Global Markets 2016 outlook : Nothing to fear with no major cues for cheer! Read on.....

US financial markets retain bullish advantage from growth comfort and interest rate dynamics against dollar strength

The external impact on India Financial markets is neutral and mixed. The confidence is from sustainable US economic recovery extending support to India capacity expansion through higher domestic consumption and improved exports. The demand-supply dynamics in commodity assets stand in favour to retain price advantage to hold Current Account Deficit and inflation expectation steady for further baby-steps monetary easing by the RBI. The concern however is from the shift of FII appetite to US markets (from EMs) chasing low risk - high reward risk-on asset classes. The fear mitigant for India is the shift of inflows from hot money short term FIIs to sustainable and accelarated longterm FDI/ECB investors. Given the positive outlook on the way forward, FED has already shifted to rate hike cycle in Q4/2015 notwithstanding resistive outcry from the IMF and other developed & emerging economies with 25 bp hike, not to be seen as baby-step at this stage. The expectation in 2016 is for quick shift of policy rate from 0.25-0.50% to 1.0-1.25% corridor by not later than mid 2016.

The fear of unknown is from the Euro zone and China that are in economic struggle despite ultra-dovish monetary support. While the ammunition at disposal is very limited, the extent and duration of retaining the supportive dynamics is not clear. Having said this, it is very low probability of seeing monetary reversal stance in 2016. The impact from here on India markets will be on Rupee price stability keeping short term foreign investors away for now.

India markets in nervous undertone with expectation shift from optimism to hope

India Financial markets fortunes are mixed without clarity eitherway. The strong external tailwind support is now behind with consolation that it may not turn on the head now, at least in H1/2016. The direction bias will be set from developments in the domestic sector. The expected big bang policy reforms didn't materialise and not seen to be forthcoming soon. The shift from optimism to hope has already resulted in sharp unwind of bullish set up since March 2015. The bottom-line for India in FY16 is the downward shift of sentiment from euphoria to optimism to hope. Can the Government restore optimism in 2016 or allow further slippage from hope to disappointment? At this stage, It is good to set the bias for shift from hope to optimism given the positive cues from the external sector on the CAD, Inflation and Rupee exchange rate.

Can India restore GDP growth optimism from 7-7.5% to 7.5-8% in FY17? Can India see soft landing of CPI inflation around 5% in 2016? Can India restrict fiscal deficit at lower half of 3.5-4.0% in FY17? Will India continue to get external support to hold CAD at 1.5-2.0% in 2016? Will Rupee be stable at 66-70 with not more than 3-5% depreciation in 2016? Will RBI get the desired bandwidth to lower the operating policy rate from current 6.75% in 2016? The directional bias on India risk-on financial markets for 2016 will be dependent on outcome from these critical fundamental cues. The worry is that in the absence of strong FII support, upside gains will be shallow while downside risks can run deep! Despite dilution in external tailwind support for India Financial markets, MARKET PULSE continue to retain hope on long term India economic prosperity. The Government has already opened the doors wide for external investors, and working on policy, regulatory and administrative initiatives to make India as "easy to do business" destination. The public investment into core sectors are being beefed up to provide comfort to domestic investors to pad up to build significant size for capacity expansion. It is true that the pace is slow, but need to give benefit of doubt to the intent and sustained efforts to knock out the resistive political hurdles!

What is the take-away? It is not wise to look beyond 3 months, hence there is no strategic long term play for time horizon beyond 2016! It is prudent to stay short sighted and be fleet-footed to either take monies off the table and stop running the losses taking comfort as long term positions. It has been rewarding 2015 for fleet-footed investors (and traders) across asset classes and it shall be so in 2016 as well, looking for long term trend clarity eitherway!

India equity market in sideways mode given the lack of clarity against limited investor support

NIFTY 2015 high of 9119 looks distant away while low of 7539 is at risk in 2016. MARKET PULSE set end of 2015 Nifty focus at 7500/7650-8000/8150, seen as intermediate zone between 2016 big-picture focus range of 7000/7150-8500/8650. Bank NIFTY is also supported now at intermediate zone of 16150/16500-17350/17700. What Next? MARKET PULSE retain outlook (set on 5th December 2015 update) for 2-step strategic buy entry in Nifty at 7680-7715 and 7515-7550 (Bank Nifty at 16500-16650 and 16000-16150) and 2-step short-build zone of 7965-8000 and 8100-8135 (and 17150-17200 and 17450-17500). Given this outlook on India equity, DJIA index is firm with 2015 low of 15370 looks distant away against high probability of 2016 high above 2015 high of 18351. The end of 2015 consolidation outlook at 17000/17350-18000/18350 has held well building steam for shift higher beyond 18350.

The risk on India equity is from FII play when Nifty under pressure below 2015 low and DJIA looking firm for move beyond 2015 high. The flow dynamics will be between sell-on-recovery stance of FIIs and buy-dips support from DIIs, which provide comfort for Nifty stability at 7500/7650-8000/8150 (Bank Nifty at 16000/16350-17150/17500) in Q1/2016. At this stage, MARKET PULSE stay neutral on FY17 shift of NIFTY focus into 7000-7500 or 8150-8650 (Bank Nifty into 15000-16500 or 17500-19000). Government and RBI have to be on over-drive to arrest downside risks on India equity markets on shift into new financial year in the absence of FII appetite in 2016. All taken, it is prudent to stay risk-neutral in Q1/2016 (ahead of Q1/FY17) awaiting better clarity ahead.

India Bond market in consolidation mode from FII appetite shift from risk-on equity to risk-off Gilts

MARKET PULSE squeezed end of 2015 focus on India 10Y yield at 7.70-7.80% (post end of 2015 chase from over 8% to below 7.50%). While retaining bearish undertone, set RBI support at 7.78-7.80% ahead of 2-step 2016 strategic buy zone in 7.72% 2025 bond at 7.83-7.85% and 7.93-7.95% against duration-cut zone of 7.68-7.70%. This outlook was set in traction with US 10Y yield stability at 2.20-2.35% against yield spread of 5.35-5.60%. It was also set as high-risk short-build on India 10Y bond when India-US 10Y yield spread stay elevated at 5.55-5.60% and India 10Y-Repo rate spread at 1.0-1.10%. What Next?

India 10Y bond is under pressure from domestic low demand - high supply flow dynamics and gradual lift-off in US Treasury yield in 2016. There is limited scope for squeeze in India-US 10Y yield-spread below 5.35% despite US 10Y spike into 2.50-2.65% by mid 2016 against stubborn CPI inflation print at upper-half of 5-6% and Rupee downside risk into 67-70. All combined, see good FII appetite in India 10Y bond at 7.80-7.95% (against Rupee value at 67.35-68.85). This FII strategy in 2016 is not bad against 3-5% Rupee depreciation and 12M Libor weighted average not beyond 1.25%. The big-picture DII play (including Banks) will be between duration-cut zone of 7.65-7.70% and duration-build zone of 7.90-7.95%. The strategic traders appetite will be to build shorts at 7.68-7.73% with caution on shorts at 7.78-7.83% and to build long at 7.88-7.93%. It would need supportive RBI (with 25-50 bps rate cut) and neutral FED (with extended pause post 2nd round of 25 bps hike) to get the India 10Y bond focus into 2015 high of 7.45-7.50%. Most will agree that it will be manna from the heaven if it comes true!

Rupee set for repeat of 2015 with downside risk not beyond 5%

Post the USD/INR intra-2015 bull chase from 63-63.35 to 66.85-67.10, MARKET PULSE set end of 2015 focus at 66.20-67.20 in alignment with RBI admin range of 65.85/66.10-67.10/67.35 for end of 2015 close at 66.35-66.85. During this time, 12M $ rallied from set strategic base of 68-68.25 to resist zone of 71.25-71.50 despite time-value decline from 7.5% to 6.25% in traction with 1.25% rate cut from RBI. Rupee value-decay of 5.25-5.50% in 2015 is not bad against average time-premium of around 7%. What Next?

Not withstanding the beneficial impact on Rupee from lower Brent Crude at $35-50, Gold at 1035-1135 and FDI/ECB inflows, the headwind force is severe. The downside risks are from cues around USD strength against major currencies pushing DXY beyond set 2015 strategic resist zone of 100-100.50, squeeze in 12M time-value to 5-5.5% against steady Repo rate at 6.50-6.75% and hardening 12M Libor into 1.25-1.75% in 2016. The PBoC impact on EM currencies will also add to pressure on the Rupee. The flow dynamics has also turned against with FII $ bids in the cash market and risk-off importer demand in the forward market. One can't ignore huge RBI $ appetite when $ supply turns excessive from lumpy inflows. All combined, MARKET PULSE retain set 2016 zoom-in focus at 65.85/66.10-67.10/67.35 and await orderly or one-shot adjustment into 67.10/67.35-68.85/69.10 at start of FY17. Also retain 12M USD/INR strategic focus at 70/70.25-72.50/72.75.

Post the EUR/INR intra-2015 down-hill chase to set strategic base at 69.90-70.15, correction from here held at short-initiation zone of 72.85-73.35 before consolidation at 70.65/71-73/73.35. The outlook for Q1/2016 is for consolidation here tracking EUR/USD play at 1.05/1.0650-1.10/1.1150 against USD/INR at 66/66.20-67/67.20 and stay neutral on breakout eitherway. It may not be sustainable below 69.90-70.15 against possible intra-2016 shift of EUR/USD play into 1.0/1.0150-1.05/1.0650 against USD/INR shift to 67.10/67.35-68.85/69.10.

Commodities retain bearish undertone from demand-supply dynamics driven by weak global economic recovery

Brent Crude extend weakness below set long term strategic base of $37 on intra-2015 push-back from $70. Is it good (and prudent) to chase weakness into (or below) $35-37? While the demand pick up in 2016 will stay muted, the attention will be on the extent of supply squeeze to retain fair value play at $35-50. Having said this, long term hedge demand will emerge on extended weakness below $35-37 to stay risk-off (or neutral with 50% hedge) to mitigate risk from possible relief rally into $48-50. At this stage, big-picture focus is retained at 35/37-48/50 and it would be high risk chase on extension eitherway.

Gold held at strategic base at 1000-1035 post sharp intra-2015 unwind from over 1300 before stability at end of 2015 consolidation range of 1035/1050-1085/1100. What Next? The worst case scenario for 2016 is not seen beyond $950, while best case is seen restricted at $1135-1185. Gold has clearly lost its safe-haven status but seen fairly priced at 950-1000 for 2016 stability at 950/1000-1135/1185.

What is 2016 strategy?

2015 has been extremely good for fleet footed play both for investors and traders. Shift of risk play between on and off and staying neutral at intermediate zone has given good double-digit returns to investors in the OTC markets and triple-digit returns (on the margin) to traders on the ETF platforms, across asset classes. The strategy remains valid for 2016 with review at Q1/FY17. It is caution for passive investors who rode the 2012-2014 bull trend; it is possible that 2015-2017 may turn as consolidation phase before exerting pressure on the 2015 high prints. So, it is loss of time-value against search of sustainable strategic "base" during 2016-2017. All combined, cues are mixed to have "long term" trend clarity eitherway; markets will be volatile, so are the views and trading strategies. It will be game of "wind surfing" for strategic investors/traders to stay in patience for the right wave for entry and plan quick exit before getting knocked out by contra waves. It will be greed to look for 90-100% of end-to-end moves and it would be prudent to stay content with 60-75% of set big-picture focus range. As always, stop loss has to be affordable and to what one can chew! It is good not to be a "boxer" in this market; one unexpected blow can knock out even the best (and the favourite) by an underdog!

Wish you all a very happy and profitable 2016.

Moses Harding
harding.moses@gmail.com
9674734145

Leave of absence : Shifting base from Kolkata to Mumbai

Dear all,

It has been a roller-coaster ride in 2015, and I hope you had a good and profitable ride "wind-surfing" the frequent swings in the markets. It is important to be patient for entry on the right wave and exit on time before a bigger wave topples you down! It is also important to cut the losses quickly and ride the profits with trail stop to catch 50-75% of the end to end move. In this process, even if the strike rate is 50%, you end up with decent profit on cash investment and great returns on leveraged margin.

I am in the process of relocation from Kolkata to Mumbai, and will be out of market for some time till end of 2015. I will be happy to take individual queries on the markets regarding hedge, trading and investment strategies. If you may need any guidance or validation comfort on your views, please feel free to post your queries with details on my mail id harding.moses@gmail.com or SMS/WhatsApp on 9674734145.

Will be back by 1st week of January 2016; till then, take care and wish you all the best of luck ahead when markets will turn erratic and volatile in illiquid holiday season!

Wish you all a merry Christmas and great New year (2016) ahead!

Moses Harding
harding.moses@gmail.com
9674734145

India Financial markets : boxed between hope and gloom.....Read on...

Tough battle for India against combined might of FED, ECB and PBoC when RBI ammunition goes off target

RBI was generous with ultra-accomodative 50 bps rate cut on 29th September policy review, but it turned ineffective on India risk-on assets post knee-jerk reaction which couldn't sustain beyond couple of weeks. RBI big supportive act (and measures) is seen as inadequate when FED prepares for shift from accomodative to vigilant stance with start of rate hike cycle in mid December and if data turns supportive in 2016, shift from vigilant to hawkish is not ruled out. ECB is also showing signs of possible end of accommodation in 2016 for shift to neutral stance by end 2016. The other worry is from PBoC importing inflationary pressures building downside risks on the Rupee and upside pressure on commodity prices. All these combined have made India as "high risk" destination on quick reversal of sentiment from being seen as the best-in-Emerging markets, not long ago! The sentiment reversal has gained momentum since mid October when RBI is left with few ammunition, which it can't afford to let go till mid 2016. When FIIs in exit mode, DIIs support can only delay the inevitable and also serve as providing better exit value for FIIs! When external tailwind support has turned on the head at Tsunami force, stakeholders look internal for support from domestic cues and dynamics. Post ECB not being very generous and FED rate hike risk ahead, global markets are nervous with DJIA index in sideways mode 17100/17250-17850/18000 with multiple failure below 18000 against firm hold above 17150. USD Index lost bullish momentum at set pre FOMC cap of 100-100.35, got pushed back from new 2015 high of 100.51 to below 98.50 into 97.50. EUR/USD got 400 point intra-day relief from below 1.0550 to over 1.0950. US 10Y yield couldn't sustain overshoot beyond set tolerance range of 2.20-2.35%.

The impact on India risk-on assets are severe in the absence of RBI monetary bandwidth and lack of clarity on the critical policy guidelines around GST, Land reforms and other measures around "ease of doing business in India" and providing investment opportunities seen as low short term risk against high long term reward. India equity market is already in struggle to avoid new 2015 low, 10Y bond yield back at pre 50 bps rate cut levels and Rupee punching new 2015 low at 67.01 pulling all time low of 68.85 into striking distance. All combined, what it needs in India is "walk the talk/noise" actions from the Government when RBI supportive role is limited in the medium term. RBI has already front-loaded supportive rate actions as combination of steroid (ahead of start of recovery) and as catalyst  (to step up momentum for shift from lower to higher gears). Will it work against other major Central Banks?

Can India domestic cues ring-fence external impact? No great confidence as yet

It is high time the Government shifts to higher gears on its economic growth and development agenda. The initiatives and measures undertaken towards this agenda are many. While some are still in the ideation to policy preparation level, most have not shown desired results. With Land reforms expectation gone behind, GST roll-out target of April 2016 will also go behind if not cleared in the current winter session of the Parliament. The India macroeconomic fundamentals are definitely better than what it was a year ago, but sustainment at current levels and building improvement on them against external headwinds is not an easy task, hence the loss of confidence on the Indian economy and financial markets. The catalyst to growth has to be from accomodative monetary policy (both on rates and liquidity) and risk-on credit appetite of financial intermediaries. While RBI has limited bandwidth on monetary policy, large Banks are credit averse nursing plenty of problems around Capital, NPAs and Profitability. The investor (both domestic and foreign) appetite is good but continue to stay suspect on many factors that do not balance short term risk against long term reward.

All combined, it is not clear on India's ability to ring-fence the pipeline external impact, hence the foreign investors shift appetite to either wait-and-watch mode or exit till clarity on sight of better prospects. Till then, any relief on markets will only be used for exit shifting to risk-off asset classes. The appetite of foreign investors may shift from equity to high yield fixed income at Rupee fair value zone of 67.20-68.85. The domestic investors appetite will stay balanced between equity and fixed income for building strategic portfolio for 2016 while Nifty at 7500-7650 and 10Y bond at 7.78-7.93%. The picture ahead is not gloom and doom as yet; hope for slow-pace sustainable recovery is alive, hence good to buy on 3-5% correction from here on the equity and debt markets. No cheers as yet, but not prudent to dump India Financial assets.

India equity market : No comfort on reversal of bear phase, but short term base is not far away

The lower high's trend since March 2015 high of 9119 is only gaining momentum. It is possible that December high of 7979 (on 2/12) may stay safe through the month, while November high of 8116 and October high of 8336 have moved out of the radar. The risk is now on September low of 7539 and 29th September pre rate cut low of 7691. It would need miracles (accomodative FED, more generous ECB and quiet PBoC) to shift Nifty focus back at 7965-8115, which was set by MARKET PULSE as long-unwind and short-build zone. NIFTY weekly close below 7800 (at 7781) is very negative to set up pull-bias into 7680-7715 ahead of 7515-7550, seen as safe value-buy zone with stop below 7500 for 7000-7150. For now, watch immediate resistance at 7850-7885 ahead of 7965-8000 to hold for continuation of bear phase into 7680-7715 enroute to 7515-7550. It would be lucky not to see a new 2015 low print below September low of 7539. Continue to retain 7500-7550 as make-or-break zone between 7000-7150 and 8000-8150. It is near zero probability for Nifty 2015 close move above 2014 close of 8282 for negative return of 3.5-13.5% against big-picture rest of 2015 trading range within 7150-8000. The rest of 2015 big-picture strategy is to play back-and-forth with buy appetite at 7680-7715 and 7515-7550 (stop at 7480) and short-build at 7850-7885 and 7965-8000 (stop at 8035).

Bank Nifty is sharply down by 9.8% from 2015 close of 18736 and by 19.2% from March 2015 high of 20907. Since then, November high at 17450-17500 is very firm and October high of 18029 has gone out of focus. It is less said the better on the fortunes of Banking stocks except few Banks who are largely insulated from the woes of Capital, NPAs and Profitability. But when the systematic important large Banks are under pressure, the small Banks can do little to come for rescue to arrest the slide. The unwind of benefits from 50 bps rate cut on the Investment portfolio is another major hit on the banking system. The pull bias is into November low of 16587 and 29th September rate cut low of 16648 ahead of 7th September and 2015 low of 15762. The index has been volatile in back-and-forth mode at set pre & post rate cut focus range of 16500/16650-17350/17500. MARKET PULSE set 17350-17500 as too hot to hold zone for 16500-16650, not ruling out revisit to set 2015 strategic base of 15750-16000. For now, watch immediate resistance at 17150-17200 ahead of major 17450-17500 to retain the current bear phase for 16500-16650 enroute to 15850-16000. It would be lucky not to see new 2015 low below September low of 15762. The outlook for 2015 close is between 15750 to 17500 for negative return for 2015 at 6.5-16%. The big-picture strategy is to sell at 17450-17500 (stop/reverse at 17550 for 17900-18050) and to buy at 16500-16650 and 16000-16150 (stop at 15900).

The unwind of bearish momentum for shift to consolidation phase would be from DJIA index upside break of set hot-to-hold zone of 17850-18000/18350 for punch of new 2015 high over 18351 shifting trading range from 17000/17150-17850/18000 to 17850/18000-18850/19000. DJIA has remained steady in 2015 trading around 2014 close of 17823 now post swings between set 2015 strategic focus range of 14850/15350-17850/18350 with back-and-forth moves at 18351 to 15370 to 17977 between June and now. It is positive that global investor appetite on DM equity assets will cushion downside risk on India.

India Gilt Market : 1.25% rate cut in 2015 leaves no impact on the 10Y yield

India 10Y benchmark yield 2014 close was around 8% and the new 10Y benchmark 7.72% 2025 (issued in May) is now at 7.75% unwinding most of the impact of 1.25% cut in 2015. The intra-2015 low held solid multi times between June - August at 98.70 (around 7.93%). RBI overdose 50 bps rate cut triggered sharp rally to 2015 high at 101.64 (around 7.45% on 5/10). MARKET PULSE target for end FY16 was 7.50% with 2015 best case not beyond 7.65-7.70% against outlook of Repo rate at 7% in Q4/2015 and 6.75% in Q1/2016. The ahead of time hit of target 7.50% helped an early unwind of strategic investments and duration-cut of core SLR book to sub 2 years. The reversal from 7.45-7.50% has met 1st target 7.75-7.80%. The way forward is not good with limited investor appetite who are in shock to see huge erosion in the mark-to-market value, most turned from positive to negative. The upside momentum in US 10Y yield into 2.35-2.50% also exerts pressure for short term consolidation in India 10Y at 7.70-7.85% at India-US yield spread at lower end of 5.35-5.60% tolerance zone. With 7.70-7.85% as best case scenario, the worst case at 5.50% spread will shift focus into 7.85-8.0% with big-picture focus at 7.70-8.0%. All combined, 10Y bond appreciation in 2015 will be close to par against 2014 close of around 8% against 2015 close outlook at 7.78-7.93%. The sharp decline in 1Y yield from 8.50% to 7.25% in 2015 is the blessing in disguise for borrowers, while retail investors have nothing to regret to get similar yield in the longer end despite 1.25% rate cut. The poor thing are the Banks whose opportunity (and real) loss on investment book is more than the one-off NII benefit from interest differential between outgoing and incoming deposits, which will be knocked out on revised Base Rate application method proposed by the RBI. For now, 10Y bond finds immediate support at 7.78-7.80 from RBI and 7.83-7.85% from strategic investors. Beyond here will be panic for revisit to 7.93% (old 10Y bond at 8%). The immediate resist zone is at 7.65/7.68-7.70% initiating huge appetite for long unwind (of strategic investments portfolio) and duration-cut (core SLR book).

India Currency market : Rupee shift status from one of the best to weak in the absence of FII appetite

Rupee is now down by 5.8% against 2014 close of 63.03. It is not seen to be over as yet with subsequent post of new 2015 low punch at 66.90 (27/11) and 67.01 (4/12) post quick and shallow correction from 66.90 to 66.43 (1/12). MARKET PULSE set end December 2015 forward USD/INR focus at 66.50/66.65-67/67.15 for hedge strategy, post end of spot chase from 64.70-64.85 to 66.70-66.85 and 12M USD/INR from 68.75/69-71/71.25. Rupee performance in 2015 is not considered bad against over 11% rally in USD Index from 2014 close of 90.27 to 2015 high at 100.51. The woes on the Rupee is also from PBoC currency administration which exerts downside pressure on EM currencies and Rupee can't stay as odd man out. The way forward is not good in the absence of FII flows which has triggered importer dominance in the forward market while exporters enter only on signs of RBI support to Rupee to hedge not beyond near term receivables. The immediate support for USD/INR is at 66.35-66.50 ahead of 66-66.15 (bull trend reversal only below 65.85) with RBI Rupee support zone at 67-67.15. With firm short term base at 65.85-66.35, bias is clearly in favour of Rupee weakness beyond 67.20 into August 2013 low of 68.60-68.85. For now, retain near term focus at 66.35/66.50-67/67.15 (end December 2015 forward USD at 66.50/66.65-67.15/67.30 and 12M USD/INR at 70.50-72.50, breakout eitherway is tough to hold. The hedge strategy is to stay in traction with spot Rupee outlook at 66/66.35-68.50/68.85 (stop at 65.85 and 69). RBI also has the need to build $ reserves at 66.15-66.50 for Rupee support at 66.85-67.20. All taken, Rupee exchange rate outlook revolve around extent of RBI #USD/INR purchases and Rupee protection $ supplies for net adjustment with OMO bond purchases. RBI may turn as net $ supplier in the near term to retain USD/INR play at 66.20-67.20.

EUR/INR 3-step down-hill chase from September at 75.50, 74.50 and 72.50 was script perfect for end of chase at 69.90-70.15. It was seen as high-risk to hold short at lower end of set big-picture focus at 70-76.50. It is not surprise to see sharp post ECB overnight reversal to over 72.50 against 400 pip correction in EUR/USD from below 1.0550 to over 1.0950. What Next? With EUR/USD resistance at 1.0950-1.1050 against 1.0450-1.0550 support, EUR/INR play is now seen restricted at 70.65/71-73/73.35. The upside risk is from Rupee not building traction with Euro recovery against the USD. All taken, retain 69.90-70.15 as strategic short term base and loss of steam at 73.10-73.35 for end-to-end focus for now.

Global currency outlook : USD retains bull trend into 2016

DXY loss of steam over 100-100.35 (at 100.51) is not surprise. This target was set as end of intra-2015 bull chase from 90-92.50 ahead of mid December FOMC. The reversal from over 100.35 was at faster pace for consolidation at 97.50-98.50, below the set zoom-in focus at 98.50/98.85-100/100.35. DXY bullish momentum in 2015 is strong from combination of advantage from both economic performance and interest rate differential between USD and other major economies. With this major advantage, 2015 close at/over 97.50-100.50 against 2014 close of 90.27 set up positive close at/over 8-11%. USD is expected to retain this advantage in 2016 at diluted pace. For now, short term big-picture strategic focus set at 96.50/97.50-100.50/102.50 not ruling out new 2015 high above 100.51.

EUR/USD complete back-and-forth of set 2015 big-picture focus at 1.05/1.0650-1.15/1.1650 with 1st failure on both side overshoot and for hold at outer corridor on 2nd attempt. The post ECB relief rally from 1.0450-1.0550 short-squeeze zone (low at 1.0538) was at break-neck into 1.0950-1.1050 (high at 1.0980) before consolidation at 1.08-1.0950. For now, retain focus at 1.0450/1.0550-1.0950/1.1050 in consolidation mode, breakout eitherway is not expected to sustain. The hedge strategy for 2016 is held in traction with intra-2016 consolidation at 1-1.10 building momentum for 2017 recovery into 1.15-1.25.

USD/JPY boxed at set zoom-in focus at 122/122.35-123.50/123.85 in multiple back-and-forth mode since November. The underlying bullish undertone is valid with immediate support base at 121.65/122 for upside break of 123.50-123.85 enroute for knock at 2015 high at 125.85. The hedge strategy for 2016 is tuned at 120-130.

Moses Harding

Note : This is the last update for 2015. Hope you found MARKET PULSE analysis supportive to your hedge/trade/investment strategies. Wish you all a merry Christmas and Happy New year! Ciao in 2016. Till then, take care; Cheers!

Moses

Masala bonds : Will offshore lenders welcome? Read on...

Welcome agenda for India macroeconomic stability

The measures to liberalise ECB norms and activation of Rupee denominated "masala bonds" are giant steps in the right direction to remove structural woes on the macroeconomic fundamentals when India is setting up pace for sustainable growth momentum over 7.5% in FY17-FY19 and into double-digit beyond 2019. The relaxation in end use restrictions, broad-base of lenders basket and adjusting the spread to practical market reality are welcome moves.

The benefits to India are milti-fold:

(a) shift of borrowers credit/cash demand from onshore to offshore will not add to domestic liquidity pressure when RBI is vigilant on liquidity retaining Repo rate as operating policy rate. Such a liquidity pressure will turn resistive to its accomodative interest rate policy, having already delivered 1.25% cut in 2015 against limited space for 2016 and beyond.
(b) Attracting long term ECB and masala bonds (for tenor 3-10 years) is relief for Rupee exchange rate and to ring-fence FPI induced volatility and to cut frequent presence of RBI in the FX market. It is much needed when Rupee is more vulnerable to downside risks from ECB and FED walking in opposite direction in their monetary policy stance. The combination of weak EUR/USD and spike in USD interest rate will come very heavy on Rupee value against the USD. The risk from PBoC is also in the radar which continue to stay as unforeseen bolt from the blue.
(c) Shift of currency risk from domestic foreign currency borrowers to offshore Rupee lenders is long overdue measure for steady move towards full convertibility on Capital account. When Rupee is expected to face challenges from sudden bout of weakness and stretch beyond interest rate differential on annualised basis, it is systemic risk for domestic borrowers (and on domestic banks) on unhedged "carry" trade foreign currency liability exposures, and RBI has the need to mitigate this risk by offloading the same on foreign lenders.
(d) Rupee exchange rate volatility is driven by FDI mood-swings from sudden shift from India risk-on to risk-off and vice versa; seldom they remain risk-neutral for long period. This leads to stakeholders pain (real loss and/or opportunity loss) and RBI is forced to stand in guard eitherway to arrest excessive one-way price move to balance competitive interest between exporters and inflation. It is high time India cut this FPI induced short term volatility by attracting stable long term debt.

Will domestic borrowers lose the "carry trade" play or foreign lenders keen to take currency risk?

Most foreign currency denominated ECBs are not fully hedged. At the moment, most borrowers tend to keep 6M Libor cost open taking comfort from sustainability of low short term interest rates without the need to pay 6M to 3-10Y Libor hedge cost. Most borrowers also do not see the need to pay the elevated 5.5-6.0% swap cost for long term USD/INR currency hedge. If both the LIBOR and USD/INR hedge is done, it may not be cost effective to cover CDS risk premium and intermediation margin spread. Even if some space is left for good risk borrowers, the operation risks from marking to market & related periodic exchange of cash flows with Banks is not seen to be worth it. It is better to borrow in Rupees at fixed rate. Most AAA/AA borrowers have already moved away from ECB carry-trade play to interest rate arbitrage play in the domestic market. Taking comfort from declining short term money market rates, borrowers have increased appetite in 3-12M CP market (riding the down-hill from 8.75-9.5% to 7.5-8.25%) for decent cost arbitrage against stable 3-10 years long term fixed rate at 10-11%. This approach is now seen as low risk - medium reward against high risk - low reward nature on ECB exposures. All taken, while the demand for foreign currency ECB (from domestic borrowers) will be on decline, there will be less appetite for Rupee denominated masala bonds (from foreign investors). It will work only if foreign lenders could provide decent cost benefit over 10-11%. Can foreign lenders price masala bonds at fixed rate coupon of 8.5-9.5% for 3-10 years tenor?

Against demand for issuance of Rupee denominated Masala Bonds by Indian borrowers, need to review supply side appetite from foreign lenders at fixed coupon rate of 8.5-9.5% for 3-10 years for AAA/AA credit risk. The first look of it doesn't evince interest against CDS credit risk premium of 1.5-2.5% and current hedge cost of 5.5-6.0% (all-in at 7-8.5%), which leaves little for foreign lenders at 1.5-2.5% USD return for 3-10 years). The only option for the foreign lender is to keep the USD/INR exchange rate open to buy masala bonds. Will (or can) they? Long term Rupee exchange rate stability with an annualised depreciation of 3-4% is seen to be behind. The proof of the pudding is from the rate of Rupee depreciation in the last 2-3 years since 2012. The external dynamics will keep Rupee under pressure for annualised depreciation of 5-6% for next couple of years. All combined, foreign lenders preference will be on foreign currency lending with minimal appetite for Rupee exposure. The demand for taking on masala bonds into the Balance sheet will only be to test the water rather than as strategic preference.

Shift of appetite from offshore to onshore credit is there to stay through 2016

The demand-supply dynamics is complex; while domestic borrowers will prefer fixed rate short term Rupee credit (retaining interest rate arbitrage play from CP and short term demand loan credit products against fixed rate long term loans), foreign lenders appetite will be on long term foreign currency debt for encashment of elevated tenor premium. Given the huge credit appetite of domestic banks (with bandwidth for cut-throat pricing by shifting excess SLR cash to low risk - low reward credit), foreign lenders will find it tough to compete with India based lenders when short term US yields are set to inch higher. The only hope is from new entrants (into eligible investor category) who may not be adverse to pay entry premium for acquiring India risk assets/debt.

All taken, it is great initiative but need to be prepared for baby-steps start with hope for turn into giant steps beyond 2016-2017.

Moses Harding

RBI Monetary Policy : Balancing act between cheer and gloom....Read on....

Retain caution on inflation expectation

Post the front-loaded 50 bps rate cut on 29th September review, status-quo was expected on policy rates and liquidity ratios. Thankfully, the delivery was to unanimous expectation.

The expectation was from RBI outlook and expectation on the GDP and inflation. While RBI is seen to be in comfort on FY16 GDP target at 7.5%, RR remain suspect on CPI retaining FY16 target at 5.5-5.8% with marginal improvement to 5% by end FY17. RBI has taken into account possible reversal of trend in commodities in 2016, weak Rupee against strong USD against global currencies and supply side bottlenecks to absorb higher consumption demand leading to elevated prices on essential items. This outlook on inflation sets aside next round of rate cut in the near future, in any case not before June 2016. While remaining suspect on inflation, it is not fair to expect RBI to cut CRR or SLR or shift operating policy rate from Repo to Reverse Repo rate during this period. All taken, RBI monetary policy stance stay accommodative on policy rates (with limited room for more cuts) and vigilant on liquidity (retaining operating policy rate at higher end of LAF corridor).

Resolutions to Banks Balance Sheet woes not clear

While RBI provides top priority to resolutions to NPA woes of the Bank to make them fit and strong to feed into higher credit demand from growth momentum, more focus is on the revised Base rate application by Banks. The lending rate fixation is factor of risk - reward and demand versus supply against the incremental cost differential between outgoing deposits and incoming funds. RBI also took comfort from relaxation in off-shore access to domestic borrowers. The shift of demand from domestic to offshore may not be to the liking of domestic lenders leading to cost advantage only to good risk borrowers, while high risk wholesale borrowers in core sectors continue to struggle for funds willing to pay higher credit premium. Who will share the burden of Banks NPA restructuring strategy? There was no clarity on this, as Banks do not have the Capital or P&L bandwidth to do it on their own.

Way forward is bumpy against FED rate hike

The short/medium term outlook is nervous when India operating policy rate stay steady at 6.75% while US FED Fund rate may inch up to 1% by mid 2016. Against this policy rate outlook, sub 1% inflation in the US against 5-5.5% in India is not positive for India Financial markets. While nothing to expect from RBI in the next 2 policy review in February - April 2016, all attention will be on the FED on quantum of rate hike and on ECB for timing of end of QE, expected to be ahead of schedule. All taken, foreign appetite on India risk-on assets will stay low. Will domestic appetite bridge the gap to aspire for 12-15% rally from here back to 2015 high by end of 2016? Dunno, fingers crossed!

Having done the devil's advocate, BJP is seen to get the opposition together on policy reforms. If the pipeline initiatives are put into execution mode at faster pace, India may get the attention and appetite of foreign investors. I could only wish for the best to get the euphoria on NaMo back on track which drove the markets crazy between May 2014 to March 2015.

Over all, there is nothing much to cheer from the policy review. The take-away is the recognition of the downside gloom from domestic and external dynamics without clarity on ring-fence to retain the economy in sustainable growth track and dilute the pent-up nervous undertone on India risk-on financial assets.

Good to end with caution to stay vigilant on the financial markets for better balance of risk-reward, awaiting better clarity from the mid-December FOMC review.

Moses Harding