04/08/18

RBI HIKES RATES, FED ON HOLD, BOE HIKES RATES

Highlights:

-GLOBAL and INDIAN MARKET DEVELOPMENTS

-DATA HIGHLIGHTS AND FX MARKET DEVELOPMENTS

-TECHNICALS

-STRATEGY FOR HEDGING AND SUGGESTED PORTFOLIO

-DATA AND EVENTS FOR NEXT WEEK.

Major economic events:

-Rupee stabilizes. RBI hikes rates.

-Indian Equity indices climb to new highs.

-Fed on hold, BOE hikes rates.

Important developments during last week: Indian Rupee stabilised further despite overall strength of USD against crosses and further Yuan weakness. Rupee rallied to 68.30 on RBI’S decision to hike rates by 25 bps, but could not sustain gains as Global developments were not conducive. Rupee stabilisation could also be attributed to fresh inflows into debt markets and tapering off of Equity outflows. Indian Equities maintained last week gains and is the top performer in 2018. Indian Equity markets withstood one more rate hike by RBI.

RBI hiked repo rates by 25 bps to 6.5%. GDP growth for 2018-19 fiscal is retained at 7.4% with growth climbing to 7.5-7.6% in first half. Inflation in second half of this fiscal is expected to be 4.8% and 5% in Q1 of next fiscal. RBI maintained neutral stance citing evenly balanced risks.

RBI Governor said that risks emanate from Crude prices, trade and currency wars, financial markets volatility and rising input costs. He also added that capacity utilisation is robust and investment is picking up. Non food credit is growing at 13%. FDI inflows have improved significantly, while FII inflows have declined due to strong USD.

Indian Core sector grew by 6.7% in June. Cement and Coal sector climbed 13.2% and 11.5% respectively. Crude Oil production was down 3.4%. Electricity sector grew by 4%. Core sector has climbed 5.2% in Q1 in this fiscal as compared to 2.5% in Q 1 of last fiscal.In May, Core sector grew by 4.3%.

FII’S have sold Rs 828 Cr of Indian Equities in July till date . FII’S have bought Rs 2146 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have bought Rupees 1200 Cr of Indian Equities till date for this calendar year and have sold  Rupees 38993 Cr of Indian debt in this calendar year till date.

Global developments: It was a week dominated by Central bank’s monetary policy outcomes. While Fed maintained status quo, BOE hiked rates by 25 bps and BOJ maintained easy stance.

Global asset markets whipsawed as there were fresh signs of trade friction. There are reports that US is planning to impose 25% tariff on USD 200 bn worth of imports than the earlier proposed 10% tariff. US data was on the softer side, yet strong enough to keep Fed on track for further rate hikes. U.S. economy added 157,000 jobs while the unemployment rate fell to 3.9%.Consensus was for 193k jobs. The net revisions over the previous two months were +59,000, compensating for below par July data. Wage gains were in-line with expectations, rising 0.3% over last month and 2.7% over last year.

Federal Reserve kept interest rates unchanged on Wednesday, as expected, characterizing the U.S. economy as strong and staying on track to increase borrowing costs in September and likely again in December.

The Monetary Policy Committee members of the Bank of England stood all united while voting unanimously in favor of the Bank rate increase by 25 basis point to 0.75% in August. The rate hike is justified by tight UK labor market and inflation above 2% throughout the next two years. While the Bank of England remained fairly upbeat on the economic growth, its outlook for further policy moves remained conservative.          

BOJ announced strengthening of framework for continuous powerful easing. 

Important developments for next week: US CPI

Important levels to watch for are: 1) EUR/USD: 1.15 on the downside and 1.1850/1.1960 on the upside. 2) USD/INR Supports: 68.30 on the downside and 69.10 on the upside.

Market developments:

-Indian Nifty closed at 11360.

-Gold closed at 1221 and WTI Crude closed the week at USD 68.65.

-Indian 10 Year G-SEC closed the week at 7.76%. US 10 Year Yield closed at 2.96%.   

Data Highlights of last week:

-US pending home sales climbed 0.9% m/m.

-US personal income and spending climbed 0.4% m/m respectively and Core PCE index climbed 0.1% m/m, in line with consensus, Chicago PMI climbed to 65.5.

-US house price index           climbed 6.5% y/y.

-US ISM(mfrg) declined to 58.1, Price paid component declined to 73.2,ADP employment report showed that pvt sector added 219k jobs, construction spending declined -1.1% m/m.

-US weekly jobless claims declined to 218k and factory orders climbed 0.7% m/m.

-US ISM(non mfrg) declined to 55.7.

-EU PMI(services) dipped to 54.2, and retail sales climbed 0.3% m/m.

-EU PPI climbed 0.4% m/m.

-EU PMI(mfrg) was finalized at 55.1.

-EU unemployment rate declined to 8.3% and CPI (flash) accelerated to 2.1% y/y.

-German retail sales climbed 1.2% m/m.   

-UK PMI(mfrg)            declined marginally to 54.  

-UK PMI(construction) climbed to 55.8.

-UK PMI(services) declined to 53.5.

-Japanese unemployment rate rose 0.2% to 2.4% in June. Industrial production dropped -2.1% mom in June. Housing starts dropped -7.1% yoy. Consumer confidence dropped -0.2 to 43.5 in July.          

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 68.72. 50 day moving average is at 68.22. 200 day moving average is at 65.81. Daily MACD is in sell zone, implying top at 69.10 . Important support zone is at 68.30 and later at 67.70. Important resistance is at 69.10

EURO/USD: The pair is below 100 and 200 day major moving averages. Next Major resistance is at 1.1850 and later at 1.1960. Major support is at 1.1508. Daily MACD is in sell zone, implying an important top at 1.1850. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is bearish in daily chart. Daily MACD  is in sell zone, implying important top at 1.3215 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below all major moving averages. Important resistance is at 1.3215 and later at 1.3365/1.3475. Important support is at 1.2957 and later at 1.2770.

USD/YEN: The pair is above major moving averages. Daily MACD is in sell zone, implying important top at 113. Next important support is at 110.20 and later at 109.20. Important resistance is  113.      

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered.                                

Suggested Portfolio: 1) Sell USDINR on rally with stop loss at 69.12.                

Hedging suggestion: Considering the volatility in the markets, suggest hedging of Currency exposures be done from costing/affordability angle.

Currency Map:

Data and Events for upcoming week: US Data: PPI, CPI and  weekly jobless claims EU data: Sentix investor confidence survey, German industrial production UK: GDP, industrial and manufacturing production Japan: