VIX, the volatility index, rose past 20, an endorsement of rising volatility. Indian markets had a mixed bag – rupee and bonds outperforming equities.
Return of volatility – that's how one would see markets on the day. Lower equities, higher bonds, lower crude, a weaker dollar and growing pessimism – characterised the week that went by. Brexit back on the front page as UK Prime Minister faces leadership challenges. The US-China appear to be heading towards a thaw in trade fracas. Italy's refusal to comply with the EU budget demands and deceleration in growth in two of world's top five economies, Japan and Germany, were other news events that dominated market focus. The US benchmark yield dropped 9 basis points (bps) to close at 3.09%, strongest this month.
VIX, the volatility index, rose past 20, an endorsement of rising volatility. Indian markets had a mixed bag – rupee and bonds outperforming equities. Retail inflation was softer than expectations whereas wholesale inflation surprised on the upside.
In other events, the resignation of the architect of Brexit negotiations, Dominic Raab, threw cold water on the passage of the agreement between the EU and UK. Supply glut resulted in oil prices heading lower as WTI Crude fell to its lowest level nearly in a year. Rising US production, which now is on par with Saudi Arabia, is seen as a key reason for softer crude prices. Chinese officials have sent conciliatory signals on trade negotiations ahead of a crucial meeting between the leaders of the two countries later this month.
Indian market had its moments of kick-up-of-heels as the Indian rupee touched it's strongest in 10 weeks when the greenback dropped to 71.75 in intraday trade on Friday. Bonds have mirrored rupee's recent gains and the benchmark 10year bond-yield touched 7.70 during the week before closing higher on profit taking and a bit of risk-off mood ahead of a key Reserve Bank of India's (RBI) board meeting. What is generally ignored as a non-event for markets, this time around the RBI's Board Meeting may draw a lot of attention as expectations on certain key banking decisions are high. Irrespective, bond yields are likely to remain lower as lower retail inflation and continued liquidity support should keep the short end of the curve well bid. The 1-year T Bills have already moved 45 basis lower in a month on strong buying.
The week ahead is again a truncated one – with two market holidays. The short end of the yield curve will closely correlate to systemic liquidity, which favours another leg of the bond rally. The five-year OIS and rupee forwards have softened substantially in recent weeks. We may see the 10-year bond yield moving lower towards 7.70%.
RANGE-BOUND
- The five-year OIS and rupee forwards have softened substantially in recent weeks
- This week around the RBI's Board Meeting may draw a lot of attention as expectations on certain key banking decisions are high
The writer is a market expert
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