Weekly report for 19-23 November 2012

MARKET PULSE: Weekly report for 19-23 November 2012

Gloom and doom in global asset markets on serious concerns over growth and fiscal deficit

There is Tsunami kind of headwinds on growth in most of the global economies with signs of recession and stagflation. Western bourses are weak; DJIA is already down from October 2012 peak of 13622 to 12471, sharply down by over 8.7% at an alarming annualised rate. The worst is yet to come; trend is bearish for further extension into 12035 ahead of November 2011 low of 11232. The investment appetite on western bourses is weak as investors seek to stay invested in safe-haven assets of sovereign bonds and Precious and Base metals. There is flow of investments from the West to the East, into select Emerging markets. India is not seen to be a favoured destination in the BRICS bloc. There is risk of India being displaced from this bloc and replaced by other smaller economies which have better growth prospects without huge downside risks on fiscal deficit, inflation and Balance of Payment. Indian economy is facing strong headwinds across all fronts. The political strength is weak and fragile; monetary environment is not supportive to address issues relating to growth and fiscal deficit; macroeconomic fundamentals are weak with high risk of GDP growth below 5.5% and fiscal deficit above 5.8%; inflation is stubbornly high at 7.5% despite over 3 years of hawkish monetary policy stance. There is serious concern on high Trade/Current Account deficit with risk of move above 4% of GDP by end of FY13. The market has already taken note of these negative factors; NIFTY is down below 5580 from recent high of 5815 and rupee down from recent high of 51.35 into 55.20. Exchange rate and Equity market reflects the health of the economy; strong bearish set up on Indian exchange rate and equity market is not good for the Indian economy and will trigger pull-out of investments from India to other better destinations. This is the major cause of worry for the Indian economy and markets at this stage.

What is wrong in India? The Parliament, Government and RBI are in different directions. All stake holders are aware of the issues relating to growth, twin deficits and inflation. The peers do not have issues relating to twin deficits and inflation. The ability to address growth through loose monetary policy provides strong support to their asset markets to dilute the impact from headwinds. Governments and Monetary Authorities are together in fighting growth pressure and restoring investor and consumer confidence. The negative real interest rates in most economies are not seen as risk to inflation. But, India is different and seen as outlier, struck in serious conflict between growth and inflation dynamics. The political and monetary environments are not seen capable to revive weak macroeconomic dynamics. The solutions to get back into shape are simple and straight forward. When things are complex, the best is the common-sense approach. It would need combined strengths of the Government, Parliament and Monetary Authority to get the Economy back on track; revive investor and consumer confidence and get the asset markets into bullish mode. The immediate need is to mobilise one-off revenues to maintain fiscal deficit at lower end of 5.3-5.8% tolerance zone; shift into dovish monetary policy stance to prevent slippage in growth momentum below acceptable zone of 5.5-6.0%; remove supply-side bottlenecks by reviving domestic investment appetite; extend liquidity support to core sectors of the economy and open up investment opportunities for off-shore investors to drive rupee into lower end of 45-60 range. The priority on inflation control for extended period of time has inflicted severe damage on growth and fiscal deficit; shift of priority to growth is long overdue which would remove strong downward pressure on rupee exchange rate and equity market. It is easier said than done at this stage, given the absence of unanimity in implementation and execution. “Together to move forward” is the mantra that the Indian economy and asset markets need at this time. Let us study the impact on asset markets in the near term?

Currency market

Rupee is already down by 7.5% from recent high of 51.35 on weak domestic cues. Rupee lost traction with gains in the Euro while weak Euro weighed heavy on the Rupee which is now seen as the most underperforming currency. MARKET PULSE highlighted the risk of extended weakness beyond 55.10-55.20 into 55.60-56.10. The intra-week update urged importers to cover near/short term imports on rupee correction into 54.80-54.60 (intra-week high of 54.62) and looked for RBI’s support at 55.10-55.20 (low of 55.19) and supplies from exporters to sell 12M dollar receivables at 58.05-58.20 (spot at 55.10-55.20). While weekly close below 55.20 (at 55.17) is comfort but close above 54.80 is bearish into the immediate term. It took 20 trading days for rupee gains from 56.03 to 51.35 post Government action on fuel price hike and other reforms while unwind of more than 80% of this gain has taken 27 trading days; such is the volatility in rupee exchange rate which should be a serious concern for RBI. The outlook for the week is not in favour of rupee. The immediate focus is at 55.60 while Euro stays above 1.2650; extension into 1.2500 will bring the focus into 56.10. The greenback will find strong support at 55.10-54.80 window where importers will be seen in hurry to cover near/short term dollar payables. On the other side, there will be supplies from exporters to cover 12M dollar receivables around 58.50 (spot at 55.60). It makes sense to cover 12M exports at 58-60, higher end of long term spot rupee range of 45-60. It is impossible to catch the tail or head for large amounts; hence it is prudent to phase out hedging activity. There is also added pressure on rupee from NDF market with higher demand for forward dollars in the off-shore market, squeezing the spread in 3M dollars from above 25 paisa to below 10 paisa. For the week, let us watch 55.10-55.60 with extension limited to 54.80-56.10. It would need strong support from RBI to get the focus back into 54.60. Strong signals from the Parliament to support the Government on reforms will get the focus back into 53.20; short term range is seen at 53-56 at this stage.

USD Index found good support above 80.85-80.70 support zone (low of 80.90) to hit the set objective at 81.35-81.50 (high of 81.45) before close of week at 81.19. In the meanwhile Euro rallied from 1.2665-1.2635 (low of 1.2660) to meet set objective at 1.2790-1.2820 (high of 1.2801); thereafter expected 100 pip correction from here into 1.2710-1.2685 held at 1.2688 before close of week at 1.2745. What next? Euro is seen set at 1.2650-1.2800 range; break either-way will trigger 150 pip rally into 1.2500 or 1.2950. The bullish undertone in the USD Index and USD/JPY looking heavy at 81.50-82.00 could trigger test/break of 1.2650. On the other hand, extension of gains in USD/JPY into 84 will trigger test/break of 1.2800. While staying neutral on the break-out direction, slight bias is in favour of extended Euro gains into 1.2935-1.2950 shifting the short term focus into 1.34. The strategy is to trade end-to-end of 1.2650-1.2800 with stop/double reverse on conclusive break thereof.

USD/JPY traded perfect to the script; the rally from 79.15-78.90 buy zone hit the 81.45-81.70 target; expected correction from there held at 80.90-80.65 support (low of 80.87) before close of week at 81.30. USD/JPY is at mid-point of the 79-84 short term range and the bias is clearly into the higher end while 80.90-80.65 stays firm. While conclusive break above 81.45-81.60 will get the focus into 84.00, there is risk of sideways trading at 80.65-81.65 before moving up. The strategy is to hold “long” entered at 80.90 with stop below 80.65 for 82.00. We will watch price action at 81.65-82.00 to get firm grip on the next direction.

Interest rate market

10Y Bond found solid support above 8.22% (at our buy zone of 8.22-8.25%) and reversal from there met with good resistance above 8.17% (ahead of sell zone of 8.17-8.15%). The cues into the near term are mixed; good buying interest at 8.22-8.25% on rate cut hopes on or before January 2013 while pipe-line bond supplies, overshoot in market borrowing and threat of cut in HTM limit from 25% to 23% (in alignment with SLR) would halt run-away rally in the Bond market. There is also hope of OMOs from RBI on spike in 10Y yield above 8.22%. For the week, we continue to watch 8.17-8.22%; test/break either-way difficult to sustain. The strategy is to stay invested at 8.22-8.25%; while traders can look to book profit at 8.18-8.15%, strategic investors can hold for March 2013 target at 8.05-8.0% which should hold.

OIS rates were in tight trading range of 7.70-7.75% (1Y) and 7.10-7.15% (5Y). While we look for consolidation within the said range in the immediate term, near term bias is for break of lower end into 7.55% and 7.0% respectively. For the week, let us continue to watch 7.70-7.75% in 1Y and 7.10-7.15% in 5Y. The strategy is to stay received at/above 7.75% and 7.15% for the set objectives.

FX premium eased from higher end into lower end of set ranges of 6.15-6.65% (3M) and 5.4-5.7% (12M). In the intra-week update, we reviewed the range into 6.0-6.5% and 5.25-5.5% respectively and suggested to unwind received book at lower end and initiate paid book for the ALM play. The combined impact from interest and exchange rate play will exert downward pressure on the premium in the immediate term and await reversal in exchange rate play for bounce from lower end. For the week, let us watch 6.0-6.5% in 3M and 5.25-5.5% in 12M. The strategy is to trade end-to-end; test/break either-way not expected to sustain.

Equity market

NIFTY fell sharply from intra-week resistance window of 5750-5780 (high of 5752) to hit set buy zone of 5610-5580 for further extension into 5559 before close of week at 5574. MARKET PULSE considered 5610-5580 as good re-entry point (for the first lot) after chasing 150 point rally from 5630-5580 into 5780-5830. What next? The immediate term outlook is weak as weekly close below 5580 will take bulls out of the street. The global bourses also do not provide support driven by uncertainties in the US and Euro zones. The domestic cues are worse, hence may need to allow deeper correction for better value buying. It is important for NIFTY to get back into familiar trading range of 5580-5780 to knock out bearish momentum. The immediate support is at 5568-5559; test/break here will quickly extend weakness into 5510-5475 where it is good for strategic players to buy the second lot holding the final lot for 5415-5400 with stop on break here. There are strong resistances at 5610/5640/5670 which should hold to retain bearish undertone into 5400. For the week, let us watch 5510-5610 with extension limited to 5475-5640. The strategy for traders is to sell at 5610-5640 and buy at 5510-5475 with tight stop on break thereof.

Commodity market

Stability in USD Index (within 80.85-81.50) pushed Gold into sideways trading mode between set resistance at 1735-1750 (high of 1737) and support at 1710-1695 (low of 1704) before close of week at 1713. We continue to watch sideways trading mode in the immediate term with bullish near term outlook into 1765-1790. The lack of confidence in the recovery in global economy will keep commodities firm, precious metals outperforming others. For the week, let us watch 1695-1745 with initial bias into lower end which should hold for swift rally into higher end, not ruling out extended gains into 1765-1790. The strategy is to buy dips into 1705-1690 with stop below 1680 for set objective.

NYMEX crude is struck in tight trading range of 84.50-87.50 (low of 84.57 and high of 87.01); despite tensions in the Middle East and bullish USD Index, stability in Crude signals strong bearish undertone into near/short term. We continue to stay with short term range of 75-90 with strategy to stay short at 86.50-89.50 with stop above 90 for 82.50/77.50/75.00. For the week, we watch 85-88; test/break of higher end is not expected to sustain while break of 84.50 will open up quick run into 82.5-77.5 in the near term.

Have a great week ahead...........................................Moses Harding