Global markets: Weekly update for 02-06 February 2015

Risk-off play seen to be in extended mode adding bearish momentum on equity assets:

Weak global economic outlook has diluted the liquidity (and interest rate) support to risk-on assets; it is not a surprise to see loss of liquidity traction against combination of weak growth momentum and deflationary dynamics. While US is seen to be relatively better placed, impact from UK, Euro zone, Japan and China can't be ignored; hence, no surprise to see DJIA index losing steam at 17600-18100 for push-back into 17000-17150. The near term strategy (since mid December 2014) was to play back-and-forth between 17100-17150 (cheap-to-acquire zone) and 18100-18150 (hot-to-hold zone); since then, have seen back-and-forth at 17067 to 18103 to 17136 before weak monthly close at 17164, unwinding the entire move. What next? The undertone is weak (and bearish) for shift of near-term focus at 16700-17600 with bias into lower end. The appetite is seen to be on "sell-on-recovery" mode with minor resistance at 17350-17365 ahead of strategic sell zone at 17500-17625; 1st signal for extended reversal (of 15855 to 18103 rally since mid October 2014) is on failure at immediate support zone of 16975-17125. All taken, positive vibes (and optimism) is not at sight to turn bullish for strategic play; good to stay fleet-footed with the trend, which is weak (and nervous) as Central Banks are short of ammunition to tackle the growth-inflation conflicts.

Risk-off mode and worsening economic conditions add bullish momentum to Gilts:

US 10Y Treasury yield swiftly down from 1.85-1.90% to the set near-term target at 1.50-1.65%; though to the script, the speed is scary! Over medium term, the yield is already down from 3.0-3.15% to 1.50-1.65% despite complete unwind of QE and FED preparedness for shift into rate-hike cycle. The guidance of  "patience with caution" by FED (signalling deferral of rate hike shift into Q4/2015 to 2016) and ultra-dovish monetary policy stance of major economies (with generous QE at zero/negative interest rate through 2015-2019) turned catalyst for the move from 2.45-2.60% to 1.50-1.65% in quick time. What next? Can the bullish rhythm extend beyond 1.50-1.65%? Don't know, but would be high-risk chase below 1.50%, and if it does, it would signal doom & gloom for global financial markets. For the week, it is prudent to retain focus at 1.50/1.55-1.75/1.80% for back-and-forth play; break-out either-way is not expected to sustain, hence stay neutral on break-out bias.

Brent in recovery mode while Gold dilutes bullish momentum:

Brent Crude was stuck at 47.50-50.00 (with back-and-forth punch at 47.57 & 49.99) before swift late surge into 53.08 before solid close at 52.95. The long term focus has already been set at 45-55/65 with sight of demand-supply equilibrium at/below $45; strategy, therefore was to buy dips into 45-46.50 in preparation for unwind of $115.71 to 45.19 crash for short term target at $61.75-62.00, with lift of base from 45.00-46.50 to 50.00-51.50. For now, set trading focus at 50.00/51.50-60.50/62.00 for near-term consolidation. Is some relief package to Russia in the making?

Gold got into consolidation mode, post the intra-Janauary 2015 swift rally from 1165 to 1310 (with punch at 1168.25 and 1306.20); intra-week push-back from 1298.76 saw false break below 1255-1260 (low at 1251.86) before gaining steam into 1285 for close at 1282.80. What next? Gold retains investor appetite, as alternate to Gilts and risk-aversion for equities, thus holding on to bullish undertone. For now, set focus at 1240/1255-1310/1325 for back-and-forth play. It is not clear to set directional bias beyond here, at this stage.

USD in bullish consolidation mode:

Post the swift bullish momentum pick-up from mid-Dec'14 support at 87.50-87.65 to over 94.00-94.15, the outlook is for consolidation at 93.50/93.65-95.65/96.00; saw intra-week failure at 95.33 (ahead of previous high at 95.48) for swift push-back into 93.69 for firm close at 94.85. There are no fresh cues to review the said outlook, but would fine-tune the focus at 94.00/94.15-95.85/96.00 awaiting fresh cues. The short term bias is for extended bull-run into 99.00-99.50 with firm strategic support at 93.65 (ahead of 92.85).

EUR/USD is in back-and-forth mode at set focus zone of 1.11-1.1450 (with punch at 1.1098 and 1.1422) before close around mid-point at 1.1286. What next? There has been dilution in interest rate play (against the Euro), thus extending support at 1.11. Having said this, bearish outlook over long term attracts Euro supplies at 1.1385-1.1435 (relief only above 1.1450). For the week, continue to retain focus at 1.1050/1.1100-1.1400/1.1450 in preparation for shift of near-term focus into 1.0750/1.0800-1.1050/1.1100.

GBP/USD is in back-and-forth mode at set focus range of 1.4950/1.5000-1.5200/1.5250 with intra-week punches at 1.4973 to 1.5222 to 1.4988 before close at 1.5066. What next? The undertone is bearish with minor resistance at 1.5150 (ahead of major end-of-correction zone at 1.5225-1.5275) with bias for another knock at 1.4950 for extension into 1.4800-1.4850, which should hold for short term consolidation at 1.48-1.53. For the week, set focus at 1.4800/1.4850-1.5150/1.5225 for back-and-forth play.

USD/JPY stayed rock-solid at zoom-in range of 117/117.50-118.50/119 with back-and-forth punches at 117.25 to 118.65 to 117.25 before weak close at 117.44. The bullish momentum is diluted from interest rate squeeze and weak NIKKEI, thus setting bias into short term support zone of 115.50-116.00. There is not enough momentum to take out 118.50-119.00 and the major resistance at 120.50-121.00. For the week, set focus at 115/115.50-118.50/119 for back-and-forth play and stay neutral on break-out bias.

Have a great week ahead!

Moses Harding

India markets: Weekly update for 02-06 February 2015

Valuation adjustment in progress in Equity assets with comfort from rate cut hope:

The weekly focus was set at 8750/8785-8965/9000 with expectation of back-and-forth play in value adjustment mode from hot-to-hold zone of 8965-9000 and cheap-to-acquire zone of 8750-8785. The play, therefore was expected to be between value encashment at higher end and for value investment at lower end awaiting rate-cut from RBI, positive vibes (and optimism) from Budget 2015 and sovereign rating upgrade from Global rating agencies. The intra-week rally from 8825 punched 8996 before sharp reversal into 8775 before close of week at 8808. The intra-week focus for Bank NIFTY was set at 19850/20000-20500/20650 in consolidation mode. The moves were swift (and erratic) for extended rally from 20098 to 20907 before sharp (and deep) push-back into 19732 before close at 19843.

What next? January 2015 rally in NIFTY at 11.5% (and Bank NIFTY at 14.8%) is stretched (and excessive) against the expected 15-20% value appreciation by end 2015 with NIFTY target at 9500-10000. The dynamics (and outlook) ahead is mixed; domestic cues stay supportive to retain bullish undertone, while external cues are suspect and nervous. The comfort, however is from strong FII appetite for India assets, who will be seen to stay in buying corrective dips mode against long term bull trend. All taken, there is no reason to panic on NIFTY correction from 9000, while support at 8750-8785 stays firm, ahead of major "make-or-break" support zone of 8600-8650. For the week, good to retain focus on NIFTY at  8600/8650-8950/9000 (and Bank NIFTY at 19200/19550-20450/20650); directional bias will be set by RBI on 3rd February (into lower end on rate-pause or into higher end on delivery of 25 bps rate-cut). It is prudent to stay in back-and-forth mode (ahead of Budget 2015) and overshoot either-way will be seen as excessive, hence unsustainable for long!

Gilts in bullish undertone deriving comfort from start of accomodative monetary policy stance:

With fire works in equity and Rupee exchange rate markets, 10Y Gilt 8.40% 2024 traded steady around 7.70% (at 7.68-7.72) with good appetite either-way; unwind of excess SLR book at below 7.70% and fresh build-up above 7.70% for rate-cut action, shift of Repo rate from 7.75% to 7.50%. The only discomfort is from India 10Y yield not in alignment with US 10Y Treasury yield ease from 1.85% to below 1.65%, thus widening the India-US 10Y bond spread from 5.85 to over 6.0%. What next? Retain strategy to stay invested at 7.70-7.75% for 7.45-7.50% on expectation of 25 bps rate-cut and in the event of rate-pause, extended consolidation at 7.70-7.75%. For the week, two options in play; stability at 7.65-7.75% or shift into 7.45-7.55% on delivery of 25 bps rate hike, thus setting up intra-week focus range of 7.45-7.75%, hence the strategy to stay invested at 7.70-7.75%, come what may! India-US 10Y bond spread at over 6% puts RBI at ease to deliver 25 bps rate-cut; in the event of rate-pause (with dovish guidance), bullish momentum will be retained for 7.50-7.65% (against US 10Y Treasury yield at 1.50-1.75%) adjusting for India-US bond spread at 5.85-6.0%. All taken, it is high-risk to trade from "short" side.

Rupee in structural adjustment mode:

Rupee bullish momentum from 63.90/62.20 ran out of steam at 61.20-61.45 (set short-squeeze support for 12M $ at 65.50-65.65 for unwind of earlier sale at 68.00-68.50 + time-decay); reversal from 61.29 was sharp into 62.03 before close of week at 61.86. Over all, the play was restricted at 61.20-62.20 for back-and-forth shift from upper-half to lower-half. What next? While the long term Rupee bullish undertone is intact, the near term risk is from structural adjustment, weak global cues and extent of RBI appetite for the US Dollar. At this stage, downside risk on Rupee from rate cut action is not seen as cause for worry given the FII appetite and elevated India-US interest rate spread (across 1-10Y tenor) as ring-fence to FII pull-out from India bond assets. All taken, it is safe to stay with consolidation outlook at 61.20/61.35-62.20/62.35 till optimism from Budget 2015 and sovereign rating upgrade are pulled into the radar for restoration of bullish undertone into 60.45-60.95. The strategy is to play end-to-end of 61.20/61.35/61.55-62.05/62.20/62.35 tracking 12M $ at 65.50-66.50. The worry from bearish impact on Rupee from weakness of global currencies (against the USD) is diluted given the domestic optimism (and strengthened euphoria) on macroeconomic fundamentals and India emergence as safe-haven destination for value investment.

EUR/INR swift fall from 72.00-72.50 found support at 68.00-68.50 as per script; thereafter, the 2-step correction in recovery mode from 68.00-68.25 and 69.00-69.25 failed ahead of set end-of-correction zone at 70.50-71.00. While the long term bearish undertone is firm, near-term consolidation at 69-70.50 is preferred before shifting gear to take out 68.00-68.25. The risk for this outlook is beyond 70.50-71.00 for deeper recovery into 72.00-72.50 before sharply down. Over all, strategic chase from 80.00 is still valid with long-term target below 65.00 with parity outlook between USD and Euro.

Have a great week ahead!

Moses Harding

RBI seen at ease to take the next baby-step 25 bps rate cut!

No long term risk on growth from macroeconomic fundamentals:

RBI shift to hawkish monetary policy stance since July 2013 was driven by conflicts in growth-inflation and Rupee exchange rate-interest rate dynamics. The major concerns (and irritants) were from elevated Inflation, high Current Account Deficit (CAD), and Fiscal Deficit pressure on the system. These concerns are no more relevant, as the trend (and long term outlook & expectation) has taken an U-turn, thus diluting the worries of RBI. Brent Crude long term stability at $40-65 is good for Inflation, Current Account Deficit and Fiscal Deficit, thus establishing Rupee exchange rate price stability. The huge pipe-line FDI flows and sustainability of long term FII appetite for India assets is good for growth, liquidity and domestic interest rate. Government is also on over drive to bring sustainable long-term resolutions to remove supply-side bottlenecks, seen as catalyst trigger to make tangible beneficial impact from dovish monetary policy stance to attract investments and spur consumption. All taken, macroeconomic fundamentals could only turn better from now on, with outlook for CPI at 4-6%, CAD at 1-2.5% and Fiscal Deficit at 2-4% of GDP, and it is imperative for RBI to turn supportive to push GDP growth momentum into higher end of 5.5-7.5%. The outlook on Rupee exchange rate, for long term stability at 58-63 provides the necessary band-width for RBI to ease rates, while retaining the operating Policy rate at Repo rate till expectations turn to reality!

Liquidity in plenty but rate pass through not significant:

Domestic interest rates have moved down since July 2013 across the curve; 1Y down from over 10% to sub 8.5% and 10Y down from over 9% to below 7.75%. Banks continue to hold huge excess SLR against mandatory 22% of NDTL. The rate pass-through is visible (and significant) at higher end of the pyramid, with large good-risk borrowers are able to access long-term funds at sub 9-9.5% while the small/medium enterprises continue to pay huge premium to lenders (to compensate for the squeeze from large borrowers). While the base rate will arrest extended advantage to large (and good credit risk) borrowers, further rate cuts will lead to cost reduction to small & medium enterprises through squeeze between base rate and actual rate. The external environment is strongly in favour of liquidity. Most of India Trade & Investments partners (Euro zone, UK, Japan and China) are seen to be in ultra-dovish monetary policy stance for extended period of time, while US appetite (for India) will stand enhanced post build-up of NamObama chemistry! RBI will stay in $ buy-mode to administer demand-supply equilibrium, leading to infusion of Rupee liquidity into the system. All taken, combination to manage excess system liquidity and to ensure effective rate pass-through across borrowers segment will put pressure on RBI to ease rates now with 25 bps with another 50 bps in April-September 2015, if cues continue to stay in favour!

Expect 25 bps rate cut with cautiously patience guidance:

The expectation was for 50 bps rate cut on or before 3rd February monetary policy review; got 25 bps ahead of policy date, and now expect another 25 bps on policy day. The guidance on the way forward will not be hawkish, but RBI is expected to trend with caution (and patience) seeking confirmation (and validation) on risk factors that could dilute the optimism and positive outlook. More importantly, the need is to divert liquidity from Gilts to productive assets to support economic capacity expansion, and create vibrant capital market to meet liquidity demand from core sectors that need to stay catalyst to spur growth momentum. The priority is to ensure availability of liquidity (to critical sectors) at affordable cost on matched maturity basis.

India financial markets have already built pipe-line rate-cuts, sovereign rating upgrade and optimism on growth pick-up through combined domestic and external participation. It is prudent for RBI to retain this bullish undertone (and pent-up euphoria) by delivering 25 bps rate-cut on 3rd February, which will be seen as all stake-holders in same pitch, and more importantly walking together! Will Rajan oblige? Yes, I believe!

Moses Harding

Global Markets: What next?

Less said the better on Global economy and the extent of monetary support to arrest hard landing

The heavyweight economies (Euro zone, UK, Japan and China) are in bad shape with good comfort from the US. The worst impact from combination of growth deceleration and deflation will keep the investor and consumer sentiment low and down. The Central Banks have no other option but to pump huge liquidity into the system (to pull investments) and maintain zero/negative interest rate regime (to push consumption). Given the abundant global liquidity around, FED preparedness for shift to rate-hike cycle (as follow-on post QE unwind) has lost its relevance and bite. It is now clear that major Central Banks (except FED) will stay in ultra-dovish monetary policy stance till end of 2016, while FED might defer its tightening mode beyond mid 2015. All taken, there is significant relief for risk-on equity assets (and Gold) and good appetite for risk-off Gilts and rated corporate bonds. Commodity assets (excluding precious metals) will be under pressure from extended demand compression in the absence of squeeze in supply.

Global equities retain its bullish consolidation mode

DJIA price-stability is firm at inner-ring of 17350-17850 within the set near term strategic range of 17000/17150-18000/18150. The intra-week play at 17346-17840 (before close at 17672) is in validation to the expected outlook. While we retain this trading range of 17150/17350-17850/18000, there are no major triggers at sight to allow overshoot beyond 17000-18150. For the week, the bias is for bullish consolidation at 17500/17600-18000/18100 with strategy to play end-to-end. It is good risk-reward for strategic play between set outer corridors, post the back-and-forth chase from 17067 to 18103 to 17243 (between 16th December 2014 and 16th January 2015). As of now, see 17000-17150 as cheap-to-acquire zone and 18000-18150 as hot-to-hold valuation given the mixed cues between risk-off (from growth-inflation conflicts) and risk-on (from liquidity-interest rate dynamics) factors in play.

US Gilts boxed between risk-off reward and rate-hike risk

Despite FED rate-hike fears, US 10Y Treasury yield is down from recent high of 2.40-2.65% to 1.70-1.95% on safest-haven appetite flow from developed economies to de-risk against run-away strong USD. These dynamics will stay valid through 2015-2016 with the outlook that FED may either delay rate-hike to end 2015 or into 2016 or rate-hike impact may not be significant (for non-US investors) on adjustment to USD strength. All taken, US 10Y has firm support at 1.90-2.0%, not ruling out further extended gains into 1.50-1.65% in the short/medium term. For now, the bias is for consolidation play at 1.65/1.70-1.85/1.90%; overshoot either-way is not expected to sustain.

Brent Crude recovery to stay restricted while Gold retain its bullish consolidation mode

Post the crash in Brent Crude from 115.71 to 45.19 (from 20th June 2014 to 16th January 2015), the recovery is shallow at 50.40-50.65 for consolidation at 47.50-50.00. What next? The outlook is not bullish for months (or years) ahead when demand-push factors are not visible to absorb excess supply in the system. The only comfort is from sight of demand-supply equilibrium at 40-45, which extends support at $45. It is possible that speculative offers will emerge above $50 for extended push into 40-45 in the near/short term. For now, it is good to retain focus at 45/45.50-50/50.50 for back-and-forth play; overshoot to stay within short term big-picture at $40-55.

Gold recovery from strategic support/short-squeeze zone of 1120-1135 has hit 1310-1320 intermediate target ahead of 1345-1360, seen as strategic resistance zone for long-exit. The risk-on appetite is now even between equity and precious metals, chasing the liberal dose of liquidity support and zero interest return on risk-off assets. What next? The base has already been lifted up from 1120-1135 to 1260-1270 with near-term target at 1345-1360, not ruling out overshoot into 1385-1400. For the week, retain focus at 1270/1285-1345/1360 with bias into higher end; strategic chase from $1120-1135 is to be held tight with trail stop at 1255 for take-profit target in 2 lots at 1345-1350 and 1390-1395.

USD in break-neck bullish momentum

DXY bullish momentum was clearly visible from frequent shift of base (since October 2014) from 84.50 to 92.00 for target beyond 94.00-94.15; acceleration to the momentum is now established post ECB liberal dose of stimulus and ultra-dovish monetary policy outlook till 2016. The unwind of multi-year crash from 121.02 to 70.70 (between July 2001 to March 2008) is in progress with 50% recovery of 95.85 is at striking distance. The intra-week rally from set base of 92.00-92.15 is swift from 92.15 to 95.48 with bullish weekly close at 95.00. For now, near-term base is lifted up at 93.50-93.65 for 95.85 enroute to 101.50-102.00. The USD party gonna be extended one!

EUR/USD is the worst hit from December 2014 high of 1.2569 (set strategic sell zone of 1.25-1.26 for chase into 1.1375-1.1450); thanks to ECB, the extension has gone beyond 1.1375 with low at 1.1113 before short-squeeze triggered consolidation at 1.1100-1.1250. Needless to say, undertone is weak while below 1.1350-1.1450 with immediate target at 1.0750-1.0800 and for more towards parity. Prudent to be with the chase and temporary relief only above 1.1475, seen as low probability occurrence.

GBP/USD too dragged down from set resistance zone of 1.5550-1.5600 (revised down at 1.5200-1.5250) with target at 1.50; have seen move from 1.5584 to 1.4948 before weak weekly close at 1.4987 (in quick time this month). The undertone is weak for 1.4900-1.4915 enroute to 1.4810-1.4835 with relief only above 1.5100 to arrest further extension into 1.4300.

USD/JPY stayed calm at 117-119 amidst storm around with intra-week play at 116.91-118.87 before close at 117.52, thus validating the consolidation outlook at inner-ring set near-term big-picture at 115/116.50-118.50/120. What next? Post the Dec'14 back-and-forth moves from 121.84 to 115.56 to 120.82, outlook was for stability at 115/116-119/120 with emergence of exporters $ offers and equity linked downside pressure. Despite this push-back pressure, the strategic support at 115-116 is solid in traction with USD bullish momentum for next attempt to take out 121.84 enroute to 124-125. For now, let us retain focus at 115/116-120/121 for back-and-forth play.

Have a great week ahead, Cheers!

Moses Harding

India markets: What Next?

India euphoria and appetite sky high!

Indian economy (and financial markets) can't get better support! The domestic euphoria is getting stronger with combination of NaMo credence and emergence of strong macroeconomic fundamentals. The external support from sustainability of Brent Crude at $40-60 through 2015 and abundant liquidity flow through 2015-2016 is strong catalyst to set up growth acceleration into (and beyond) 7.0-7.5% by 2017-2019. What more to ask for? India need not chase money, investors (and lenders) will chase India opportunities (and assets) to be part of the long term party with stretched visibility till 2019-2024.

Equity market in mark-time mode

NIFTY held at set intra-week buy zone of 8500-8535 (low at 8531) to hit Pre-ECB target at 8765-8800, before losing steam at post-ECB resistance zone of 8865-8900 (high at 8866) before all-time new daily/weekly close at 8835. The intra-Janauary 2015 pick-up from 8065 to 8866 by 10% at start of 2015 is beyond hoped for, to recover more than the 7.7% fall seen in December 2014 (from 8626 to 7961) in quick time! Bank NIFTY posted better performance at start of 2015 with 10.75% rally from 18211 to over 20000 (at 20167).

India outlook gets better with combination of ultra-strong supportive momentum from external sector and optimism into the Budget 2015. The signal from IMF that India will overtake China growth momentum by 2017 and ECB's €1.14 Trillion monetary stimulus are reasons to cheer and to stay over-weight on India equity into 2015 and beyond. There are no concerns whatsoever from FII appetite, as they have no where to go with limited options elsewhere. India equity looks better than the US (which is also looking good) given the emergence of Rupee as the strongest currency in the World. There is no option for domestic retail and wholesale investors but to stay with the bullish trend given the limited upside in Fixed Income Bonds assets. All taken, there is no serious downside risks on India equity market. The only risk is for move into consolidation phase on run upto Budget 2015. The global fundamental risk from de-growth and deflation is adequately covered by liquidity-push factors and India optimism as catalyst to the long term bullish undertone. The near term focus range for NIFTY is already reviewed at 8750-9000 (from earlier 8450-8700) with bias for extension into 9300, seen as end FY15 target. The minor support at 8785-8800 has held firm with previous weekly close at 8835, but not sure as yet to look for beyond 9000 this week. It is prudent to allow bit of consolidation (to digest the 10% rally since 7th January 2015) at 8750/8785-8965/9000 before gaining steam for beyond 9000 into 9300. The strategy is to retain entry at 8785-8800 and add at 8750-8785 with tight stop for 8965-9000. Bank NIFTY is now supported at 19850-20000 for 20500/20650 in back-and-forth mode.

Gilts in extended consolidation phase

10Y bond 8.40% 2024 is in sideways mode at 7.65-7.75% with no strong cues to trigger break-out either-way, while India-US bond spread in back-and-forth mode at 5.70-5.95%. Most cues continue to stay in favour of short/medium term bullish extension below 7.65% into 7.35-7.50% on delivery of next rate cut post-Budget 2015 or in April policy review meeting, while domestic and external appetite stay solid to absorb weakness beyond 7.75%. There is no risk of squeeze in India-US 10Y bond spread given the consolidation of US 10Y at 1.75-1.90%. All taken, retain consolidation mode at 7.65-7.75% with overshoot limited at 7.60-7.80%. Retain strategy to trade end-to-end and stay invested for shift of focus into 7.40-7.55% by (or before) April 2015.

Rupee retain strength against global currencies

Rupee traded perfect to the script, intra-week push-back held dot at 62.20 with  recovery held at 61.35-61.45 (finding resistance from 12M $ support at 65.50-65.75 on short-squeeze $ demand through unwind of short entry at 68.00-68.50 + time-decay). Rupee rally against Euro and GBP was more significant; EUR/INR pushed down from 72.00-72.50 to below 68.50 and GBP/INR from 94.50-95.00 to below 92.00. Most cues continue to stay in favour of Rupee from abundant FII supplies and elevated FX premium at 8.0-7.0% across 3-12M tenor. The one-way Rupee gain is arrested to an extent by take-profit short $ squeeze and RBI bids, while importers out of sight.

Now that Rupee has recovered beyond the recent fall from 61.70-61.80 to 63.80-63.90, focus is pulled towards 58.35 (reversal point of recovery from all-time low of 68.85) with immediate target at 60.65 on break below 61.10-61.35 resistance zone. The trading range for the week is set at 60.50/60.65-61.50/61.65; strategy is to retain the two-stage short $ entry at 62.20 and follow-on at 61.70 for take profit at 60.60-60.70, while tracking 12M USD/INR at 64.75/65.00-65.75/66.00 with bias into lower end. The risk to this expectation can only be from RBI adding to usual month end $ demand, but risk can't go beyond 61.70-62.20.

Have a great week ahead!

Moses Harding

India markets : What's in store this week!

Bullish momentum restored in equity market:

Post the back-and-forth moves between 8626 to 7961 to 8445 to 8065, NIFTY settles down at 8435-8535. The trigger for these volatile both-ways swing is based on the strategy to buy "corrective-dips" to stay invested on India optimism and "sell-on-recovery" to stay clear of external weakness. All taken, NIFTY at 7950-8100 was seen as "cheap-to-acquire" valuation, while at 8450-8625 was "hot-to-hold" building more downside risks! This strategy which was put to execution post 3rd December 2014 RBI monetary policy has paid rich dividend in quick time.

What next? The India optimism has now gained momentum with start of rate-cut cycle; expectation of immediate rate-cut has been delivered, as RBI didn't have any reason to delay any further post the triggers from steady Brent Crude at $45-50, favourable trending in CPI and CAD beyond RBI expectation, strong assurance from the FM on fiscal prudence, Rupee unwind of bearish momentum from 63.88 to below 62.70, and above all strong decline in US 10Y Treasury yield below 2% into 1.70-1.80% on expectation of delay in shift to rate-hike cycle by FED. The outlook now is for delivery of (post-budget) 25 bps rate-cut on or before April 2015 monetary policy, and if all goes well another couple of baby-steps cut before end of 2015 for shift of operating policy rate from current 7.75% to 7.0%. While domestic cues are solid for sustainability of bullish undertone, the uncertainty is from external cues which look weak, fragile and nervous. Having said this, optimism from the US economy and FII/FDI appetite for India (in the absence of better opportunities elsewhere) will play a major role to mitigate risks from external sector. All combined, strong domestic tailwinds and safe-haven appetite of external investors will retain the bullish rhythm (and trend) into 2015 with NIFTY target at 9500-10000. It should also be kept in mind that it would not be a straight-line upward journey; moves will be back-and-forth with lift of "base" going forward!

The immediate support for NIFTY is at 8435-8450 to provide near-term bullish consolidation at 8400-8650, with bias into higher end. There is high probability of punch of new high over 8626, but sustainability of the same is doubtful on profit-booking offers from both domestic and foreign institutional investors. For the week, good to retain focus at 8400/8435-8615/8650 with overshoot bias for shift into higher trading range at 8585/8635-8935/8985 on run upto Budget 2015. Bank NIFTY has set firm base at 18950-19100 with sight beyond 19400 into 20000. The strategy is to buy the trend (absorbing corrective dips) and play the counter trend by selling (at higher end with stop/reverse) to catch the 3-5% retracement moves. By playing both sides, it would be great repeat reward for 2015.

Gilts in sideways mode before next round of appreciation:

The strategic (since issuance) play on 8.40% 2024 (from 8.35-8.40% to 8.60-8.65% to 7.65-7.70%) is done! What next? Positive first, pipe-line rate-cut hope ahead will extend support and limit downside risks. The negative is from structural adjustment of the SLR investment book and shift of FII appetite from Gilts to equity assets, going forward. There will be another net supply of around Rs.5 Trillion from FY16 Government borrowing programme. All taken, demand-supply dynamics will not stay supportive to Gilts for run-away gains from here. Building on shift of policy rate from 7.75 to 7.0-7.25% by end 2015, 10Y benchmark Gilt yield can stretch at best to 7.35-7.50%; thereafter, significant gains can only be from shift of operating policy rate from Repo to R/R rate giving 1% advantage; this will be too much of an expectation till FY16, and would go out of focus if FED gets into rate-hike mode by then. All combined, short term stability in India 10Y bond is seen at 7.65-7.80% with shift of focus to 7.50-7.65% on delivery of next round of 25 bps cut in April'15. This is not a great play for FIIs and strategic investors, who will shift appetite to equity which is seen to deliver attractive returns in 2015. For now, it is good to stay tuned to 7.65-7.80% with neutral break-out bias tracking India-US 10Y bond spread at 5.65/5.70-5.95/6.0%. Now, with elevated spread at 5.90-6.0%, India 10Y bond has firm support at 7.73-7.75% with risk build-up into/over 7.80% on reversal of US 10Y Treasury yield from 1.70 to 1.95%. It is good to play end-to-end of 7.65-7.80% till the next round rate-cut comes into focus.

Rupee recovery mode intact while RBI stay easy in absorbing FII flows:

Post the back-and-forth moves in 2014 between 58.35 and 63.90, Rupee recovery below 62.70 at start of 2015 is relief. At 63.75-63.90, most feared risk of 68-70 (to be with bullish DXY), but the turn was violent the other way below 61.70-61.80 with a punch at 61.48 before consolidation at 61.80-62.20. Over all, it was perfect execution of the script trading back-and-forth of 61.70-61.80 and 63.75-63.85, at break-neck speed! What next? Rupee has emerged as the strongest of all with most (if not all) cues in favour. The major risk factors from high CAD and FII reverse flow are not relevant now, as CAD is trending down below 2% while FIIs increase India appetite with limited options elsewhere. Despite rate-cut, FX premium at 7.50-6.75% across 3-12M tenor is seen attractive for exporters. All combined, both cash and forward market will stay in supply driven mode. The only concern is the extent of RBI presence on the $ bid (while DXY in extended bull phase over 92.50-92.65) to retain Rupee exchange rate not far away from REER! The immediate firm support for Rupee is at 62.05-62.40 with minor resistance at 61.45-61.70; bias is for build up of Rupee bullish momentum for unwind of 58.35 to 63.90 weakness (seen in 2014) with ST target at 60.45/59.60. The risk to this view could only be from external bolt from the blue, seen as low probability with diluted impact, if at all! All taken, it is good to retain the fresh short $ initiation at 61.95-62.20 (post back-and-forth trade between 61.70-61.80 and 63.75-63.85) and add at 62.20-62.70 (with stop at 62.75) for 60.00-60.50. The hedging strategy can stay tuned to 60-63 consolidation (12M USD/INR at 64-67).

Moses Harding

Brent Crude & Gold outlook : Special update

No clarity on immediate directional bias on Brent Crude

There are no signs of relief for Brent Crude, now under pressure to stay above $50. The strategy was not to stay "short Brent" at/below $50; it did recover from around 49.50, but didn't have the steam to extend beyond 52.50 or so, and now back at $50. There is unanimous expectation of Brent Crude recovery into $65 in 2015, the uncertainty is the turning point; now seen anywhere at $40-50. There are no major triggers in the near term to change the bearish undertone (and the trend) from geo-political factors or demand-supply dynamics or macroeconomic developments. The time-value will turn against Brent in the near term for extension below $50 into $40, before sharp bounce back into $55-65. With this near-term outlook, it is not bad for fleet-footed traders to be "short Brent" at $52-55 for $40-43, against long-term strategic hedge demand at $40-50. All combined, there would be good two-way interest at $40-50 and more of speculative short at $50-55.

Gold derives support from mixed cues and volatile sentiment

Gold is in back-and-forth mode at set focus zone of 1170/1185-1220/1235; the recovery from below $1135 into $1220-1235 is largely from shift of appetite from hot-to-hold valuation in equity (and bonds) into relatively cheap-to-acquire precious metals. The sharp rally in global equity (and Bonds) since mid October 2014 against depreciation in Gold value from over $1250 to below $1135 is the trigger for shift of appetite to Gold (as alternate to cash in ZIRP & NIRP conditions). What next? The long term trend is down into $950-1000, not supported by demand-supply dynamics and currency risk from USD strength. The near term relief from $1135 into 1235-1260 (best case not beyond 1310) is seen as temporary; it is matter of time before build-up of appetite shift back to equity and debt. All combined, recovery from below $1135 into/over $1235-1260 is default by design, as alternate to equity or debt or cash. For now, retain focus at 1180/1195-1245/1260 with bias into higher end. It is good to play end-to-end and prepare for reinstate of "short-Gold" book (post strategic exit below $1135) at 1245-1260 retaining appetite for 1285-1300 for target below 1130-1135 and for extension into $950-1000 in the second half of 2015.

Moses Harding

USD (against majors) outlook : Special update

Targets met; consolidation phase before next round of sustained rally:

The bull-rally chase in DXY from 84.50 met set target at 92.50 (up at 92.52 from mid October 2014 low of 84.47) and thereafter into consolidation mode at 91.50-92.50. In traction with DXY, EUR/USD is down from 1.2885 to set consolidation target zone of 1.1650-1.1850 (low at 1.1753) and GBP/USD down from 1.6524 to 1.50-1.52 target (low at 1.5032). However, USD/JPY lost traction with DXY post the 105.18 to 121.84 move (high of 8/12) short of 123.50-125 target for deep push-back into 115.56, before consolidation at 118-121 (within set big-picture at 115/116.50-123.50/125). The strength of USD is attributed to combination of economic and monetary fundamentals in favour of the US, as investor monies from developed economies flow into the US, chasing higher valuation (both in equity and bonds) and USD currency gains against zero (or negative) cost of funding. It's perfect leveraged carry-trade play to encash gains both in underlying asset and USD exchange rate; with aggregate return of over 20% in less than 3 months on zero-leverage and astronomical return on leveraged play! What more to ask for?

What next? USD expected to retain this competitive edge in 2015

Post this mid-October 2014 to start of 2015 rally, the outlook is for consolidation in DXY at 90.50/91.50-92.50; EUR/USD at 1.1675-1.1875, GBP/USD at 1.50-1.52 and USD/JPY at 118-121. 

How long (and stretched) will be the consolidation play? Will short-squeeze trigger extend the recovery beyond the set outer limit for steep correction before start of next bull-run beyond 92.52 (DXY); 1.1753 (EUR); 1.5032 (GBP) and 121.84 (JPY)?

DXY strategic support is now at 91.35-91.50 and 90.50-90.65, seen as strong base to build bullish momentum to take out 92.50-92.65 for next target at 94.00-94.15. The correction from 92.52 is shallow at 91.90 and may not have steam beyond 91.50. The strategy therefore is to stay in buy-dips mode to be with long-term bullish undertone. It is near-zero probability for sharp reversal below 90.50-90.65, hence prefer near-term consolidation at 90.65/91.35-94.15.

EUR/USD correction from 1.1753 has hit 1.1846 (ahead of 1.1850-1.1875 resistance zone). While retaining this zone as solid, deeper pull-back into 1.1950-1.2025 is not ruled out before gaining steam for 1.1650-1.1750. The strategy for big-play is to sell (and reinstate shorts) in multiple lots at 1.1850-1.1875, 1.1925-1.1950 and 1.2000-1.2025 (with tight stop) for 1.1625-1.1650, not ruling out extension into 1.1375.

GBP/USD correction from 1.5032 hit 1.5174 (short of 1.5175-1.5200 resistance zone) with momentum intact for overshoot into 1.52-1.53 before gaining steam to take out 1.5025-1.5050 for 1.4800-1.4850. The strategy for big-play is to sell in 2 lots at 1.5175-1.5200 and 1.5275-1.5300 with tight stop at 1.5325 for 1.4800-1.4850.

USD/JPY is little different; got the most of carry-trade advantage from mid-October to 8th December 2014 with equity index appreciation of 24% (up from 14529 to 18030) and USD up by 16% (from 105.18 to 121.84), thus triggering unwind of leveraged carry-trade play (with exit of USD/JPY hedge) ahead of year-end 2014,  for sharp push-back in NIKKEI index from 18030 to 16672 (USD/JPY down from 121.84 to 115.56) before stability at 16800-17400 (and 118-121). Given the ultra accommodative monetary policy stance of BOJ, this game will be a sustainable one till FED clarity on timing of rate action. Till then, retain the set big-picture range of 115/116.50-122/123.50/125 with buy-dips strategy in multiple lots at 118.00-118.50; 116.50-117.00 and 115.00-115.50 for 121-122 and 124-125.

Moses Harding

India-US equity market outlook : Special update

US equities extend bullish support to global bourses:

US equity market is leading from the front since mid-October 2014 optimism on US economy and resultant FED comfort on growth & employment with end of QE and guidance on rate-hike, which is believed to begin by mid 2015. Since then, DJIA index is up from 15850 to 18100, up by over 14% in less than 3 months. Given the sharp spike in USD driving DXY up from 84.50 to 92.50 since mid-October 2014 (up by 9.5%), USD returns for non-US investors from Euro zone, UK and Japan is very attractive. Despite high valuation-build since mid October 2014, there is significant upside gains to pull-in investor appetite, as US economy continue to outperform developed economies over long term. The contradictory stance in interest rate direction retain the currency advantage for the US against its peers. All combined, global investor appetite for US equities will stay strong with higher allocation for 2015. It is matter of time for DJIA index taking out Boxing Day high of 18103 to much higher levels with target at 20000 at conservative 10% appreciation by or before end of 2015. The strategy will be to accumulate on corrective dips with strong long-term base at 17000-17250. It will be an unpleasant surprise if DJIA tanks below 17000 as no major risk factors are in the radar.

India equities in bullish sideways mode:

India equities is mirror image of the US but at lower bullish pace; since mid-October 2014, NIFTY is up from 7723 to 8626 (by 11.7%) against currency depreciation from 61 to 64 during this time (by 4.9%), thus delivering USD return of around 7% against the comparative return of 14% for DJIA for US investors and 23% exchange rate adjusted returns for non-US investors in US equities. This would mean that FII investors will shift focus from India to US in 2015. Having said this, it is not end of flow for India. The economic story ahead is strong thanks to external tailwinds and resultant beneficial impact on macroeconomic fundamentals, supported by pick-up in growth momentum. It is also true for non-US investors (into India) that Rupee is in appreciation mode against major (and EM) currencies despite marginal depreciation against USD, thus retaining higher allocation for India among emerging markets. Combination of significant upside in macroeconomic fundamentals supported by favourable monetary conditions, it would be an unpleasant surprise if India is not given an upgrade in sovereign rating, thus bringing in new investors and higher India allocation from existing investors; reduced dependence on hot-money FII flows being replaced by FDI flows against lower CAD at 0-2% will provide long term confidence on Rupee exchange rate. All taken, there is no risk of FII exit from India assets; flip side being the increased appetite from domestic retail and institutional investors.

NIFTY has set up long term base at 7723-7961 with high probability of punching new all-time high above 8626 post-Budget 2015, with near/short term pre-budget 2015 support at 8065 which should hold for revisit to 8445-8626. If the execution risk is diluted going forward, NIFTY will deliver 15-20% return with end of 2015 target at 9500-10000. The strategy is to be in buy corrective dips mode to ride the external tailwinds and domestic economic vibrancy. Given the significant upside in equity stocks relative to Fixed Income bonds, investor appetite for equity (over debt products) will provide the desired momentum.

Moses Harding

India-US 10Y Gilt outlook : Special update

Risk-off support from Brent Crude

US 10Y Treasury yield eased into 1.90-1.95% from consolidation zone of 2.20-2.35% on set up of panic on Brent Crude extended fall below $50 before stability at 50-53. This was followed by outlook of FED preparedness for shift to rate-hike cycle by mid 2015 and ECB preparedness for next dose of liquidity injection. All combined, guiding yield stability at 1.95-2.05%. While there is good clarity on FED/ECB monetary policy stance on the way forward, outlook on Brent Crude is mixed but with reasonably good confidence that stability at $50-65 will be established soon. All taken, short term outlook is for stability at 1.90/1.95-2.20/2.25% with upward bias ahead of expected FED rate action by mid 2015. The strategy is to play end-to-end and it will be high risk to stay invested at 1.90-2.0%.

Domestic optimism versus risk of dilution in FII appetite

India 10Y bond yield is rock-solid at 7.85-7.90% on cross winds. Domestic cues are in favour on dilution of long term risks from twin-deficits on growth-inflation dynamics. Expectation on CAD is solid for sharp trend down into 0-2% on long term sustainability of Brent Crude at $40-65, while inflation worry is behind with no major risk from base-effect impact or supply-side bottlenecks. There is minor worry (and risk) on growth from execution delay, while achievement of fiscal prudence to create space for public investments is distant away. With significant dilution in Rupee risk (on interest rates and inflation), it is the best time for RBI to trigger 50 bps rate-cut now or soon; there is no strong case to delay any further! The concern however is from FII appetite going forward and extent of domestic appetite from Banks, who will be in unwind mode of huge excess SLR book to release funds for build-up of Credit and Corporate investment portfolio to meet higher demand. All combined, there is strong support at 7.90-8.0% but don't see bullish momentum beyond 7.65-7.75% given the shift of operating policy rate from 8.0% to 7.5% with 50 bps rate-cut followed by extended pause. All taken, short term pre-rate cut range is firm at 7.80/7.85-7.90/7.95%, preparing for post-50bps rate cut range to 7.65/7.75-7.85%. The strategy is to stay invested at 7.85-7.95% for exit at 7.65-7.75%, thus completing the 1% chase from 8.65% 7.65%.

Ease in India-US bond spread will reduce FII appetite

Foreign investors have been happy to play over 6% carry-trade advantage between India-US 10Y bond spread, which is now down at 5.65-5.90%. The contradictory monetary policy stance between FED (baby-steps rate hike mode) and RBI (one-shot 50 bps cut and pause thereafter) will squeeze the bond spread below 5% by end of 2015 on India 10Y bond yield stability at 7.65-7.80%; sustainability here is dependent on Rupee exchange rate stability and long term CPI stability at lower end of 4-6%. This risk will shift FII appetite from India to elsewhere.

Stable outlook with more downside risks

Combining the domestic and external dynamics in play, short term outlook is for stability in 10Y bond at 7.70-7.95% while not ruling out downside risks beyond 7.95% with worst case not beyond 8.15-8.40% on accelerated FED rate-hike (driving US 10Y yield into/above 3%), and stubborn India CPI at higher end of 4-6%. It is good to keep this in mind and retain immediate attention at 7.65/7.70-7.90/7.95%.

Moses Harding

Rupee outlook : Special update

Extended relief in the absence of RBI hurdle:

Rupee derives strong support from domestic cues (and evolving favourable dynamics) such as significant improvement (and optimism) on macroeconomic fundamentals, elevated FX premium and adequate external appetite. Given the Tsunami kind of domestic tailwinds, external headwinds from USD strength, Greece/Euro crisis and global growth worries from crash in Crude Oil price couldn't make any impact on Rupee. The result was obvious for sharp recovery in Rupee from 63.75-63.90 to 62.80-62.95, seen as RBI $ protection zone (and good value to build $ reserves). It is also not surprise that without change in operating dynamics, withdrawal of RBI bids at 62.80-62.95 could only lead to accelerated Rupee recovery in an otherwise $ supply driven market, both in cash and forward markets, thus extending Rupee recovery below 62.80 into 62.20-61.70 for 100% unwind of sharp $ rally from 61.70-61.85 to 63.75-63.90.

RBI in search of demand-supply equilibrium level:

RBI is seen losing its huge appetite for $ given its limited ability for Rupee sterilisation from the domestic money market, which is in liquidity over-hang mode! Given this stance, it does not make sense for RBI to supply cheap Rupees to external investors, which resulted in more leveraged flows. Now, the search is for USD/INR level where FIIs will lose appetite and importers (and FC carry-trade borrowers) will consider good to cover short/medium/long term $ liabilities exposures. On the other hand, there will be need to push FX premium sharply down to flush out medium/long term $ supplies in the forward market from exporters. The change in dynamics is the fact that while RBI delayed rate-cut on Rupee risk, now has great comfort for delivery of one-shot 50 bps rate-cut with great comfort on Rupee, without worry even it would push Rupee down to 63.75-63.90, seen as fair value adjusting to external dynamics.

What next?

It is win-win for all; exporters are covered across the curve, March 2015 around 65.00 and 12M over 68.00 (at spot over 63.70) while importers (and carry-trade borrowers) are partly covered in the near term (at spot 61.70-61.85) and open across short/medium/long term. All taken, it should be great relief for most (if not all) stake-holders! It was great ride for strategic traders from 61.70-61.85 to 63.75-63.90 to 62.80-62.90 with stop loss short-entry below 62.80 for 61.70-62.20.

The expectation on the way forward is to find demand-supply equilibrium at 61.70-62.20; post which delivery of 50 bps rate-cut (now or soon) and resultant squeeze in FX premium will shift Rupee focus from 61.70-62.20 to 63.35-63.85. Hedge and trade strategies will be built based on this outlook for near-term sideways consolidation at 61.70/62.20-63.35/63.85 till end of FY15.

Moses Harding

Take away from "Gyaan Sangam"

Promoter (and ownership) clarity

PSU banks board is answerable to (and under pressure from) many; the Government, RBI, employees & officers associations and to people's representatives! As always, it is not easy to play tunes to all simultaneously, hence the set up of inefficiencies, which has gone to the extent of "riding the tiger" - can't get down or stop! But, the time has come to take decisive "actions" to script the revival (and turnaround) of "Goliath's" in the Financial Services sector (PSU banks) following the footsteps of "David's" (new Generation Private sector banks), adopting to the best strategies, ignoring the not-so-good's! The approach has to be top-down, thus establishing promoter - management clarity.

The suggestion to bring all PSU Banks under "Holding Company" model is welcome, subject to provisions of (RBI kind of) autonomous (and professional) band-width. There is also beyond forward looking suggestions to bring other Financial Services units of Life (and General) Insurance, AMCs, DFIs, ARCs etc., but would be prudent to begin with Banks before looking at holistic picture! The approach to bring professional excellence at Board executive management is the immediate need of the hour; the issue is not with the quality of manpower but the operational empowerment with strict enforcement of responsibility (and accountability) is critical, to begin with! The set up of 4-tier structure of Holdco (Capital management), Non-executive advisory Board (to devise policy guidance), Non-executive management Board (to monitor policy execution) and Executive Management Board (for delivery of set KPIs/KRAs) is seen as starting step towards "Operation Revamp India Financial System", which is seen as biased (and favourable) to the top-end stake-holders and risk-averse to the lower end of the pyramid to enforce push-triggers through Priority Sector and Financial Inclusion mandatory targets. The mantra is inclusive (and efficient) banking for extended coverage at enhanced productivity and efficiency!

Focus on productivity and efficiency to build valuation

There exists multi-focus business play in the Indian financial system. PSU banks operations are focused at "on-balance" sheet (risk weight) products; foreign banks' concentration in off-balance sheet (cross-border and global financial markets) products; private banks in mix of on and off-balance sheet products/services and regional level niche-products financial entities. In the last couple of decades, the business focus is enlarged to distribution business to leverage feet-on-street, brick-and-mortar branch presence and customer acquisition capabilities with the theme of "what you do not manufacturer, build distribution capabilities" (buy-and-sell model) to enhance infrastructure productivity for higher efficiency! It is high time PSU banks get focus on enhanced coverage (of products and services) to ensure higher growth rate on bottom-line revenue parameters over the top-line balance sheet growth parameters. PSU banks need to emerge as holistic financial services provider, improving efficiency in wholesale lending and financial inclusion.

Evolution of graded financial services delivery structure

RBI's agenda is seen to be for bringing the entire financial system into organised structure to ensure safety of public money and to enforce transparency (and good governance) in the system. The way forward is to set up graded structure of global banks, national banks, regional banks and niche banks. There is need to create handful of Global Banks (comparable in size and scale to top foreign banks) with capabilities to service large entities with cross-border requirements; decent numbers of national banks to cater to India-business centric entities; large number of regional banks to cover mid to small enterprises and national level niche banks with product specific focus for financial inclusion and payment & collection services. The agenda for banks' consolidation and creation of Payment and Small Banks are steps in this direction; post which, there may emerge opportunities for large NBFCs to get converted into national banks. It is also possible for the Holding company to build (and extend) ownership linkage from Global Banks to Regional Banks for better coordination for efficient service coverage. The set up of ownership linkage from Global Banks to niche banks with operational (and execution) excellence will not build valuation but also will lead to customer delight setting up fair (and level) play amongst different categories of Banks in the Financial Services sector; next step would be to allow Banks to manufacture financial products (and services) that they distribute now, so as to bring in regulatory control under one roof, cutting regulatory arbitrage between RBI, SEBI and IRDA. The job is begun, and now "gyaan" need to get translated to "kaam"!

Moses Harding

Global Markets update for the week 05-09 January 2015 : Mixed cues!?

Global markets begin 2015 in cautious risk-off mode:

DJIA index opens the New year in cautious mode with steady undertone below strategic resistance zone of 17850-18100; close below 17850 is the sign of dilution in bullish momentum (and confidence) post the Q4/2014 rally from 15850-17350 to 18100. What next? There is nothing major to trigger panic; positive cues (and optimism) from US economy and extended monetary support from ECB (and other major Central Banks) will support to retain bullish undertone into 2015. There are concerns from China, Russia and Iran but not expected to be severe to cause economic and/or financial crisis as witnessed before! For the week, retain focus at 17350/17600-18100/18350 for sideways consolidation, with most trades likely at the inner-ring, and overshoot into outer corridors not expected to sustain.

US 10Y Treasury yield is down at lower end of set focus range of 2.10-2.35%; risk-neutral stance (and lack of clarity on the way forward) has resulted in multiple sets of back-and-forth moves, while overshoot (into the outer corridors) within set big-picture range of 1.95/2.10-2.35/2.60% didn't sustain for long. What next? For the week, retain focus at 1.95/2.0-2.20/2.25% and prefer back-and-forth moves while retaining the short term outlook for shift into 2.10-2.60% consolidation with bias into higher end.

Brent Crude extends weakness into lower end of set focus zone of 55/56.50-58.50/60 with no sign of dilution in bearish momentum despite sharp fall from over $115 into $55 since June 2014. While preferred near/short term trading range is seen at 55-60/65, do not rule out extended unsustainable weakness below $55. Given the fact that long term volatility was seen between 35-140 with most trades around $85-110 range, hedging demand should emerge at $35-55 to freeze the price-advantage over long term to avoid regret later in the event of value-adjustment back into 60-85 zone. All cues (and dynamics) taken, below $55 is cheap-to-acquire for long term perspective. For the week, retain focus at 55-58.50/60, not ruling out hedge-play at/below lower end and trading-shorts at/above higher end.

Gold is stuck at set focus zone of 1160/1170-1200/1210 with no major cues to trigger break-out either-way. However, short term bias into mid 2015 (ahead of FED clarity on rate-hike) is into the lower end of set strategic focus range of 1110/1135-1235/1260. For the week, retain focus at 1135/1160-1210 with bias into lower end.

DXY extend gains over 90.50 shifting into higher near/short term trading range of 90.00-92.50 with bullish undertone. USD retains economic and monetary advantage over the major economies in 2015-2017. For the week, retain focus in EUR/USD at 1.1875-1.2050/1.2100 and USD/JPY at 119.50/120-122; prefer sideways momentum absorbing short-squeeze before back into bearish trend.

India begins 2015 with nervous optimism

NIFTY sets up the heat with solid recovery from lower to higher end of set 8150-8400 consolidation zone. There has been good policy initiatives since May 2014; many see them as adequate in the 1st year of NaMo regime (against short of political majority in Rajya Sabha), while some see as limited actions (against loud noises and cosmetics touches). All taken, India is different since mid 2014 and seen as one of the best investment destination, next only to the mighty US! This optimism on the way forward will prevent the worst while looking for tangible (and effective) actions to trigger the best (for new high's); till then consolidation is the outlook and way forward! For the week, set focus at 8200/8250-8485/8535 with most trades likely at 8345/8370-8470/8495; near term big-picture at 8150-8485/8635. Stay neutral on push-back into 8150 against lower probability of sustainability over 8485.

India 10Y benchmark bond 8.40% 2024 is in back-and-forth mode at 7.75/7.85-8.0/8.10% within set strategic focus range; post the 7.78 to 8.03% moves, stability is established at inner-ring 7.85-7.95% range. What next? Risk-neutral stance against rate-cut expectation and "Gyaan Sangam" for transformation of PSU banks retain positive undertone for Gilts in the short term (into Budget 2015 and end FY15). While inflation and CAD headwinds are behind, concerns remain only on the ability to meet set fiscal deficit target. All combined, prefer stability at 7.80-7.95%; strategy is to unwind excess SLR (and trim duration of SLR) at/below 7.80% and good to stay invested at/above 7.95% retaining the big-picture at 7.75/7.80-8.05/8.10%.

USD/INR settle at lower end of near-term focus range of 62.85/63.10-63.85/64.10 post the sharp fall from 61.70-61.80 to 63.85-63.95 since 1st week of December 2014. Rupee is now supported by domestic optimism and retention of FII appetite, thus losing traction with USD gains elsewhere. As always, RBI steps in to administer price-stability to guard against excessive Rupee appreciation from hot-money FII inflows. Given this scenario and risk of sudden downside value adjustment of Rupee (latest seen in December 2014), it is prudent for importers to stay risk-off at lower end and exporters to stay risk-neutral retaining appetite for next step-down value adjustment against DXY gains over 90.00-92.50 trading zone. For the week, set focus at 62.95/63.10-63.45/63.60 and be fleet-footed end-to-end. Retain Rupee risk bias into 64.85-65.35 on extended USD strength and domestic setbacks. Long term hedging (and carry-trade) strategy is tuned in traction with 12M USD/INR value at 67.00/67.25-68.25/68.50; break-out either-way not to hold for long!

Moses Harding

Changes in approach in Planning Commission and PSU Banks : Impact analysis!

Expanded and inclusive approach in Planning & Strategy

Many see the new approach in Planning Commission as old wine in a new bigger bottle! It is obvious that role and responsibility will be the same, the differentiator should be in the deliverables (with well-dedined KPI/KRAs) and accountability for ensuring execution of set vision targets. The erstwhile Planning Commission was seen to be advisory in nature focusing on (ideal) vision statements without being in sync with (delivery and) execution capabilities; hence the strategic shift from top-down to bottom-up approach!

The focus will obviously be on macroeconomic fundamentals - growth, inflation, current account deficit and fiscal prudence. All these are impacted from economic demand-supply and financial cost-benefit dynamics. There is need to build robust infrastructure across monetary, financial, legal, labour etc to make the economic, financial and business environment easy for doing business for investors and consumers. All these combined will lead to creation of opportunities seen good to acquire by domestic and foreign investors. Needless to say, public sector should lead from the front in the initial stage for private sector to follow!

It is indeed a different approach and it is early to make judgement on the performance and efficacy. It is important to build linkages between this strategic unit and tactical & execution units to ensure that what is planned is translated to ground-level impact and economic benefits. Indian system is stuck in steep upward slopping pyramid shape; be it economic efficiency or private wealth, with heavy base with inefficient business entities and individual poverty. The need is to crush the pyramid from the top to build formation (and shape) of large belly with upward/downward slopping triangle, so that majority of the population (enterprise or individual) stay at the belly to ensure long-term sustainability in consumption and investment.

PSU banks transformation, key to success!

PSU banks (and few large private sector banks) own (and control) more than 90% of market share in the Financial Services sector. In this group, the few large private sector banks are strong in terms of overall productivity and efficiency (measured from Return on Assets and equity) and command huge investor acceptance (measured from Book Value to Market Cap and Market Price to EPS multiples). The agenda is why not replicate what the few large private sector banks have done to establish investor confidence since their inception in 1994?

It is not rocket-science but the clean-up (and transformation) has to begin from the top - promoters and strategic executive leadership. The Return on Assets is derived (at the numerator) from aggregate of Net Interest Income, Other Income, Cost of operations and credit loss, while (the denominator) the Risk Weighted Assets is managed with good mix of assets linked to capital usage versus the yield/return. The management of these key parameters differentiate the laggards (PSU banks) from the leaders (new private sector banks). It is irony that those who command size are inefficient and those who are systemic irrelevant are highly efficient! The exercise begins with "gyaan" session, but the success depends on ruthless execution, taking cues from well-run private sector banks.

It is good that key issues concerning the Indian economy - Planning & Strategy and Financial Services sector (the facilitator) are being addressed simultaneously. At this point, I could only wish good luck (and God speed) to Narendra Modi & his team! It is indeed a great beginning into 2015 and stake-holders are in wait-and-watch mode to see transformation of the efforts into tangible beneficial impact!

Moses Harding

High time Banks review Credit pricing mechanism!

Base Rate not aligned to market:

Banks are not allowed to lend below the set Base rate, which is at range between 10.00-11.5%. Base rate is supposed to be relevant for application for AAA credit risk for tenor upto 6-12 months. Base rate is derived from average cost of 6-12 month deposit rate + statutory cost + allocated operating cost + standard credit cost provision. As obvious, Base rate does not cover credit-loss provision for high-risk credit (excluding Gilts, top-notch AAA credit and adequate security from liquid assets), tenor premium beyond 6-12 months and adequate return on asset/capital. When 6-12 month deposit rates are down at 8.5% and statutory cost are at minimum against adequate return from SLR, the Base rate pressure is from operating cost inefficiency. Be that as it may, resultant outcome is that Bank's base rate is not competitive to market reality, thereby shifting the financial intermediation to non-bank lending/investment entities.

Deposit-Credit growth not reflective of reality!

There is shift of credit demand from Banks to non-bank entities from good credit borrowers. The high term loan and cash credit lending rates of Banks are not to their liking. Most good credit risk borrowers are able to shift term loan and Cash Credit borrowing with CP/NCD debt products with Mutual Funds/Asset & Wealth Management companies, non-bank Financial Institutions, Provident & Pension funds and cash rich individual & corporate entities. This leads to flight of deposits & advances from Banks to non-bank financial intermediaries. So, the deposit & credit growth as shown in the system is not reflective of reality. The irony is that Bank deposits are fed into these non-bank financial entities for step-down financial intermediation. In reality, Bank's term loans portfolio is loaded with high credit risk borrowers and Cash Credit limits remain undrawn, being used to issue CPs & short term NCDs, while Banks are unable to price Working Capital linked Demand Loan (as alternate to Cash Credit) below the Base rate.

What is the remedy? Should Base Rate linkage be removed?

RBI intent is to establish transparency in credit pricing; but when it leads only to inefficiency, it is high time to find resolution! Banks prefer high base rate to avoid fine credit pricing across the segment of borrowers. It becomes worse when the system gets into abundant liquidity mode against squeeze in credit demand. Banks are under tremendous pressure to retain NII/NIM against severe cost pressure from non-bank competitors and holding good chunk of deposits at zero/negative spread with RBI as excess SLR. There is no quick-fix resolution when it is not easy to balance survival of non-bank financial entities against setting up of level playing field between bank and non-bank financial entities.

Thinking aloud for RBI to work on win-win resolutions to Banks, non-bank Financial Institutions and depositors; needless to say, worst hit are depositors and Banks!

Moses Harding

Start of 2015 markets update : mixed & nervous mood!

Equity market:

DJIA index failure at higher end of 17850-18100 consolidation zone (2014 high at 18103) for 2014 close below 17850 (at 17823) is worry; first signal for validation of set consolidation outlook in 2015!? What is the trading range to track in the near term? Watch out for immediate resistance at 17991-18103 with minor support at 17585-17600 and strategic support zone at 17050-17300. At this point of time, there are no major triggers to upset the mild bullish undertone taking comfort from economic turnaround signals and extension of liquidity support to financial investors, whose mood is seen to be shifting between risk-on and risk-neutral with hope that developed markets would outperform emerging markets in 2015. For now, let us set our trading focus in DJIA index at 17550/17600-18100/18150 and stay neutral on break-out bias into 18350 or 17300; good to play end-to-end being with the price momentum either-way!

NIFTY struggle at minor resistance zone of 8285-8300 ahead of 8365-8400 is worry for the bulls; not seen as a great start into 2015, but not to be viewed as panic while minor support zone is firm at 8200-8215 ahead of 8130-8165, strongly supported by strategic investors. There is no major risks on the Indian economy; growth is in uptrend, CAD & inflation worries are behind and fiscal deficit will be managed, as before around 4% for FY15. All taken, India macroeconomic fundamentals will be in much better shape than what it was in 2013-2014. There are signs of slow-down in policy activation, but the intent is strong; need to give the benefit of doubt that it could go only better into 2015 and beyond! Taking all these dynamics in play retain the outlook for near-term consolidation at 8150-8400, mid-point of strategic investment zone of 7950-8600; at this stage, prefer to keep 7700-7750 outside the radar which is seen as worst case for 2015 & beyond. For now, let us stay focused at 8150-8300 retaining break-out bias into 8365-8400. Need big-time FII play to pull focus below 8135-8150 into 7950-7965, not preferred at this stage.

Bank NIFTY has major resistance at 18875-18925 with minor support at 18400-18450 ahead of 18200. The outlook is not gloomy despite high valuation of private sector bank stocks posting great returns in 2014. The upside in 2015 will be from public sector banks who are in reform process, outcome of which would translate to higher productivity and efficiency. Bank Stocks will obviously gain the most from economic turnaround (in 2015 and beyond) resulting in better NII and marginal relief from NPA. The shift into rate cut mode will emerge beneficial to PSU banks from better NIM and higher other income from profit on sale of investments. While dynamics are mixed, most cues suggest sustainability of bullish undertone into 2015. For now, let us set our focus at 18200/18450-18950 not ruling out extended gains into 19250; good to play end-to-end!

Currency market:

DXY posted firm 2014 close at 90.27 post sideways mode at set consolidation range of 89.50/89.75-90.25/90.50. This is the first signal for more to come in 2015. The step-up in strategic base is firm, from 84.50 to 87.50 and now momentum seen good for the next step-up into 90.50-92.50 ahead of 95-110 (just for reference for the big-picture ahead!). For now, let us set focus at 89.50/90.00-92.50/93.00; strategy is stay in buy-dips mode to be with the chase of bull-run.

EUR/USD closed 2014 with very bearish undertone for close just short of 1.2050 target (low at 1.2095). In traction with DXY, step-down from 1.40 is steep at 1.21 with next target at 1.1650-1.1875. Most cues favour the US Dollar against Euro and any short-squeeze driven recovery will be seen as relief and not trend reversal; strategy to be in sell-on-recovery mode is valid. For now, let us stay focused at 1.1875-1.2175/1.2225 with bias into lower end.

USD/JPY failed for close at higher end set consolidation range at 118.50/120-123.50/125; comfort is from hold at 118.84 and worry is from failure for 2014 close above psychological 120. Nevertheless, need to give benefit to exporter short-squeeze for 2014 year end post intra-2014 relief rally from mid October low of 105.18. Most cues stay in favour of USD against the JPY to retain the bullish undertone. For now, see strategic 2015 support at 115.00-115.50 for bias into 123.50-125.00; retain buy dips mode into lower end of near-term support zone of 118.50-120.

USD/INR traded to the script; step-up valuation from 61.70-61.80 to 63.80-63.90 before consolidation for back-and-forth play at 62.95-63.10 and 63.70-63.85; hedge strategy to stay risk-off at either-end on exposure till end March 2015, if not beyond has come out good. In the process, 12M USD/INR got re-rated from 66.00-66.25 to 68.00-68.25 before back-and-forth consolidation at 67.25-68.00/68.25. Two questions emerge critical when stake holders appetite is either risk-off or risk-neutral! How strong is FII/FDI pipe-line in 2015? Why and to what extent RBI should stay in $ buy mode? While not sure of extent of FII appetite, FDI flows should be in plenty at least in relative terms. RBI has been in USD defence mode in 2014 absorbing FII supplies to maintain demand-supply equilibrium. There is debate on why RBI should resort to USD support stance incurring negative-carry and giving exchange rate advantage to FIIs. There is no choice, as excessive Rupee gains will only bring non-RBI $ bids, also triggering FII reverse flow. At this stage, RBI has to stay in $ buy mode to cut excessive price volatility and to retain FII appetite by offering cheap Rupee. Given this scenario and against the USD bullish momentum, it is safe to assume that USD/INR has firm 2015 base at 62.85-63.10 with pull towards 63.85-64.15, not ruling out possibility of end FY15 target at 64.85-65.35. Rupee relief below 62.85-63.10 can be from RBI step-out from $ buy mode and/or sharp unwind of USD gains of 2014; both are low probability occurrence! For now, find no reasons to review set focus at 62.95/63.10-63.95/64.10. Retain hedge strategy to cover end Mar'15 exports at 64.85-65.10 and importers to stay risk-off at 62.95-63.10. Trading (and carry-trade) strategy is for back-and-forth play on 12M USD/INR at 67.00/67.25-68.25/68.50.

Gilts market:

It is great start for India 10Y bond (8.40% 2024) extending gains into 7.75-7.85% and momentum looks good for completion of back-and-forth moves between set exit zone of 7.75-7.80% and reinvest zone of 8.0-8.05% for fleet-footed play. The relief is from rate-cut expectation and stability in US 10Y Treasury yield at 2.10-2.25%, thereby retaining the India-US bond spread at acceptable level of 5.60-5.75%. There are no major triggers to upset current bullish stability, hence let us set focus at 7.75/7.80-7.90/7.95% for back-and-forth play. It is prudent to expect good supply at lower end (against reduced demand) from FII exit, unwind of excess SLR book and cutting the duration of SLR book through churn from longer to shorter tenor.

Wish you all a great & profitable 2015!

Moses Harding