It is collapse in the developed markets led by the US! The severe bearish undertone (and resultant investor risk-off stance) drives Dow Jones Index below strong support zone of 16000-16350 with huge appetite for Gilts, pushing Brent the 10Y US yield below 2%; weak equity assets and over valuation of Gilts is sign of extended grief on the system, making FED guidance on shift to rate-hike stance irrelevant. The diminishing risk of rate-hike (for extended ZIRP beyond 2015) cuts the bullish momentum of the USD for unwind of 79.75 to 86.75 rally. Euro gets relief over 1.2785-1.2800 and Yen below 106.50. Gold gets support from lower Gilt yield for marginal gain into 1235-1260.
What is the impact on Indian markets?
The worst hit will be the equity assets as investors shift appetite from equity to Gilts. NIFTY is at risk of extended weakness below 7815 into 7685; hold here is critical to keep 7550 out of focus. As feared, NIFTY focus zone shift to 7550/7700-8000/8150; retain 7550-7700 as no-sell zone for strategic traders and look good to buy for strategic investors.
Gilts will be in demand despite RBI's intent to hold 10Y yield above 8.40%; focus shifts to 8.15-8.40% trading range with higher bond spread of 6.20-6.35% with US 10Y yield. It would be good tussle between investors and RBI, cutting the bullish momentum through higher negative carry (pulling call rate close to 9%). Till clarity on RBI counter attack, prefer back-and-forth at 8.30-8.40%.
The impact on Rupee is mixed with conflicts from weak equity and weak dollar. Impact from interest rate cues is supportive to Rupee from administered elevated short term MM rates and widening bond spread into 6.20-6.35% (which has played back-and-forth of 5.85-6.35% shifting directional bias in tune with investor risk stance). All taken, retain Rupee focus at 60.70/60.95-61.70/61.95; end Mar'15 $ at 63-64 and 12M $ at 65.50-66.50.
Moses Harding
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