03/06/2018

RUPEE RECOVERS AS CRUDE DECLINES FURTHER, Q4 GDP CLIMBS 7.7%.

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 climbs as Crude falls.

-Indian Q4 GDP @ 7.7%.

-Italian Political developments, US trade tensions with China and EU dominate Global developments.

-US spending, employment data and EU/UK mfrg data keeps economic momentum on upswing.

Important developments during last week: Rupee recovered 72 ps w/w (1.06%) to close at 67.05 as against 67.77 last week. Rupee hit 68.42 last Thursday amidst panic over Crude, fiscal worries and expanding trade deficit. With Crude declining, positive sentiment emerged and Rupee has now gained close to 2% since last Thursday. Higher than expected GDP data also added to positive sentiment. Rupee gain is creditable considering continued FPI pull out from Equity and debt markets.

FII’S sold Rs 8081 Cr of Indian Equities in May till date . FII’S also sold 17400 Cr of Indian debt securities in May . On a cumulative basis, FII’S have bought Rupees 334 Cr of Indian Equities till date for this calendar year and have sold  Rupees 31172 Cr of Indian debt in this calendar year till date.

Indian Q4 GDP grew 7.7% as against 7.2% in Q 3. For the full fiscal year of 2017-18, GDP grew by 6.7%. Agriculture, manufacturing and construction sectors grew at 4.5 per cent, 9.1 per cent and 11.5 per cent respectively in the fourth quarter.

Gross Fixed Capital Formation (GFCF), a useful metric to measure corporate investment activity, grew 14.4 percent at current prices during January-March quarter, due to 9 percent growth in capital goods. Private final consumption expenditure (PFCE) grew at 6.6 percent in 2017-18, lowest in last three years. Government final consumption expenditure (GFCE) or government expenditure grew 10.9 percent in 2017-18 and 16.8 percent in quarter-ended March.

Core sector climbed 4.7% in April. Good monsoon and GST collections are expected to give boost to GDP growth in 2018-19.

Expect USDINR to trade in the 66.50-68.40 range in coming weeks.

Global developments: It was a week dominated by better than expected Global mfrg and US employment data. Markets were initially rattled by Italian political developments. However, Euro and asset markets recovered as Italian political situation calmed. US trade war with China and EU escalated with US President alleging that “China has consistently taken advantage of the American economy with practices that undermine fair and reciprocal trade.” And he accused that “China has aggressively sought to obtain technology from American companies and undermine American innovation and creativity.” Chinese spokesperson countered US statement and said that China will take “resolute and forceful” measures to protect its interests .US imposed steel and aluminium tariffs on EU, Canada and Mexico as temporary exemption expired. EU is expected to retaliate.

In the midst of Italian political drama and trade tensions, US and EU/UK data were broadly supportive of economic momentum. US consumer spending climbed and the economy added 223k jobs. With this, Fed is sure to hike rates in June, even though Sept rate hike is far from certain due to Geo political risks and trade tensions.

OECD projects 2018-19 global growth to be at around 3.8% while G20 growth would be 4.0%. It noted in the release that “the global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, and supported by very accommodative monetary policy and fiscal easing.”

However, OECD also warned of “significant risks posed by trade tensions, financial market vulnerabilities and rising oil prices loom large”. And it urged that “more needs to be done to secure a strong and resilient medium-term improvement in living standards.”

Chinese official PMI manufacturing rose to 51.9 in May, up from 51.4, and beat expectation of 51.4. PMI non-manufacturing rose to 54.9, up from 54.8 and beat expectation of 54.8.

Oil prices declined last week and provided a great relief to consuming countries.

Important developments for next week: EU retaliation to US tariffs.

Important levels to watch for are: 1) EUR/USD: 1.15 on the downside and 1.1820/1.1960 on the upside. 2) USD/INR Supports: 66.50 on the downside and 67.40/67.58/68 on the upside.

Market developments:

-Indian Nifty closed at 10696.

-Gold closed at 1293 and WTI Crude closed the week at USD 65.72.

-Indian 10 Year G-SEC closed the week at 7.85%. US 10 Year Yield closed at 2.89%.   

Data Highlights of last week:

-US S&P house price index climbed 6.8% y/y. Consumer confidence dipped to 128.

-US ADP employment report showed that pvt sector added 178 k jobs as against 190k consensus, trade deficit was lower than expected at -68.2 bn USD.

-US Personal income climbed 0.3% m/m, spending climbed 0.6% m/m, PCE index climbed 0.2% m/m.                                                                                                         

-US Pending home sales declined -1.3% m/m and weekly jobless claims dipped to 221k.

-US ISM(mfrg) was better than expected at 58.7 and construction spending climbed 1.8% m/m. Prices paid component in ISM climbed to 79.5 vs consenus of 78.1.

-EU PMI(mfrg) was finalized at 55.2.

-UK PMI(mfrg) climbed to 54.4.

-EU CPI climbed 1.9% y/y and unemployment rate climbed to 8.5%.

-German retail sales climbed 2.3% m/m .

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 67.65. 50 day moving average is at 66.43. 200 day moving average is at 64.66. Daily MACD is in sell zone, implying top at 68.42 . Important support zone is at 66.50. Important resistance is  at 67.30 and later at 67.98.

EURO/USD: The pair is below all major moving averages. Next Major resistance is at 1.1820 and later at 1.1960. Major support is at 1.1508. Daily MACD is in buy zone, implying an important bottom at 1.1508. Weekly MACD is in sell zone, implying important top at 1.2560.

GBP/USD: Trend is bearish in daily chart. Daily MACD  is in buy zone, implying important bottom at 1.3205 and weekly MACD is  in sell zone, implying important top at 1.4375. The pair is trading below all major moving average. Important resistance is at 1.3450 and later at 1.3550. Important support is at 1.3205 and later at 1.3050.

USD/YEN: The pair is below 200 day major moving average, but above 20 and 100 day moving averages. Daily MACD is in sell zone, implying important top at 111.40. Important support is at 108.10. Important resistance is  111.40 and later at 113.75.                                 

Strategy for USD/INR: USDINR payables can be covered from cost angle and exports can be covered on rally due to extended rally.

Suggested Portfolio: 1) Sell USDINR on rally with stop loss at 68.60.                      

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: Factory orders, ISM (non mfrg), weekly jobless claims,  EU data: PMI (services), retail sales, investor confidence survey, German industrial production data UK:  Japan: