Yields may hit 7.50% by September

"T" is the word. From Taper Tantrum to Trumping Korea to Trade War, it's T that shakes markets than any other. The latest in that series in Turkey. With Lira's meltdown and the European Central Bank (ECB) warning on eurozone bank exposure to Turkey unleashes a tidal wave of EM currency concerns. The UK Q2 GDP and US CPI data were overshadowed, however. India IIP data came in strongest in five months and this data point continues to be the most volatile piece in the data jigsaw puzzle.

At the close on Friday, global equities edged lower weighed down by contagion fears from an intensifying Turkish currency crisis. The US benchmark 10year yield fell 9 bases from 2.97% a week ago. Crude prices remained soft and the Chicago Board Volatility Index remained unchanged at 12.5. It is at early stages where an emerging market (EM) contagion is feared as Turkish lira weakened nearly 18% overnight and is already down some 70-odd per cent this year.

While one can debate Turkish economic muddle it would continue to be a subsidiary to the overall political landscape. In the coming days, pressure from the Washington, Moscow, Berlin or London administrations should be decisive in any larger ramifications and the coming week could experience its share of early summer volatility.

Much of the market collapse, where the euro dropped to its lowest level in 18 months was post ECB fretting over European bank exposures to Turkey corporate and banks. Turkish borrowers have significant exposure to debts denominated in euro and dollar and as the lira falls, their ability to pay back those debts erodes. The situation was further aggravated with President Donald Trump's tweet that the United States will double steel and aluminium tariffs on imports from Turkey in response to the detention of an American pastor that Turkish president Erdogan believes helped organize a coup plot against him. In other developments, the British pound weakened on news of a likely 'no-deal-Brexit'.

In the domestic markets, rupee remained somewhat choppy with a nearly a per cent move up-and-down during the week. Last few sessions saw heavy demand partly in response to fear of contagion effect. June IIP data came in much stronger, albeit on a lower base. Both consumer and capital goods grew strongly. With IMD forecasting a normal monsoon, the days ahead should see a continuance of good data.

The week ahead should be interesting. With two holidays and key inflation data to be released, it remains to be seen if bonds continue the softish run which we have seen last few weeks, post-Reserve Bank of India (RBI) policy. Weekly auctions showed decent bids and the cutoffs and bid to cover came in as per expectations. Bond yields are discounting a longer pause and liquidity in the system and currency's stability will be key drivers for a few months now. The 10-year bond should find good buying interest in the 7.75%-7.80% range with selling pressure on the break out of the higher range. A move to 7.50% should not be ruled out this quarter.

SOFTISH RUN

• Weekly auctions showed decent bids and the cutoffs and bid to cover came in as per expectations
   
• The 10-year bond should find good buying interest in the 7.75%-7.80% range with selling pressure on the break out of the higher range

The writer is a market expert