14/07/18

RUPEE STABILISES, CRUDE DECLINES, INDIAN EQUITY INDICES SOAR

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 as Crude declines.

-Indian IIP declines, trade deficit widens, CPI climbs

-US unveils new trade tariff barriers on Chinese imports

Important developments during last week: Indian Rupee oscillated in the 68.88-68.31 zone and finally ended at 68.53 as against prior close of 68.46. Fall in Oil price has raised hopes of Rupee stabilisation and possible short term gains targeting 67.70/67.20. RBI intervention has also helped to cap Rupee fall. Macro data was little to cheer as IIP fell, CPI climbed and trade deficit widened.Indian trade deficit widened to 5 year highs of 16.6 bn in June from May data of USD 14.62 bn. Exports rose 17.57% in June to USD 27.7 bn while imports climbed 21.3% to USD 44.3 bn. Oil imports climbed 56.61% to USD 12.73 bn. Gold imports declined 2.8% to USD 2.39 bn.

IIP grew only by 3.2% in May as against 4.9% in April. Mfrg climbed 2.8% in April. Consumer durables output remain unchanged month-on-month at 4.3 percent, while consumer non-durables output fell to (-) 2.6 percent in May as compared with 7 percent a month ago. Electricity production grew 4.2 percent in May from 2.1 percent in April, while mining activity’s growth further accelerated at 5.7 percent May from 5.1 in April.CPI climbed 5% in June as against 4.87% in May. However, Food inflation moderated to 2.9% in June from May’s 3.1%.Fuel inflation grew at 7.14 percent in June from 5.80 percent in May.

FII’S have sold Rs 1377 Cr of Indian Equities in July till date . FII’S have sold Rs 1951 Cr of Indian debt securities in June till date . On a cumulative basis, FII’S have bought Rupees 160 Cr of Indian Equities till date for this calendar year and have sold  Rupees 43269 Cr of Indian debt in this calendar year till date.

Technically, Rupee has posibility of gaining to 67.70 and a downside break of 67.70 could help Rupee gain further to 66.85. Since there has been a parabolic fall, correction can also be swift and large. This phase can be followed by a consolidation.     

It was an impressive week in Equity markets as opening corporate results were either better or in line with expectations. TCS, reported 15.8% jump in revenue and 23.46% increase in June quarter profit to Rs 7340 Cr.Infosys announced 1:1 bonus issue. Reliance announced mega plans for broadband entry, consumer electronics and retail marketing. TCS, Reliance and Auto stocks along with private sector banks took indices closer to all time highs. This is creditable considering lack of FII participation citing trade fears and high valuations. HUL,HDFC bank.,Ashok Leyland, Kotak Bank, Bajaj Finance and Zee are some heavyweights reporting results in coming week.

Global developments: Global Equities withstood trade war fears but oil and metals fell sharply and USD gained as Trump administration announced the plan to impose tariffs on additional USD 200B of Chinese imports as follow up action to Section 301 investigation.

The list of targeted products is released, including consumer items such as clothing, television components and refrigerators as well as other technology products. There will be 10% tariffs on the products, which could come into effect after public consultations end on August 30. After imposition, the Section 301 tariffs will cover as much as half of Chinese imports to the US.

China said that it will take the “necessary counter-measures and resolutely safeguard its legitimate rights and interests”.           

Chinese Ministry of Commerce said in a statement that it’s “shocked” and finds it “totally unacceptable” as the US accelerates the trade war escalation. It warned that the “irrational” action is “hurting China, hurting the world, and hurting itself. Also, China pledged to make “necessary counter measures” and call on the international community to defend against “trade hegemonism”. It will also file a complaint to the WTO again US unilateralist action.

Pound embraced the departure of Brexit Minister Mr Davis and Foreign Secretary Mr Johnson, who was adopting an hardline approach to EU. However, Pound was volatile as the news broke out about the resignation of UK Foreign secretary.

UK GDP rose grew 0.3% mom in May and 0.2% in the three months to May.

European commission cut Eurozone growth. 2018 GDP is projected to grow 2.1%, revised down from Spring forecast of 2.3%. 2019 growth is projected to grow 2.0%, unchanged. On Eurozone inflation, 2018 CPI is projected to be at 1.7%, revised up from 1.5%. 2019 CPI is projected to be at 1.7%, revised up from 1.6%. 

ECB minutes recapped that “policy rates would be kept at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remained aligned with a sustained adjustment path”.

Our analysis of the Global situation:

So far, So good for Equities as it is bought on dips despite trade war escalation. There is no panic yet in Equity markets. Yet, the long term effect is to come. Tariffs can either raise the consumer prices and hence inflation and hasten rate hikes or create more business uncertainity leading to cut in investments and jobs and hence the opposite action on rates.

US economy has remained robust till now with employment reaching full potential and Core PCE index climbing to Fed’s target of 2%. Fed is yet to take a full measure of trade tariff impact as it remains to be seen as to how tariff war will play out.

Global growth can be hurt by US protectionism. Fall in base metal prices, particularly Copper bodes warning signal to Global growth.Fall in Oil price is the major blessing in disguise for consuming nations like India. USD has benefitted the most in this uncertain environment unlike previous times when Swiss Franc, Gold, Yen and US treasuries gained on Global uncertainity.Despite future misgivings on tariff impact on US economy and USD, at present King Dollar reigns supreme.

Important developments for next week: US follow up action on trade tariffs

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: 68.30/67.70 on the downside and 69.10 on the upside.

Market developments:

-Indian Nifty closed at 11018.

-Gold closed at 1241 and WTI Crude closed the week at USD 70.56.

-Indian 10 Year G-SEC closed the week at 7.78%. US 10 Year Yield closed at 2.83%.   

Data Highlights of last week:

-US PPI climbed 0.3% m/m.

-US CPI climbed 0.1% m/m and weekly jobless claims dipped to 214k.

-EU industrial production climbed 1.3% m/m.      

-EU sentix investor confidence climbed to 12.1, better than expectation.

-German Zew survey declined steeply to -24.7. EU Zew sentiment survey also declined to -18.7.

-UK industrial declined -0.4%m/m and manufacturing production climbed 0.4% m/m.

Technicals:

USD/INR : Spot closed above 100 and 200 day major moving averages. 20 day moving           is at 68.52. 50 day moving average is at 67.93. 200 day moving average is at 65.55. Daily MACD is in sell zone, implying top at 69.09 . Important support zone is at 68.30 and later at 67.70. Important resistance is at 69.10. Spot closed above its average level of the day.  

EURO/USD: The pair is below all 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 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 1.3050 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 1.3365 and later at 1.3475/1.3650. Important support is at 1.3050.           

USD/YEN: The pair is above major moving averages. Daily MACD is in buy zone, implying important bottom at 109.35. Next important support is at 111.40/110.85. Important resistance is  113.70.      

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 69.10.                

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: Retail sales, Ny and Phily Fed mfrg indices, Industrial production, TIC purchases, building permits, housing starts, beige book, weekly jobless claims  EU data: CPI  UK:  unemployment rate, CPI, RPI, PPI ,retail sales and public sector net borrowing Japan: CPI