Weekly report for 01-05 October 2012

MARKET PULSE: Weekly report for 01-05 October 2012

Worst is behind but best seen to be distant away.....markets into consolidation phase

There has been sense of relief in Indian markets; fear of the worst that drove markets down since February 2012 is out of the way but bullish confidence into the future is suspect. Stake holders keenly watch developments in political, economic and monetary dynamics to set directional guidance on asset markets. The signals from external sector are bullish; political and monetary dynamics are put to work to get the economy back on track. The liquidity support and zero interest rate regime till 2015 will divert funds into Indian debt and equity capital market. The concerns are however from the economic dynamics. There is little hope of economic revival in the US and Euro zone in the short/medium term; economic revival in Western markets are critical to set up bullish mode in emerging markets. Euro zone continues to remain a big risk factor to global markets. However, recent developments in Western markets are supportive to Indian equity and currency assets and would continue to remain so into short/medium term. On the other hand, domestic cues are mixed. The political dynamics have improved with strong political actions to address issues relating to policy inaction and fiscal deficit. The deficit in the Current Account is driven by external factors; widening CAD is from high commodity prices and lower consumption in western economies. But, the impact of CAD on Rupee exchange rate has been diluted by opening up flows into Capital Account to maintain surplus Balance of Payment. There is now better clarity on economic dynamics. A range has been set for GDP growth and fiscal deficit; trending of which will provide directional guidance to asset markets. Global rating agencies and most economists predict FY13 growth around 5.5% and fiscal deficit around 5.8% while the Government is confident on its target at 6.5% and 5.1% respectively. The trending of GDP growth into 6.5% and fiscal deficit into 5.1% will be closely watched by investors. The concern on inflation is diluted on stable commodity prices post QE3 and rupee appreciation while more measures are awaited to address supply side bottlenecks. The expectation on RBI to shift into growth supportive monetary stance is high. While Government is doing its bit to attract long term investments from foreign investors, downtrend in interest rates and surplus system liquidity are essential to spur domestic investments. The major issue here is the over dependence on private investment while public investments are into consumption. The stake holders are keenly watching public disinvestment and sale of idle (unproductive) public assets to get out of this trap. Over all, there is hope that improvement in political and monetary dynamics will support macroeconomic dynamics of the Indian economy. These expectations have already set up bullish mode in the equity and currency market while Money (Fixed Income) market is in consolidation mode awaiting RBI’s monetary actions. To sum up, Indian markets are clearly out of the bear trap but there are no strong signals as yet to provide sustainable bullish momentum in the near/short term, hence likely to get into consolidation mode. The directional guidance will be from RBI’s rate action in October and trending in GDP growth, fiscal deficit and headline inflation. The expectation into the near term is neutral with good signs of bullish set up into short/medium term. It is very difficult at this stage to take a long term view on markets.

Currency market

Rupee has been the best performing asset in September for sharp recovery from 56.03 to 52.49 before close at 52.85. The rally in USD Index from 78.60 to 80.00 did not have any impact on the rupee on strong domestic cues and FII supplies into equity market. What next? Rupee should now get into consolidation mode; momentum in rupee gains into near term objective at 52.20-51.95 is seen as excessive at this stage without much resistance at immediate term objective at 52.90-53.15. We also need to see FII appetite while NIFTY trades above 5700. Ideally, rupee should get into consolidation mode at 52.20-53.15 in the immediate term and would see better traction with moves in USD Index (and EUR/USD). The reversal in USD Index from strong resistance at 80 finds solid support at 79.30 (EUR/USD at 1.2825-1.2975). The break-out 79.30-80.00 range will set the directional trend for rupee. Having said these, short/medium term outlook for rupee is bullish and MARKET PULSE stay with set short term range of 49-54. The long term rupee bullish expectation into 48.60-43.85 is valid subject to positive cues from political, economic and monetary dynamics. For the week, let us watch consolidation at 52.20-53.15 and need to watch failure in USD Index at 80 to retain immediate term rupee bullish outlook; else risk of extension into 53.60 while dollar index stays below 80.70; hence the caution to importers to cover 7-15 days imports around 52.60. MARKET PULSE revised its trailing stop for strategic “short dollar” position from 54.20 to 53.20 in the intra-week update. For better hedging/trading results, please stay tuned to intra-week updates on twitter (handle: mosesharding).

EUR/USD traded end-to-end of set buy zone at 1.2840-1.2825 (low of 1.2827) and sell zone at 1.2850-1.2865 (high of 1.2859) in tune with consolidation in USD Index at 79.30-80.00. We continue to watch this range but bring in the risk factor of move into 1.2700 if USD Index extends its gains above 80 into next objective at 80.70 while reversal into 79.30 will bring the focus into 1.2950. For the week, let us watch consolidation at 1.2800-1.2950 and let us watch intra-week play in USD Index to set up directional break-out into either 1.2700 or 1.3050. Stay tuned to intra-week/intra-day updates on twitter.

USD/JPY into consolidation mode at 77.40-78.20 and is struck in cross-play between USD Index and the EUR/USD. For the week, let us watch consolidation at 77.40-78.40 not ruling out break higher for extended dollar gains into 79.25. The strategy is to buy dips into 77.65-77.40 for 79.00-79.25.

Interest rate market

Bond/OIS market traded to the script; 10Y Bond attracted good investor appetite at 8.17-8.20% while OIS rates eased from 7.70% (1Y) and 7.15% (5Y) into set weekly objectives at 7.60% and 7.05% respectively. The undertone continues to stay bullish on strong expectation of monetary easing by the RBI in its October quarterly review. The outlook on liquidity and interest rates favours strong rally in bond market into short/medium term. For the week, let us watch 10Y Bond at 8.07-8.17%; 1Y OIS at 7.50-7.65% and 5Y OIS at 6.95-7.10% with bias into lower end. The strategy is to hold on to longs entered at 8.17-8.18% and add at 8.18-8.20% if seen for near term objective at 8.05% and stay received in OIS at set higher end for lower end which should hold in the immediate term.

It was 3X12M action in FX premium; remained bid in the shorter end ahead of half-yearend balance sheet play while 6-12M attracted good supplies from exporters. The near/short term outlook is bearish on easing interest rates and supply driven mode in the forward market. For the week, let us watch 3M at 6.5-7.0% and 12M at 5.75-6.0%; test of higher end will set up receiving opportunity for gradual move into the lower end.

Equity market

It was bullish undertone in NIFTY within the set near term range of 5630-5980; saw intra-week low of 5638 and reversal from there met immediate objective at 5740 and close of week above 5700 is bullish into the short term. There will be good appetite from FIIs while domestic investors likely to join the party on confirmation of RBI’s dovish monetary policy stance. For the week, let us watch consolidation at 5630-5830 and look for build up of momentum for extension into 5950-6000. The strategy is to stay invested at 5660-5630 for test/break of 5740-5750 for 5830.

Commodity market

Gold held well at the set buy zone of 1750-1735 (low of 1737.50) and rally from there met immediate objective at 1785 (high of 1783); weekly close above 1765 is positive. The short/medium term outlook for Gold is bullish having replaced USD as safe-haven asset. It is matter of time for taking out strong resistance at 1790-1805 for extended rally into September 2011 high of 1920 to complete the set short term rally from 1535-1485 (low of 1521). Strategic players can look to buy dips into 1760-1735 and await test/break of 1810-1835 for 1920. For the week, let us watch 1755-1805 with test/break either-way to attract.

The reversal from 100 got solid support below 89.50 before consolidation around 92. Let us continue to maintain the bullish stance below 90 and bearish tone above 100 into short term. The near term outlook is mildly bearish for 89-93 consolidation with test/break either way difficult to sustain. The movement in crude oil price has lost traction with USD Index and preparing for extended reversal of its rally from 77.28 to 110.55 into short/medium term; hence prefer 84-94 consolidation into the near term. The bearish outlook on CRUDE is good for the Indian economy. For the week, let us watch 89-94 with test/break either-way not expected to sustain.

Moses Harding