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| Edited By: NS Venkatesh |Source: DNA |Updated: Jan 07, 2019, 05:45 AM IST
The year that went by was memorable in many ways for market participants. Rarely ever before has one political leader dominated market themes so much as Donald Trump, the current US President. Initially, it was the North Korea standoff, then the trade war with all its trade partners, and finally it was Government shutdown for want of budgetary support – in all, one man was cynosure always. Tweeting became an acceptable form of communication and volatility was the new norm for a major part of the second half. Overall, a year to remember.
The Indian economy went through its peaks and troughs. Historic reforms of previous years (currency withdrawal and GST implementation) stabilised and economy returned to gallop mode. The rupee touched its historic low point and bonds sold off on fiscal and inflation worries and yields remained north-bound for three-fourths of the calendar year. However, there was the proverbial happy ending. The currency and bonds alongside equities bounced back. Now looking forward to the year ahead with hope and promise.
In the international markets, the release of the US non-farm payroll data last Friday was the talking point as firm wages and rising payroll numbers, 312k as against an anticipated 175k, set the tone for the year. The numbers beat all estimates and stunned main street economists. While hourly earnings improved, the unemployment rate also rose as new entrants were added to the workforce. What really buoyed markets in the late hour trading was comments from the Fed chairperson Jerome Powell that the US Central Bank would not hesitate to adjust the pace of balance sheet run off and change its rate stance significantly if circumstances warranted. It implied rate hikes are not a given hypothesis in 2019. Dow Jones index had a rocking close to the week with a strong surge of about 3%. The10-year US Treasury yields have dropped a lot and closed the week at 2.65%. VIX (volatility index) returned lower to 22.5 from previous week's 30-plus and WTI Crude was trading tad below $50 mark.
In other less redeeming data-fact, the ISM index tumbled sharply to 54 from November's 59, indicating growth concerns. It is, however, a sentiment index and therefore a lead indicator. China's PMI also fell sharply. Sub-50. China's PBOC reacted with a sharp reserve ratio cut by 100 basis points, targeted at improving liquidity. European PMI also slipped to 51.4 indicating weakness is pan-global. Makes an interesting case of how central banks will position themselves in 2019
In other market developments, the US-China trade talks are set to resume next week. The fatigue of hoping and losing may keep participants less hopeful. Apple gave sharp disappointing guidance on its revenues in over a decade, which should keep stock markets relatively choppier in the early part of the year. The US Junk bonds sold off as weakening growth prospects makes investors rush to sovereigns in search of yields.
Indian markets had a relatively quiet start. The equities though had its weaker moments, largely driven by cues from the developed markets, the week ended on a positive note. The rupee yet again traded sub-70 for a large part of the week, in reaffirmation of the fact that flows continue to be good. Bond yields started on a positive note and soon lost the optimism that guided sentiments for the most part of the last quarter. If one were to look at the opening and closing levels of yields for calendar 2018, it would appear the markets barely moved. The carnage in the interregnum where yields spanned more than a 100 basis would not be forgotten.
News of large farm-loan waiver and higher state governmental borrowings have pushed yields higher towards 7.45. System-level liquidity has improved and the prospect of regular OMOs should support sentiment. With inflation risk lower, any spike in yields will be opportunities. Participants may soon position for a possible rate-stance change in the February MPC under the stewardship of a new governor and therefore risk-reward favours duration. The 10-year bond yield should move towards 7.25 after some more correction. It's also time for the new benchmark issuance as current outstandings are close to 1 lakh crore.
The writer is a market expert
