MARKET PULSE: Weekly Report for 8-12 October 2012
Thumps up to reforms....markets cautiously bullish ahead of parliamentary approval and RBI’s monetary policy review
Market stake holders are in awe after cabinet approval of second round of reforms in quick time. Markets already gave thumps up for the first round of reforms on 14th September ahead of mid quarter review of monetary policy. This was seen as clear message to RBI to turn dovish on monetary policy. RBI did respond with 25 bps CRR cut and more importantly was seen to take a pro-growth stance soon. The second round of reforms within a month was a surprise; seen too good to believe at this stage. There is doubt that Parliamentary approval may not be forthcoming while some (including MARKET PULSE) believe that Chairperson of UPA would have done the “number game” before giving the nod to the cabinet. The proposed policy reforms are not anti-vote bank and seen as attracting long-term capital to core sectors to set up growth momentum into 6.0-6.5%. These long term capital flows will also bridge the huge gap in Current Account deficit and reduce dependence on short term, hot money flows. It is also obvious that without robust growth momentum, ability to support the vote bank will be difficult. Moreover, not much of opposition was seen outside UPA barring a few parties; hence Parliamentary approval is not seen as risk factor at this stage. It is also possible that more reforms will come up in the winter session of the Parliament. These reforms to attract off-shore capital and recent action on fuel subsidy will reverse the trend on domestic savings and investment. This is necessary to address supply side bottlenecks in the system. There are lots to do thereafter on issues relating to Land, Labour, Linkages (road, port, power and related infrastructure) Legal, Liquidity etc to get the growth momentum above 8.0%. Over all, there are strong reasons to believe that the worst is behind and the best is not far away!
The combination of external cues (QE3 and affirmation of dovish monetary stance till 2015) and domestic cues (policy hyper-action, measures to address twin deficits and resultant shift of sentiment from despair to hope) has brought sharp rally in equity market and Rupee exchange rate. In Q2, NIFTY rallied from 5100 to 5800 (14%) and Rupee was up from 56.43 to 51.35 (9%). Interest rate market too responded favourably with 10Y Bond yield down from 8.28 to 8.12% and 5Y OIS rate down from 7.35% to 6.87%. The favourable market reaction to positive developments in political and monetary dynamics will get reflected in Q2 corporate performance. There will be bottom-line improvement from reversal of FX provisions and reduced cost of borrowing. The major beneficiary will be Banks and Financial services sector with higher Treasury income and better NIM. The economic data from Q3 onwards will show favourable trending in growth momentum into higher end of 5.5-6.5% and fiscal deficit into lower end of 5.1-5.8%. Global rating agencies will closely track this trending for reversal of negative outlook and if steps are taken by the Government to demonstrate impact of policy actions on twin deficits to revive growth momentum, an upgrade by end of FY13 will do lot of good to the Indian economy and asset markets. What next?
Currency market
Rupee has been the most volatile in 2012; down from 48.60 to 57.32 (18%); up from 57.32 to 51.35 (10.5%) before close at 51.85. While the recovery from 57.32 to 48.60 is in order, the speed of recovery in September (post QE3 and policy actions) from 56.43 to 51.35 (9%) was a surprise and seen as excessive by most market participants. But when there is sudden change of sentiment from despair to hope, this sharp reversal should be seen as good for the Indian economy to improve inflationary expectation and better corporate balance sheet. It is also good for liquidity and interest rate. Some believe that such a strong rupee appreciation is not good for export intensive companies; but had they covered receivables on excessive (and unsustainable) weakness in rupee into 56-57.50 and if payables are met at below 53, there will be improvement in operating margin or provide opportunity to realise FX gains into other income. So, do not see any negative impact on IT, Pharmaceutical and other export intensive companies on this sharp appreciation in rupee. The back-and-forth move in rupee is in tune with USD Index gains from above 78.60 into 84.00 before down to 78.60. Now, rupee is expected to stay in consolidation mode till Parliamentary clearance and RBI’s quarterly monetary policy review is out of the way. The underlying short/medium term trend continues to stay rupee bullish into 48.60. However, we may need to stay prepared for near term swings that would be considered good to hedge uncovered exports. MARKET PULSE has unwound the entire short dollar book at 51.70 and reinstated one-third short dollar book by selling 12M dollars at 55.00-55.10 on spot move into 51.90-52.00 (see intra-week update on Twitter). The next strong support for rupee is at 52.45-52.55 followed by 52.75-52.95; these two zones are considered as worst case scenario for rupee. The strategy for exporters is to sell 12M dollars at 51.90-52.00 (55.00-55.10); 6M dollars at 52.45-52.55 (54.15-54.25) and 3M dollars at 52.75-52.95 (53.65-53.85). On the other hand, immediate resistance for rupee is at 51.35 followed by 50.50-50.25 ahead of 49.95. The strategy for importers is to cover 1M dollars below 51.70 (spot at 51.40-51.35) and 2M dollars below 51.15 (spot at 50.55-50.50). Over all, short term outlook (October-December) for rupee is for consolidation at 50-53 with bias into lower end by end of December 2012. Thereafter, on favourable trending in GDP, headline inflation and dovish monetary policy stance will get the focus into 48.60. For the week, let us watch consolidation at 51.35-52.00 with extension limited to 50.50-52.50; test/break either-way to attract.
EUR/USD traded to the script; held at lower end of set weekly range at 1.2800-1.3050 (low at 1.2802) for sharp rally into 1.3071 before close of week at 1.3033. In the meanwhile USD Index fell from 80.15 to 79.10 before close of week at 79.33. At this stage, it is difficult to choose between USD and the Euro but interest rate play shifts bias towards the Euro in the immediate term. The bias is in favour of extended Euro gains into 1.3145-1.3170 but it would need strong momentum to take out immediate resistance at 1.3075-1.3090. On the other side, support below 1.3000 is solid with extension to stay above 1.2970 ahead of 1.2935. For the week, let us watch 1.2970-1.3170 with bias into higher end. The strategy is to buy 1.2970-1.2935 for 1.3145-1.3170. Thereafter if USD Index extends its weakness below 78.60, Euro will extend gains into 1.3280 for getting the focus into 1.34-1.35 to complete the recent rally from 1.2040. This will complete back-and-forth move between 1.20-1.35.
USD/JPY traded to the script; held at the set buy zone of 77.65-77.40 (low of 77.43) but fell short of set target at 79.00-79.25 (high of 78.86) before close of week at 78.65. Despite dollar weakness against major currencies, JPY continues to stay weak against dollar; this factor provides support to USD Index to prevent weakness into 78.60 and lower. For the week, let us watch USD/JPY AT 78.25-79.25; bias is for move into higher end not ruling out extension into 80 to complete end-to-end of set short term range at 77-80 from recent low of 77.13.
Equity market
NIFTY almost met the set weekly objective at 5830 (high of 5815) but confusion in the NSE (where a low of 4888 was punched due to operational error involving large amount of Rs.650 Crore) triggered sales by those who were lucky to buy into the momentary 1000 point fall. NIFTY however settled into 5700-5750 range before close of week at 5747 against previous close of 5703. Investors will be cautiously bullish ahead of Parliamentary approval and RBI’s quarterly monetary policy review. The undertone is clearly not bearish. The liquidity situation has improved; serious efforts are on to revive domestic savings and investments; FII appetite will improve on rupee stability; Q2 corporate results will be good; high probability of 25-50 bps rate cut and host of positive cues are in store. The only risk factor at this stage is from Parliament. For the week, let us watch consolidation at 5700-5830; earlier resistance at 5740-5750 has come into play now and bias is for extension into 5830; still favour move into 5950-6000 to complete end-to-end of set short term range of 5500-5600 from low of 5032 (seen on 26th July). The worst case is seen at 5680-5630 and best case is for closer look at 6335. The strategy is to stay invested for this short term rally.
Interest rate market
Bond market was quiet ahead of RBI quarterly policy review; 10Y Bond traded tight range of 8.13-8.17% despite selling pressure ahead of weekly auction. Such is the strong bullish undertone for Bond market on high hope for minimum 25 bps rate cut. There is also pressure on RBI for CRR cut from large PSU banks. But given the average system deficit of Rs.50-75K Crore, it would need minimum 75 bps CRR cut to drive operative policy rate below 8% (into 7%, lower end of LAF corridor). Will RBI send such a strong bullish signal till headline inflation eases below 7%? No; while token 25 bps CRR cut will only be cosmetic. The chance of 25 bps rate cut is very high with 25% probability for 50 bps rate cut maintaining deficit system liquidity through FY13. The strategy is to hold on to “longs” entered above 8.17% and add at 8.17-8.20% for 8.05-8.0% first ahead of extension into 7.90-7.75% by end of FY13. For the week, let us watch 8.10-8.17% and break either-way to attract.
The strategy in OIS was to unwind 5Y OIS received book at lower end of 6.95-7.05% range as it was not making sense to stay received there. Market punched low of 6.95 before sharp reversal above 7.0 for close of week at 7.01%. 1Y OIS traded end-to-end of 7.55-7.65 range before close at 7.62%. For the week, let us continue to watch 7.55-7.65% (1Y) and 6.95-7.05% (5Y). Given the bullish expectation in Bond market, it is good to stay received in 1Y at 7.62-7.65% and in 5Y at 7.02-7.05% for near term target at 7.50-7.45% and 6.95-6.90% which should hold.
FX premium stayed bid at higher end of 5.75-6.0% (12M) while 3M extended above 7.0% into 7.15%. The base effect came into play on sharp intra-week rupee appreciation. The shorter end of rate curve is also at elevated levels on large chunk of T-bill supplies from RBI and high overnight rate above 8%. It was suggested in the intra-week update to receive October-September (forward to forward) at 282+ for RBI rate move and resultant fall in 12M premium into 5.60-5.75% from current 6%. This will also drive 3M premium from 7.15% to 6.65-6.5%. For the week, let us watch tight consolidation in 3M at 6.90-7.15% and 12M at 5.85-6.0%. Let us not chase move beyond higher end and see as good opportunity to build received book.
Commodity market
Gold hit the first pit stop at 1790-1805 (high of 1795.70) to complete first round of rally from above support 1735 (low of 1737.50) but lost steam there for weekly close at 1780; weekly close above 1765 is bullish. In the big picture, recent rally from strong short term support zone of 1535-1485 (low of 1527) is losing steam at 1790-1805 short term resistance. This needs to be taken out to get the focus into 1835-1850 ahead of 1923. The undertone of Gold continues to stay bullish on the back of strong bearish set up on the dollar. Let us continue to watch strong support at 1750-1735 to arrest any correction and prepare bullish momentum for break of 1790-1805 into 1835-1850.
NYMEX Crude fell sharply from higher end of 88.50-93.50 range (high of 93.33) into lower end (low of 87.70) but could not sustain there for consolidation around 90 before close of week at 89.90. The undertone is bearish for unwinding of recent rally from 77.50 to 100.50. The immediate support is at 86.50-86.00, break of which will open up 82.50-82.00. Let us continue to watch resistance at 91.50-92.00 to hold for move into 86.50-86.00 this week.
Have a great week ahead.............................Moses Harding
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