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| Edited By: N S Venkatesh |Source: DNA |Updated: Oct 15, 2018, 05:35 AM IST
Another tumultuous week went by, making most market participants wonder if this is redux of a combined kind where the proverbial grand rotation between debt and equities is alternating between developed and emerging markets.
US shares went down sharply on two successive days last week and turned out to be a contagion as Asian and European indices fell in sympathy. India was the most hit as key indices are near 2018 lows. In summary, IMF lowered global growth, China tweaked reserve ratios to spur growth, and Trump bashing turned to Federal Reserve this time.
Further, Italy on verge of a possible downgrade, European debt markets bracing for a potential blow off, and India’s CPI remaining tad higher over previous month dominated last week.
The US 10-year benchmark yield has risen on 73% of days in the last 30 days, a phenomenon last seen 34 years ago.
Global markets have been cosier over last few months, virtually ignoring the gradual rise in long-term yields and the aggravating US-China trade spat. Perhaps, reality dawned and markets experience large sell-offs in equities after February this year.
Last weekend’s reserve ratio cuts by China’s PBOC was ignored as VIX rose sharply to 21.3. While crude prices showed a drop and by Friday most equity markets recovered and benchmark US yields dropped to 3.16%, financial markets are keenly watching the developing brouhaha between the US President and Federal Reserve Board, the latter on a tightening path which the former considers damaging to growth.
In this context, the coming week sees the release of FOMC minutes of the latest meeting and market players will look forward to its contents and the road maps ahead as the key word “accommodative” has been dropped. In other developments, IMF releases its forecast for global growth where a 20 basis cut is estimated for both 2018 and 2019. IMF also states that downside risks to global growth have risen in recent times as trade wars and increasing protectionism will lead to the elimination of the potential for upside surprises. The next crisis in markets may come from Italy. Both Moody’s and S&P are likely to downgrade Italy one notch from current Baa2/BBB and would place the country perilously close to a non-investment grade.
Indian markets had a roller-coaster ride with equity sell-offs on successive days until the sharpest rally in two-years on Friday. The rupee saw its best week as the currency closed at 73.50 from an all-time low of 74.48 last week.
A Indian bonds have a new-found love from institutional investors as the benchmark yield has remained sub 8% for a larger part of the week.
OMO announcements and a lower auction calendar were the brought-forward triggers from Q2 FY2019, which could morph into a trend if the current sentiment continues
For data-watchers, India’s retail inflation came in rather softer than expectations. At 3.77%, the headline reading gives comfort and justifies the RBI MPC’s recent estimates of lowering inflation average.
Food inflation continues to undershoot and could serve as the biggest offset in the overall basket. Industrial production data at 4.3% was a disappointment as mining was a key drag.
The rupee’s short-term direction and overall stability should be key for further market moves. Bond yields should continue to attract investors at 8.10% plus in the benchmark. A re-test of 7.90% cannot be ruled out this week. Market players have priced in far more pessimism at current levels.
The scope for upside surprises is more once the current crisis relating to NBFCs is sorted out. A sharp compression in spreads cannot be ruled out in the coming days on the back of strengthening the rupee.
The writer is a market expert
