MONTHLY SYNOPISIS: Oct 2019

Currency Map:

WT1 Crude: USD 54.18 vs 54.07 in Sep, Brent Crude at 60.23.

Nifty: 11877, up 3.51% m/m.

Rupee traded in the 70.68-71.73 range in Oct and closed stronger at 70.81 as against Sep close of 70.86. EURINR climbed 2.60% and GBP climbed by 5.32%. Yen closed flat m/m against Rupee. Rupee’s gains was stemmed by RBI buying at around 70.70 levels. With CNY gaining and FPI flows robust, Rupee should have gained to sub 70 levels.

Indian 10 Year G-SEC yield closed at 6.44% . USDINR fwd premia declined to 4.00%.

FII’S nett bought  Rs 14656 Cr ofIndian Equities in Oct . FII’S have nett bought Rs 60250 Cr of Indian Equities in this calendar Year till date. FII’S have nett bought Rs 5055 Cr of Indian debt securities in Oct. FII’S have nett bought Rs 43158 Cr of Indian debt in this calendar year till date.

Indian Equities soared, Rupee consolidated and Crude price remained stable. Indian markets rose on Diwali retail sales optimism and on reports that Govt may announce changes in long term capital gains tax and abolish dividend distribution tax. Auto retail sales turned around in Oct aided by lower rates, loan push by banks and discounts offered by companies. Indian auto major Maruti reported 4.5% increase in Oct sales y/y to 144277 units. Bajaj reported 11% dip, TVS Motors reported 25% decline in 2 wheeler sales. Hero Motors reported best ever single month retail sales. Corporate quartely results betterd expectations. SBI and ICICI results showed that NPA cycle is bottoming out. Reliance, HDFC bank and HUL reported higher profit.

On the macro economic front, data did not bring any cheer. GST collection is still below 1 lac cr and core sector growth declined.GST Collection in Oct stood at Rs 95380 Cr as against 91916 Cr in Sept. Indian Core sector output declined -5.2% in Sept as against 4.3% in Sept 2018.Indian CPI climbed higher, while trade deficit declined.Indian CPI climbed to 3.99% in Sept. Food inflation climbed to 5.11%. WPI eased to 0.33% in Sept. Indian trade deficit narrowed to USD 10.86 bn in Sept as against USD 14.95 bn during the same period last year. Exports fell 6.53% to USD 26.03 bn. Imports was down 13.85% to USD 36.89 bn. Oil imports declined 18.33% to USD 8.98 bn. Exports is down 2.39% in Apr-Sept period to USD 159.57 bn. Imports contracted 7% to USD 243 bn. Indian unemployment rate rose to 8.5% in Oct.

Global event was dominated by US-China trade issues, Brexit uncertainity, and monetary policy actions by central banks.

US President said that a significant phase 1 deal with China has been made covering Intellectual property rights, financial services and import of agri products. Focus is in upcoming meet between US and Chinese Presidents. If trade deal is signed, Global markets may heave a sign of relief.However,US- China trade deal uncertainity resurfaced as Chinese officials felt that trade deal covering subsidies and Core Chinese concerns may be unacceptable.

On Brexit front, UK PM failed to pull UK out of EU by Oct 31 st and the new deadline is JAN 2020. Meanwhile, UK PM has called for fresh election to shore his support for passage of Brexit deal. Though uncertainty has faded for the present, it may resurface depending on election outcome.

Fed cut rates by 25 bps to a target range of 1.5%-1.75%, but dropped a previous reference in its policy statement that it “will act as appropriate” to sustain the economic expansion – language that was considered a sign for future cuts. Fed’s statement indicates that it keeps options open, but limited as aggressive rate cuts may not happen.

BoJ left monetary policy unchanged as widely expected, but stepped up its signal for more easing ahead. Under the yield curve control framework, short term policy interest rate was held at -0.1%. Also, the central back will continue to increase monetary base at JPY 80T a year, with purchases of JGB to keep 10-year yield at around 0%.

ECB also left rates unchanged.

IMF downgraded Global economic growth to 3%, down from July forecast of 3.2%. India is expected to grow by 6.1% in this fiscal.

US Q3 GDP grew by 1.9% vs 1.6% consensus and 2% in Q2. Personal consumption climbed 2.9% vs 4.6% in Q 2. PCE climbed 2.2% vs 1.9% in Q 2. Business investment declined -1.3%.

US ISM(mfrg) improved marginally in Oct, but still in contraction. Consumer spending is still robust and employment is strong. US Consumer spending accounted the total US growth in Q 3.US non-farm payroll report showed 128k growth in October, above expectation of 105k. Prior month’s figure was revised sharply higher from 136k to 180k. Job growth has averaged 167k per month thus far in 2019, compared with an average monthly gain of 223k in 2018. Unemployment edged higher to 3.6%, from 3.5%, matched expectations. Average hourly earnings rose 0.2% mom in October, below expectation of 0.3% mom.

Eurozone GDP grew 0.2% qoq in Q3, unchanged from Q2’s rate, beat expectation of 0.1% qoq. Over the year, GDP grew 1.1% yoy. CPI slowed to 0.7% yoy in October, down from 0.8% yoy, matched expectation.         

China’s GDP growth slowed further to 6.0% yoy in Q3, down from 6.2% yoy in Q2 and missed expectation of 6.1% yoy. That’s also the worst pace since Q1 of 1992.

Currency outlook:  US-China trade issue is likely to be the major factor that could impact USDINR movement, due to strong correlation with USD/CNY movement. Decline in Yuan and EM currencies could weigh on Rupee. Expect 70.20-71.30 range for next few weeks. USD imports could be hedged at 70.70/70.20 and exports can be hedged on rally to 71.30/71.80.

EURINR exports can also be fwd hedged at 79+ levels. GBPINR exports can be fwd hedged in the 92-93 zone. GBP imports can be hedged closer to 89 levels.

JPYINR could consolidate in the 65.50-68.50 range.

Outlook for July:

Suggestion: USD exports be hedgedon rally to 71.35/71.50, EURINR exportsbe hedged on rally to 79.20+levels. GBPINR exports be hedged due to BREXIT uncertainty.