Advantage India from Brent & Gold : Outlook 2015

Significant relief for India

The dream run for Oil producers since 2009 has come to an end, unwinding most of the advantage from rally from 36.20 to 128.40 during this period, before consolidation at 100-115. The worst hit period is from June 2014 driving the Brent Crude sharply down from 115.71 to below 58.50 by over 50% in 6 month period. The positive take-away is the loss of traction of Brent Crude value from geo-political tensions (in Russia and Middle East region), thereby shifting demand-supply equilibrium advantage from suppliers to buyers. The equilibrium shift is largely from move to alternate energy products and demand destruction from low global economic growth. The major beneficiary is India bringing resolution to structural woes on high CAD and elevated inflation. This blog urged suppliers for strategic hedge at/above $115 (seen as hot-to-hold valuation) and considered as prudent for importer-buyers for gradual long term hedge at $35-65.

Gold also lost its safe-haven advantage since 2011 to unwind most of the 2010-2011 rally from 1096.25 to 1920.30. In 2014, Gold lost its Q1/2014 rally from 1209.80 to 1391.76 for March - November weakness into 1131.85 before stability at 1160-1240. The advantage for India is from marginal benefit on the CAD and bandwidth to remove the restrictions on Gold imports. This blog urged to chase the bearish set up with end of weakness zone at 1110-1135 for consolidation at 1135/1160-1235/1260.

Will the advantage stay valid through 2015?

The demand-supply supply equilibrium continue to stay in favour of extended bearish undertone; but how far it could go before shifting the dynamics to cost-revenue? The immediate support is at 55.00-56.50, seen as cheap-to-acquire valuation zone for pull-back correction into 65-75. The only major relief for the Brent would be from growth-push higher demand and/or supply-squeeze from Oil producers, who may not see sense in top-line growth at $35-55 price band. The strategy is to stay tuned on Brent Crude at 35/55-65/85 through 2015 with bias for intra-2015 recovery into 65-75/85.

Gold outlook for 2015 is retained at 1110/1135-1235/1260; break-out bias is mixed with overshoot target at either 950 or 1320. Given the optimism on growth recovery in developed economies and resultant risk-on investor appetite, Gold will continue to lose its shine as safe-haven and also as hedge against inflation. The trading mode will stay in sell-on-recovery mode for pass-through of 1131.85 into 950-1000 before price stability at 950-1150.

The bearish consolidation momentum both on the Brent Crude and Gold is relief to RBI and cheer to Indian economy for extended relief on the CAD, inflation and Rupee exchange rate.

Wish you all a great & profitable 2015!

Cheers!

Moses Harding

India Money Market : Outlook 2015

Easy liquidity despite tight RBI administration

Domestic Rupee liquidity is in administered regime with agenda to retain effective operating policy rate between Repo and MSF rate. Accordingly,  restriction was imposed at availability of liquidity at overnight Repo counter with introduction of term Repo counter; all taken refinance window is now split across overnight Repo, term Repo and balance at MSF rate. Despite this tight liquidity administration, overnight call money rate remained around Repo rate with occasional pressure into higher end of 8-9% administered range. The reasons for this scenario (against RBI's agenda) is largely from lack of credit pick-up, risk aversion of lenders and excessive FC inflows diverted into the system through RBI dollar purchases. In the absence of demand from the Government, squeeze out of liquidity through bond issuance is muted. All taken, large chunk of bank deposits lie idle with RBI in the form of excess SLR against mandatory 22% of NDTL.

Gilts volatile on mixed cues

10Y Gilt has been volatile since July 2013; yield up from above 7% to over 9% (during July 2013 to August 2014). The weakness is from combination of domestic cues (inflation risks, rating downgrade fear and threat on Rupee) and global cues (FED threat of monetary tightening and risk of FII reverse flow). Since August 2014, most cues turned in favour; luck from external factors (sharp reversal in imported commodity prices, extended ultra-dovish monetary stance by BOE/ECB/BOJ/BOC, and FED patience on rate-hike shift) and hope from domestic cues (sharp reversal in inflation, signs of turnaround in macroeconomic fundamentals, shift in rating downgrade risk to upgrade optimism and pressure from most stake holders on RBI to cut rates) drove the 10Y yield down from over 9% to below 8%. It is great satisfaction to chase the new 10Y benchmark (8.40% 2024) both ways; got bulls-eye hit on the coupon at 8.40%, chased the weakness from 8.35% into 8.60-8.85% to switch sides for bullish chase below 8% into 7.75-8.0%. In the process, also chased the India-US bond spread from over 6.5% to 5.60% tracking the back-and-forth volatility in US 10Y Treasury yield at 1.90/2.0-3.0/3.10%.

Bullish consolidation in 2015

Domestic cues are mixed; RBI's concerns are from inflation stability within its comfort zone (CPI at 4-6% and WPI at 2-4%), structural risks on inflation from twin-deficits, low interest rate impact on Rupee exchange rate and permanent resolution to supply side bottlenecks. RBI is in wait-and-watch mode to see sustainability of base effect impact and commodity price support on inflation, resolution on fiscal prudence and achievement of demand-supply equilibrium before trigger of demand-push monetary support. It can be safely assumed that beneficial impact on the CAD from sharp reversal in Crude Oil price is there to stay through 2015; stability in twin-deficits at comfort zone of 2.0-4.0% will be relief for RBI to prepare for shift to accommodative, growth supportive monetary policy stance, and into lower end of said comfort zone will lead to shift of operating policy rate from Repo to Reverse Repo rate. The external cues largely depend on timing and extent of FED shift (and speed) into rate-hike mode and the extent of FII/FDI flows into the system.

All taken, it would be consolidation phase in H1/2015 for 10Y Gilt yield at 7.75/7.85-8.0/8.10% in traction with US 10Y Treasury yield at 2.0/2.10-2.25/2.35% with the spread of 5.50/5.60-5.85/5.95%. If FED shifts into rate-hike mode by mid 2015, it would be extended stability in H2/2015 subject to inflation stability at lower end of set comfort (and tolerance) zone; CPI stability at lower end of 4-6% will squeeze India-US 10Y bond spread to sub 5% for India 10Y bond stability at 7.75-8.0% despite spike in US 10Y Treasury yield over 3%. The downside risk for India 10Y bond is also from structural demand-supply dynamics, being not in favour against lower demand from the Government and excess SLR held by Banks (which will be used for incremental need or exit on improvement in credit risk appetite). There is also need to maintain India-US bond spread attractive for FII carry-trade play adjusting for 2-3% Rupee depreciation.

The investment strategy therefore is to play end-to-end by buying at 8.0-8.10% and staying light (or short) at 7.75-7.85% till we get better clarity from Budget 2015, FED monetary policy stance and trends in inflation and twin-deficits into 2015. The comfort is that there may not be repeat of prices volatility seen in 2013-2014 and would be tight range price-stability. It would be good opportunity for passive retail investors for yield pick-up over Bank liability/investment products, while aggressive investors shift focus to high-risk/high-reward equity assets.

Wish you all a profitable 2015!

Cheers!

Moses Harding

Global Currency market : What next in 2015?

Rupee value play between FIIs & RBI

It was predictable roller-coaster ride on Rupee, hence was an enjoyable one with occasional shock and awe feeling! The satisfaction is from prediction of end of Rupee relief rally at 57.85-58.35 (on administered recovery from all-time low of 68.85) and the follow-on chase from 58.35 to 63.85-63.90 (to be precise from 58.33 to 63.89). Nothing fundamental or technical analysis worked; it is the feel of the pulse (and mood) of FIIs and RBI. Given the strong play between these two giants, traction with USD behaviour against global currencies was diluted. While FIIs were shipping in money in plenty for investment in equity & debt assets, RBI was absorbing the excess money to maintain demand-supply equilibrium and adjusting Rupee value to as close to REER. All taken, it was party-time for RBI to shore up its foreign currency reserves (and assets) to dilute structural risk from huge external debt of the system.

Rupee cues mixed between huge RBI appetite against diluted FII supply

2015 play will not be between FIIs and RBI; it is either end of party or at last round of the lap for FIIs as leveraged hot money chase will stay diluted or look at other attractive options elsewhere. The upside seen in 2014 is not there in 2015 both in debt and equity market, when Rupee may be at risk against USD strength in the absence of FII supply support. While there is comfort on India growth momentum, domestic structural woes continue to stay as headwinds. During the course of 2014, the strategic base for USD/INR was gradually lifted up from 57.85-58.35, now set at 62.85-63.35. On the other hand, there is no confidence as yet to set up strategic "cap" for the dollar given the lack of clarity on the dynamics in play and RBI's limited band-width to act on the other side for Rupee protection. At this stage, it is prudent to set the short term "cap" for USD/INR at 64.85-65.35; however, taking note of some opinions as high as 70, let us not rule out extended weakness in 2015 into 66.50-68.00, while seeing no case for new all-time low for Rupee beyond 68.85. All taken, will prefer 2015 USD/INR trading range not beyond 62.85/63.35-67.85/68.35. Given this outlook, it is good for importers to stay risk-off on short term (3-6 months) $ liabilities at forward rate below 64.50 (3M) and exporters to cover long-term $ assets at forward rate 67.00 (6M) and 68.50 (12M); hence set up of 12M $ range at 67.00/67.25-68.25/68.50 for hedge/carry-trade strategy.

USD retains bullish advantage against global currencies

2014 is the year for the USD against economic woes of UK/Euro zone and Japan, thus handing over the interest rate advantage to the USD. DXY has already posted sharp intra-2014 gains from 78.90 to 90.40 driving the Euro down from 1.40 to 1.21, GBP down from 1.72 to 1.55 and JPY down from 101 to 122. What next? The US economic and monetary dominance stay valid into 2015; US GDP growth momentum is firm (against subdued inflation) while other major economies are in struggle to get their economies back on growth track. On the other hand, while US prepare for shift to rate-hike mode, others are seen to be in extended QE and NIRP mode. All taken, DXY is seen ready to shift its short term trading range into 90.50-92.50 ahead of 95.85-96.00 and beyond. It is good to be in $ buy-dips mode to be with 2015 bullish trend.

Wish you all a happy & profitable 2015!

Cheers!

Moses Harding

Global Equity market : What next in 2015?

Dream-run in 2014 despite economic gloom & doom!

2014 is great relief for global equity market to compensate for the lean patch of 2010-2013; it is also not surprise to see significant gains in Emerging markets on shift of appetite from developed economies to select high growth emerging economies, with India getting preferred advantage. While DJIA index is up by over 70% in 5 year 2010-2014 period (from 10430 to 18000), gain in 2014 is low at 8.6% (from 16572 to 18000) with intra-2014 rally of 17% from February low of 15340. The intra-2014 fall and swift recovery was from rate-hike jitters from FED with start of QE unwind, countered by ultra-dovish monetary policy stance by UK/Euro zone, Japan and China which pushed FED to stay in wait-and-watch mode and be patient on rate-hike.  The excess liquidity at Zero (Negative) Interest Rate was boon to emerging markets on higher allocation of FII investments into EMs. It is evident from sharp gains in NIFTY in 2014 by 30% (against intra-2014 rally by 38% from February low of 5933) as against 5 year 2010-2014 gains of 57%. It is more significant in Bank NIFTY posting gain of 62% in 2014 (intra-2014 at 86%) against 5 year 2010-2014 gain of 105%. India equity bullish momentum was from combination of external and domestic factors; luck from external forces of ample liquidity and sharp reversal in prices of imported commodity assets and hope (and optimism) from Narendra Modi. All combined, there was overnight change in sentiment (and expectation) from rating downgrade threat to upgrade optimism (and euophoria). The kind of external liquidity driven equity valuation in 2014 does not give permanent relief unless backed by macroeconomic fundamentals, as improved outlook in developed economies can trigger FII reverse flow!

2015 is consolidation phase driven by development in macroeconomic fundamentals:

Will the 2014 euophoria stay valid for India equity market? It depends on sustainability of luck factor (from external cues) and transformation of hope (from domestic cues) into ground reality. It is safe to assume that the Tsunami kind of external tailwind support may not be there; an "as-is-where-is" position is the best to look for! The external risks are from churn in FII investment allocation from emerging to developed markets, FED rate-hike shift in 2015, value normalisation in commodity assets unwinding part of 2014 extended weakness and USD strength against EM currencies. It is also safe to assume that geo-political risks stay diluted when trouble shooters are in deep economic and financial turmoil. On the domestic front, the Government is indeed serious (and committed) to script the economic turnaround and efforts are visible despite limited political support. The worry is that India equity valuation has already been re-rated in 2014 absorbing most of domestic euophoria. The expectation has to now get reflected in macroeconomic fundamentals. While inflation worries are seen to be irrelevant and with optimism on growth momentum, serious concerns remain valid on twin-deficits which would add to structural pressure on growth-inflation dynamics. So, lot to be done by the Government to arrest dilution in hope (and optimism), absence of which will reverse the euophoria driven 2014 re-rating!

What is the trading range in 2015?

Combination of all cues in play (domestic and external), it does not take us anywhere (to set up directional bias on way forward) to fix focus on a parricular trading range with clarity and high confidence level. But, what certain is that there has to pleasant surprises or unpleasant shocks to trigger break-out of 7700/7750-8600/8650 current strategic focus range; at this stage believe that mid-October 2014 low of 7723 and post-2nd December 2014 high of 8626 will stay safe in Q1/2015. Beyond there, it is better to stay neutral and be ready (with fleet-foot) for break-out either-way! Same applies for Bank NIFTY between mid-October low of 15130 and post-policy high of 18923. Having said this, Bank NIFTY is expected to outperform NIFTY taking positive cues from rate-cut, improved credit risk appetite and pipe-line financial sector reforms.

On the external front, DJIA is expected to outperform NIFTY on exchange rate adjusted basis for new high over 18100 with strong support at 15855-17350.

Over all, need to keep attention on FII appetite (and mood-swings), FED rate guidance and domestic macroecomic data trend, not ignoring USD impact on Rupee exchange rate and commodity price impact on the CAD and inflation. All these factors will decide sovereign rating upgrade in 2015 or otherwise!

Wish you all a very profitable 2015! Keep in mind that not losing money is better than making money; it is good to be in credit balance but relief to avoid debit balance in the account!

Cheers!

Moses Harding

Clarification on "make-for-India" and "rate-pause" stance of RBI Governor

Governor Rajan under fire for delay in shift to rate-cut mode, which the Finance Minister consider as major factor for squeeze in IIP (and manufacturing) growth, deliberately avoiding the other impact of WPI at 0%. The FM has also misunderstood the Governor's good intent to extend "Make-in-India" wish to "Make-for-India" ambition! It is time to study the disconnect between the FM and Governor to set matters right and to get better understanding on the cause and effect.

What are the reasons for growth depression in the manufacturing sector? Growth momentum is generated from pick-up in consumption demand and investment appetite to meet resultant supply capacity expansion. It is no rocket science! It is also common sense that investment (and monies) will chase opportunities when demand-push factors emerge strongly to squeeze supply capacity. When such a situation emerge, abundant system liquidity at low interest rates will set up the desired momentum to accelerate investment flow. Is this the case now? Definitely not, the FM would agree! The issues now revolve around squeeze in demand in core manufacturing sectors and absence of public sector consumption appetite; major impact from depressed infrastructure sector and poor fiscal conditions of the Government. The private consumption (in non core sectors) has come in to prevent growth collapse. It is also obvious that rate-cut is not the solution to revive infrastructure and to spur public investment and consumption. All considered, the "cure" is with the Government (and the FM) and not with the RBI (and the Governor). As said before, liquidity (and cost of funds) is not the remedy; the need is to create good opportunities for monies to chase! At this point of time, no investor see investment returns (the IRR) beyond the yield offered by Gilts or top-notch corporate debt, hence the huge appetite for Gilts, Bank deposits and low-risk corporate bonds against alternate high-risk, low-yield private/public investment/lending opportunities.

Why combination of "Make-in-India" and "Make-for-India" India relevant? The lead impact of "Make-in-India" agenda will be felt on the CAD, from higher imports for set up with couple of years lag on boosting exports. The system has also seen many export-led economies going under growth depression when external demand stay diluted. The "Make-for-India" agenda address these two concerns; substituting imported consumption with domestic production and building growth momentum from domestic consumption (and demand). Ideally, "Make-in-India" agenda should be the derivative of "Make-for-India" story, that's what the Governor wish to convey, I believe!

The way forward on rate cut and "Make-in/for-India" agenda are best to be discussed in private, as these themes are most critical (and relevant) for India growth agenda. It is prudent not to act in haste to avoid disappointment (and reversal of stance) and best to take time at strategic planning stage to build workable (and effective) tactics for swift execution!

Thinking aloud from RR perspectives!

Moses Harding

Global markets steady into 2014 year end!

Bullish undertone in equity assets!

DJIA index settles at set year-end focus zone of 17850-18100 with positive undertone, highlighting investor's risk-on mode into 2015. Do not see cues to trigger break-out of the said range into 2014 year end; close above 18000 will be positive for 2015!

Mixed cues on US 10Y Treasury yield

Stability in US 10Y bond around 2.25% is mixed on lack of clarity on the timing of FED rate-hike action against optimism on US economy and lack of it in other major economies. Given this outlook, it is fair to assume near/short term stability at 2.15/2.20-2.35/2.40%; play end-to-end.

USD into bullish stability

DXY in sideways mode at 89.50/89.75-90.50 retaining the built-up bullish undertone. Most cues suggest shift into near/short term stability at 89.50-92.50 into 2015.

EUR/USD now finds near/short term resistance at 1.2250-1.2300 with momentum build-up for extended weakness into 1.2050 ahead of 1.1850 to complete the short term fundamentals driven value-adjustment from 1.30-1.40.

USD/JPY steady above 120 but finds it tough for extended gains into 121.50-122.00; however near/short term trend is firm into 123.50-125 while 118.50-120 stays rock-solid.

Commodities struggle against US optimism

Brent Crude at lower end of 58.50/60-63.50/65 focus zone with bias into 56.00 seen as strong long term support point. At this point, let us retain focus at 55/56.50-62/63.50 into year end and await better clarity on way forward.

Gold failure at 1235-1260 for return of focus into 1160-1210 is not bullish undertone with near-term push-bias into 1120-1135 while 1195-1210 stay firm.

Moses Harding

Stable outlook into 2014 year end!

NIFTY in consolidation mode into year end!

NIFTY held well at lower end of set near-term consolidation range of 8150-8400 finding minor resistance at 8285-8300. Break-out bias however is seen towards 8050/8065 ahead of major short term support at 7950-8000. Good to stay focused at 7950/8150-8300/8400 for now.

Rupee seen steady post the recent value adjustment!

Not surprised to see Rupee in back-and-forth mode at set focus zone of 62.85/63.00-63.85/64.00, between end Dec'14 $ support zone of 63.10-63.35 and end Mar'15 $ resistance zone of 64.85-65.10. No cues at this stage to review the outlook with zoom-in focus at 63.55-63.90 for rest of 2014.

India 10Y bond steady but with downside pressure!

10Y bond steady at 7.90/7.95-8.0/8.05% post push-back from major resistance zone of 7.75-7.80%. No major cues to trigger break-out of big-picture focus at 7.85-8.10% at this stage; minor risk into 8.10-8.25% is not ruled out, but seen as strategic investment opportunity.

Good day ahead!

Moses Harding