIFTY at 8585-8635) for reversal (to unwind stretch valuation) into intermediate support zone (DJIA at 17350-17500 and NIFTY at 8150-8200). It is done now. What next? The million dollar question is should investors prepare to absorb excessive reversal (DJIA below 17350 and NIFTY below 8180) or stay aside for more? The answer can be either-way as cues are mixed to take a firm stance either to stay in favour or against! When in doubt, it is prudent to be with the bearish momentum with stop loss - buy entry to reinstate investment!

DJIA weekly close below 17350-17500 is weak; possibility of extension below 17175 into 16900-17000 is high. The strategy is to be with the chase with stop-loss buy at 17500. On the way down, good to enter one-third (of earlier exit) at 16900-17000 with enough appetite to add more around 16650 and 16300, while trailing stop-loss buy down to stay fully invested for baby-steps recovery.

NIFTY will be under severe pressure from IIP shocker (although immediate rate cut could dilute the downside pressure) and risk on FII mood-swing when both equity and Rupee come under pressure. Any weakness below 8150/8160-8185/8200 in extended holiday market will be painful for complete unwind of 7725 to 8625 rally since mid-October to first week of December; it is pity that gains from 2 months will be knocked out in 2 weeks! As said, there is no great comfort to reinstate at 8160-8185 given the mixed cues. It is good to be with the extended reversal mode with stop-loss buy now revised down at 8285 and watch price-actions at 7920-8070 for 50% entry, retaining balance for 7700-7750 or at the then lowered trail stop buy level. All taken, bulls are down and out at the speed of 5% reversal, while bears are seen to take control of the street to execute the next 5% reversal before leaving the floor to the bulls!

Risk-off support to Gilts despite stretched valuation

There is nothing against Gilts/Bonds, while things in favour are from liquidity over-hang, NIRP/ZIRP/low interest rate regime, shift of investor appetite from high-valued equity to Bonds/Gold, interest rate expectation (extended carry-play on expectation of 12 months pause before FED rate-hike, and rate-cut from RBI ahead of next policy) despite stretched valuation. As expected US 10Y found solid support at 2.35-2.40% for pass-through of 2.15% ahead of strong resistance at 1.90%; India 10Y bond extends gains below 7.85-8.0%. In the process India-US 10Y bond spread moved up from 2.60 to 2.75%. What next? The million dollar question is the period of sustainability at current lower yields when cues may reverse quickly in the new year? The earlier reversal in US 10Y bond was sharp from 1.90% to 2.60-2.65% on minor scare from possible rate-hike by mid 2015; need to keep this in mind. India 10Y bond yield will be adjusted to this risk retaining bond spread at 5.60-5.85% to retain FII appetite on India bonds and to ring-fence Rupee exchange rate from sudden FII pull-out, repeat action of June-July 2013.

Given the current dynamics across asset classes, prefer US 10Y bond stability at 1.90-2.15%, not ruling out swift push-back into 2.35-2.40%. India 10Y bond yield at current has factored in most of positive cues including 50 bps rate cut before end of FY15; what it has not covered is the downside risks in CPI inflation print from lower to higher end of 4-6% focus zone, unfavourable demand-supply equilibrium on credit pick-up, Rupee/FX adverse impact on MM/Bond yield and risk of FII unwind. Prefer 10Y 8.40% 2024 bond in tight stability at 7.75-7.85% at 5.70-5.85% bond spread traction with US 10Y at 1.90-2.15%. Need to stay cautious on "long" book, hedging against the risk of post rate-cut sell-off!

Consolidation of USD against majors, while Rupee give up relative gains

Lots discussed about the dollar and Rupee. All taken, Rupee has lost (or diluted) its advantage over the dollar. Rupee moved into over-valued zone without adjusting to DXY rally from 84.50 to 89.50 and weakness in Euro from 1.40 to 1.2250 and JPY from 105 to 122, since mid-October (with marginal adjustment in Rupee from 60.20 to 62.50). This advantage is thanks to huge FII supplies. Will FIIs continue to pump-in more when NIFTY at risk of extended weakness into 7700-7750 and lack of comfort on 10Y bond stability at 7.75-7.85%? If FIIs choose to exit, can RBI defence be strong with pipe-line lumpy month/year end $ demand? There is no comfort to stay affirmative to these questions!

Trading focus on DXY is retained at 87.50/87.75-89.75/90; EUR at 1.2250/1.2350-1.25/1.26 and JPY at 115-120, with a note of $ retaining its short/medium term bullish momentum and now into near-term consolidation phase. Into year end, needless to say to stay light and fleet-footed playing end-to-end with tight stop on break-out.

Rupee near term focus is now at 61.95/62.20-62.85/63.10 with extension limit at 61.70-63.35. There will be good flows at either-end to prevent break-out either-way. Looked for end 2014 spot USD/INR target at 62.10-62.35 which is now shifted to a wide range at 62.35-62.85. Good to play end-to-end and not the time to stay over-weight on Rupee.

Moses Harding

Currency market outlook : Special update

DXY in bullish consolidation

Post completion of the 500 pip chase from 84.50 to 89.50 (from 84.47 to 89.55) in quick time since mid October, DXY into correction mode into set retracement target of 87.75-88.25 (low at 87.91) before  consolidation at 88.25-88.75. What next? There are no cues to upset current bullish undertone of the dollar with firm undercurrent from both economic fundamentals and interest rate advantage. This sentiment stays valid to extend focus into 89.55-90.40 ahead of short term objective at 92.50-92.65. The risk to this outlook will be only from guidance on extended pause before FED shifts into rate-hike cycle; given the positive trending in US growth pick-up, delay beyond Q4/2015 is low probability. The strategy is to absorb correction into 87.60/87.75-88.25 (with tight stop at 87.50) for chase of next round of bull-run into 92.50.

EUR resilient but fatigue on recovery

Post the sharp fall from 1.2500-1.2550 into lower end of intermediate support zone of 1.2250-1.2350 (low at 1.2245), resilient Euro recovered in full into 1.2500 (high at 1.2494) before into sideways mode at 1.2350-1.2500. Euro corrective recovery post the 1.2885 to 1.2445 weakness (since mid October) is in order. What next? remember to have set up strategic base at 1.2050-1.2250 when we began the Euro chase from 1.3850-1.4000; since then (from May 2014), Euro is down from 1.3992 to 1.2245. Should we retain strategic support at 1.2050-1.2250 or look beyond 1.2040 to 1.1875? Economic fundamentals and market dynamics do support extended Euro weakness, and more clarity would emerge post the FOMC meeting! If there be any hawkish guidance from the FED with signals for shift into rate-hike cycle sooner than later, then it would be a big blow for the Euro. Given these cues in play, would continue to see near-term cap at 1.2500-1.2550/1.26 for pass-through into the lower end of 1.2050-1.2250. Till then, prefer sideways trading at 1.2250/1.2350-1.25/1.26 with most trades likely to be at inner-ring (ahead of FOMC) before gap-down break-out; temporary relief over 1.26.

JPY in sideways mode on profit-booking

The bullish pick-up from 117.00-117.50 fell short of 123.50-125 target for back-and-forth roller-coaster ride from 117.22 to 121.84 to 117.43 before consolidation at 118-119. Japanese exporters are seen to be thrilled to see weak JPY above 120 (last seen in July 2007) ahead of end 2014. Makes sense and prudent! What next? The underlying bullish undertone is firm with strategic base at 115-117.50 for 124.16 (high of June 2007) in 2015. It is important that the set strategic base should hold ahead of thin extended holiday market. When Japan continue to struggle on growth and giving great carry trade advantage, there is no sight of end of bullish momentum for the dollar in the short term. For now, let us focus attention at 117-122 within set big-picture at 115-125.

Rupee resilience broken by weak equity

The USD bull-chase from mid September low of 60.20 and mid-October low of 60.90 for end Dec'14 spot target at 62.10-62.35 has been done ahead of time; post that the operating range was shifted at 61.70/61.80-62.35/62.50 with call for exit of short $ book at 61.70-61.80 for reinstatement at 62.35-62.50. As per script, Rupee fell from 61.77 to 62.50 before weekly close at 62.29. What next? Strategic support for the USD is already reviewed up from 61.20-61.70 to 61.95-62.20 pulling the end Mar'15 spot target of 62.85-63.35 into near-term focus. Most cues have turned against Rupee from weak equity, strong dollar, ease in interest rate and now de-growth print in IIP; combined impact from weak growth data and ease in inflation against downside risk on equity and bullish momentum on the dollar is high-risk for Rupee; that's where market dynamics are at this stage exerting extreme downside pressure on Rupee. Not sure how aggressive RBI will be in defence of Rupee when noise for early rate cut gets louder and ugly! All taken, there is no cheer for Rupee bulls when lumpy $ demand in pipe-line ahead of month/year end. Let us keep focus at 61.95/62.20-62.70/62.95 widening the end Dec'14 spot target at 62.20-62.70, being prepared for extension into 62.70-63.20/63.35. Taking all these cues in play, it was urged to stay risk-off on imports (and $ liabilities) at 61.70-61.80 and turn risk-neutral on exports (and $ assets) at 62.35-62.50 keeping appetite for extended weakness into 62.85-63.35. Caution and tighten your belt for bumpy ride ahead!

Moses Harding

Coverage by NDTV Profit - 12th Dec'14

Rupee Slips Past 62.50/Dollar to Over 10-Month Low..

Link:- http://profit.ndtv.com/news/forex/article-rupee-slips-past-62-50-dollar-to-over-10-month-low-711982?utm_source=ndtv&utm_medium=top-stories-widget&utm_campaign=story-1-http%3a%2f%2fprofit.ndtv.com%2fnews%2fforex%2farticle-rupee-slips-past-62-50-dollar-to-over-10-month-low-711982

Rupee Slips to 62.34/Dollar, Lowest in Nearly 10 Months..

Link:- http://profit.ndtv.com/news/forex/article-rupee-slips-to-62-34-dollar-lowest-in-nearly-10-months-711593

Bond market outlook : Special update

Consolidation phase on mixed cues

10Y bond yield in sideways mode at 2.15/2.20-2.35/2.40% on lack of clarity on the way forward, hence the back-and-forth mode without enough momentum on break-out either-way. There is not enough clarity as yet on the timing of shift into rate-hike cycle; opinions differ from 1H/2015 or 2H/2015 or 1H/2016 with most in expectation of extended pause till end of 2015, thus attracting investor appetite at 2.35-2.40%. On the other side, better than expected economic data print build risk of staying invested at 2.15-2.20%; this kind of back-and-forth moves is trader's delight but pain to long-term strategic investors. The other factor that add to bullish rhythm is on investor shift to risk-off stance on exit from high-valued equity assets, with loss of appetite at 2.15-2.20%. All taken, there no major cues to trigger break-out of 2.15-2.40%, but do not rule out extension below 2.15% on pressure on equity market. However, any sign of hawkish guidance by FED on improved confidence on growth and unemployment will get the focus back into 2.35-2.40% but not beyond here on excessive global liquidity at near-zero interest rate. Retain long-term outlook at 1.90/2.15-2.40/2.65% while staying neutral on break-out either-way!

India Gilts firm on risk-off and low credit demand

India 10Y bond extends gains below 8% into 7.85%, thus building expectation of 50-75 bps rate cut sooner than later. Adding to this bullish expectation, Banks (and other investor/lender entities) do not know what to do with the money when there are few acceptable credit risk opportunities giving decent return. The beneficiaries in this environment are the Government and AAA/AA corporate entities. Government benefits from lower cost on fresh issuance while the low credit risk entities are able to borrow at very low premium over sovereign yield. The hit is on retail investors and relatively high risk borrowers. Bank retail deposits are at par or lower than sovereign yields across all tenors, while sub top-notch borrowers struggle to source funds at affordable cost. Now, the stake-holders pressure on RBI for rate-cut extends to political parties taking on the Governor for not doing so! While the rate cut is seen to be round the corner, the beneficial impact will be limited and may not be surprised to see post rate-cut sell-off if the tone is not positive and seen to be done under pressure; political pressure on RBI for rate action is not a good signal to be sent to global investors and rating agencies. There are many cues for and against significant move either-way from current levels. The major triggers are from the FED (on timing of start of rate-hike cycle) and exit options to huge excess SLR, which has to be either absorbed for incremental deposit growth or has to be unwound when credit demand pick up; risk from Rupee exchange rate is also in the radar. There is now better comfort on the inflation despite base effect impact and other factors relating to supply side pressure and outside chance of sharp reversal in commodity prices. All cues taken, there is not enough space for sustainability in 10Y bond yield below 7.85% and there is no major risk for weakness over 8% if unwind of excess SLR is aligned to baby-steps rate cut. So, given the mixed cues in play, it is good to stay focused at 7.85-8.0%, being neutral on break-out either-way. There is also need to align India 10Y bond with US 10Y at 5.50-5.65% to prevent run on Rupee. This stance is valid till inflation expectation ease into lower end of 4-6%. The strategy is to stay invested at 7.95-8.0% and be fleet-footed at/below 7.85%.

Moses Harding

Can Bank NIFTY sustain current valuation? Doubt it!

Rate cut euphoria over done!

Banking stocks (and Bank NIFTY) stay resilient on rate cut hope and consequent ease in cost of funds and related Treasury gains from what is called, Profit on sale of investments. Is it good enough to sustain long term bullish undertone when there is significant pressure on core business (and revenues)?

Analysts and investor community evaluate Bank's productivity (and efficiency) from margin from financial intermediation and fee income from on & off balance sheet core business. Treasury income and NPA recovery is seen as one-off. Although income from non-core activities add to Book value and EPS, sustainability thereafter on sequential QoQ basis becomes tough as one-off does not occur every quarter!

The issues revolve around the following:

1. How Banks would gear up to handle margin pressure? While reduction in cost of funds is good, there are not many high yield bankable credit in the market. Banks have generous appetite for low risk - low yield Gilts and AAA/AA credit, thus squeezing the intermediation margin. The extended rally in 10Y bond below Repo rate of 8% is not because of rate cut hope; what to do with the money? Put it back with RBI at negative spread? There will be significant pressure on financial intermediation margin, called the NII/NIM going forward if the system continue to stay in risk-off credit-aversion mode! As the system has been in low interest rate regime for 3-6 months, benefit from interest cost advantage between outgoing deposit and incoming funds may not last long, hence Banks seen in a hurry to cut deposit rates contrary to rate guidance from RBI.

2. How Banks would maintain high fee income in the absence of opportunities? The fee income comes from extension of credit facilities (fund and non-fund), transaction banking products (handling payments and receipts), FX & Derivative products (through market intermediation), investment banking products (through advisory, arrangement and syndication of Debt & Equity capital markets) and Third Party distribution products (of MFs, AMCs and Life/non-life Insurance products), with most monies coming from credit related fund, non-fund and FX & Derivative products where maintaining sustainable high growth is tough.

3. How Banks would handle higher NPA provision and write-off when under revenue pressure? Analysts community include restructured assets to gross/net NPA for true valuation. The worry is from wholesale book where most borrowers have the intent to repay but not enough cash flows to honour repayment obligations; the number is growing! It will become more tough going forward.

Revenue growth falling short of elevated valuation!

All taken, net-off impact of revenue risk from core business and one-off treasury income (which itself may not be significant post adjustment of RBI concessions on mark-to-market provision for FY14) may at best cover couple of quarters, but not beyond unless credit demand emerge at attractive yields.

 

It is wise (and prudent) to dilute the euphoria on banking stocks till economic growth recovery shifts to higher gears generating bankable credit demand to divert funds from zero risk-low yield assets to high yield - acceptable risk productive assets. That's when the rally (and current elevated valuation) will stay sustained without fear of value-adjustment from hot-to-hold to fair-value or cheap-to-acquire price. Caution!

Moses Harding

Equity market outlook : Special update

Value adjustment in process, no panic!

Investor's over exuberance from ultra-dovish monetary stance drove equity assets up; while DJIA index unwind of  17350 to 15855 collapse (from 19/9 to 15/10) is in order, extension into 18000 is stretched given the current weak growth momentum on the system. It was kind of ZIRP/NIRP monies looking for parking space despite valuation pressure! Now, good sense is seen to prevail allowing unwind of hot-to-hold valuation from 18000 to 17350-17500, seen as a fair-value for first entry, keeping appetite for extended weakness into 17175-17200 ahead of 17000 seen as strategic base (and cheap-to-acquire) at this stage. All taken, short term consolidation at 17000-18000 is in order till clarity from FED on monetary policy guidance for 2015.

In India, it is combination of luck and hope; luck from sharp fall in imported commodity items led by Brent Crude from over $115 to below $65 and liberal dose of $ supplies from FIIs chasing safe-haven India equity & bond assets, while the hope is from high confidence on the one-man army, Narendra Modi to perform miracles in economic and social well-being. Result is the one-way uninterrupted rally from cheap-to-acquire zone of 7700-7750 to hot-to-hold zone of 8585-8635. What goes up like this (without fundamentals back-up) has to come down (in the absence of corporate earnings to support and sustain high valuation)! There is strong strategic base now at 8150-8200, which is seen as good reinstate level against the 8585-8635 exit. While some look for extension beyond here into 7700-7750, will evaluate this option on way below 8260-8285 ahead of 8160-8285. Having said this, there is no guarantee in markets, hence watch resistance zone at 8335-8360 for stop-loss buy at 8365 if there is premature end to the correction process for shift of focus back into 8585-8635; needless to say trail stop-loss entry will be reviewed below 8260-8285 ahead of 8150-8200 (at 8290). There are bullish cues from improved macroeconomic fundamentals (mainly dilution in growth-inflation conflicts), rate cut pressure, no signs of U-turn in commodity prices and good FII appetite, while risks remain from Rupee exchange rate pressure, hawkish monetary stance by FED and delay in realisation of domestic hope (and euophoria) into reality. It is only six months into NaMo regime; need to give him time when being dependent on others for policy initiatives, while the management band-width is seen to be strengthened with much agile bureaucracy and administrative machinery. Need to have patience allowing baby-steps momentum, as break-neck speed is tough to maintain leading to excessive two-way volatility.

Moses Harding

Gold outlook : Special update

Bullish consolidation in making?

Gold completes back-and-forth mode at set strategic focus at 1110/1135-1235/1260 with 1255.20 to 1131.85 to 1238.20 since mid October. The trigger for fall is from USD strength (DXY up from 84.50 to 88.19) and risk-on equity rally (DJIA index up from 15855 to 17600) during this period. The up move thereafter is from valuation worries on equity & bond assets, shifting investor appetite from hot-to-hold equity and bonds to cheap-to-acquire Gold. What next?

The fortunes for Gold on the way forward is dependent on valuation of the USD, equity and bond assets. US 10Y Treasury yield at 1.90-2.15% is not a long-term hold when FED prepares for rate-hike in second half of 2015. Equity asset valuation is also seen stretched with no signs of growth revival; high dependence on liquidity for bullish momentum on equity is short term risk. The pain is already felt in DJIA index struggling to hold gains above 17350-17600 with sharp reversal from below 18000. While the pipe-line fundamental dynamics stay in favour Gold, there are mixed signals from the USD directional bias. Having said these, interest rate dynamics continue to stay in favour of the dollar. If DXY gets into bullish rhythm again post the shallow correction into 87.75-88.25 unwinding part of short sprint from 84.50 to 89.50, there would be minor pressure on the Gold.

All taken, combination of safe-haven appetite for Gold (as alternate to over-valued Bonds and Equities) and downside pressure from USD strength will set up positive bias (if not bullish) into the near/short term. The recent high of 1255.20 is at risk for extended gains beyond 1255-1270. Therfore, there is case for upward revision in trading range focus at 1185/1210-1285/1310 with bias into higher end in baby steps!

Moses Harding

Brent Crude outlook : Special update

Is it end of down-hill or more to go?

Brent Crude failed thrice at $115-120 resistance (and high-valuation) zone post the intra-year rally from 36.20 to 128.40 (between December 2008 to March 2012). The trigger for this bullish momentum was from pick-up in growth momentum across the Globe led by China and India. The resultant demand push and supply side concerns from geo-political tensions emerged as catalyst to bullish momentum. Now, the situation is reversed since June 2014 to push Brent sharply down from 115.71 to 63.56 by over 45% in 6 months time in steep down-hill one-way move. The trigger obviously is from the reversal of the two major cues that caused earlier bullish undertone; this time, the growth pressure is from across the Globe largely from heavyweights - Euro zone, Japan and China. Despite sharp cut in demand, supplies are in plenty as producers are unable to readjust their budget financials for lower Crude Oil price to accommodate top-line reduction in production; rubbing salt to injury is from shift to alternate energy input diluting the excess dependence on imported Crude oil. All taken, the major two drivers setting up directional bias is from growth and geo-political tensions. Unfortunately, Oil producers do not have mitigation plans to protect downside risks, while enjoying the joy-ride when going is great! What next?

There is no great optimism on growth revival in the global economy in the near future. There is also no great risk from geo-political issues in the Middle East to get concerned on the supply side till there is voluntary cut in production by OPEC and non-OPEC suppliers. The probability of demand pick-up and supply-squeeze is very low, thus ruling out significant reversal from here. The cost-revenue equilibrium adjusting for inflation (and time value on investment) is the only option to figure out a long term base for the Brent Crude. Most see 85-120 as extremes for long term price equilibrium. The current level of sub 65 is more than asked for by major oil importers, more so for India when under pressure from inflation and twin deficits on elevated cost of Crude oil. It does make sense for importers to hedge 50% of long term exposure at $65 and balance at either $35 or $85 giving an average cover at $50 or $75 (both below the comfort level of $85). It is important for large PSU entities to stay comfort in Balance sheet financials (and its long term beneficial impact on macroecomic fundamentals) rather than worry about missed opportunities from extended weakness below $65. All taken, current price valuation covers most (if not all) of cues that cause downside pressure, while positive cues that can cause swift U-turn around have not been considered.

The outlook for the near term is not clear on whether or not 63.50-65.00 is strong enough to trigger recovery, but long term bias is for recovery into 85-100 as most economies work over time on growth turnaround; and when it happens, producers would be positioned for managing the supply side better to mitigate financial risks from excessive downside price move. The first signal for unwind of excessive weakness is from back into consolidation at 65-75. It is good to stay fleet-footed (on shorts) at/below 63.50-65.00 and great to start hedging risks at/below 65 in phased manner for freezing cost side of the P&L by alignment with the revenue to provide long term fixed price contracts to distributors and consumers. This will remove the worries on inflation, CAD and fiscal deficit in the event of sharp price-turnaround, when past experience suggest that directional bias can't be taken for ground and is subjected to sudden mood-swings on impact from various unforeseen cues in play; take note of price fall from 147.50 to 36.20 (between July - December 2008) before swift turnaround to 127.02 by April 2011. Is there a similar move in the making? Only time can say! Caution and Prudence are the buzz words for those who are heavily dependent on imported Crude oil? Are Petroleum Minister and Finance Minister listening? Please do! Working overtime for rate cut from RBI Governor is not significant compared to the long term beneficial impact on growth if focused on getting the best out of $115 to $65 bonanza!

Moses Harding