Dollar carnage and Davos rhetoric was the broader theme in financial markets during the previous week that went by, with the expiry driven correction in global equities after another bout of strong mid-week rally helping stocks hover around recent peaks summed up for overall market events.

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Notably enough, mainstream investors took in stride a brief US government shutdown, and the currency and yield movements were more aligned to economic data. The US purchasing managers’ indices signalled continued and synchronised global economic growth. Yields on the US 10-year treasury notes nudged higher by 2 basis points (bps) to 2.64%, while shrinking inventory levels propelled the price of WTI crude oil to its highest level in three years, near $65 a barrel.

The US dollar suffered huge losses and traded at a three-year low, albeit recovered towards the end of the week. Much of the selling accelerated after Treasury Secretary, Steven Mnuchin favoured a weaker dollar in his Davos speech, and damage-control statements later from the US President Donald Trump stemmed the slide.

This year’s World Economic Forum’s (WEF) summit at Davos remained less eventful as the failure to make progress on North Atlantic Free Trade Agreement and a short-lived barrage of verbal war on competitive devaluation made headlines. Trump’s “Only by insisting on fair and reciprocal trade can we create a system that works not just for the United States but for all nations” may not have been the resolve that global economists expected.

On the data front, US Q4 GDP disappointed at headline level having grown at an annual rate of 2.6% in the Q4 of 2017, below the 2.9% consensus forecast. However, strong consumer spending and an equally stronger business spending underlined that the growth dynamics was robust. Two major central bank meetings also dotted the event calendar last week. While markets did not expect either the Bank of Japan or the European Central Bank to signal policy shifts, there were speculations that both central banks might hint at the less accommodative policy for the future. Neither did so.

India markets continued to remain polarised between rewarding the equity investor and punishing the bond trader as the same set of data and macro-economic developments get interpreted differently. With the benchmark Nifty and Sensex languishing at around recent highs in a truncated week, bond yields closed higher with benchmark 10 years ending the week at 7.30%. News that the central bank may not pay an additional dividend to the government as was earlier believed spooked bond yields, with bond-street ignoring the reduction in additional borrowings. The sentiment is pretty weak as lower tax collections dividend receipts are expected to dent fiscal situation adversely. The Union Budget had estimated a total dividend income of Rs 74,900 crore for 2017-18 fiscal. The receipt so far is around Rs 30,660 crore and hence the stress.

Markets in the coming weeks can be extremely volatile as Union Budget announcements on February 1 and RBI’s Monetary Policy Committee (MPC) meeting on February 6 and 7 will be major events that can shape the course of Indian financial markets for the entire financial year ahead. The street expects a net borrowing of Rs 4.3 lakh crore against a backdrop where Indian bonds have been Asia’s worst performer over the past quarter. Bank treasuries will expect an opportunity or two to trim down their excess reserve holdings and avoid mark-to-market losses, and then take advantage of the new capital infusion by the government. With uncertainties from the implementation of (IND AS) 2, a favourable interest-rate environment at least in the short run will be the minimum one would hope from the Budget and MPC results. The 10-year benchmark yield should remain in the 7.25-7.35% range until the Budget day.

FINGERS CROSSED

  • The street expects a net borrowing of Rs 4.3 lakh crore against a backdrop where Indian bonds have been Asia’s worst performers over the past quarter  
  • Bank treasuries will expect an opportunity or two to trim down their excess reserve holdings and avoid mark-to-market losses

The writer is a market expert