CPI data may lift bond prices

A truncated week for the Indian markets apart. It was yet another difficult one with mostly the same theme and preoccupation for the global markets, last week. Growing doubts on the sustainable strength of the global economy, worries about corporate margins, risks to global trade from both the US policies and lurking monetary policy normalisations, European Union's (EU) rejection of Italy budget proposals-the factors appear to be growing in number. In the final analysis, the past week saw the US benchmark yields declining by 5 basis to close at 3.04%. Crude prices sharply lower and at a year's low. Volatility remained elevated.

The dominant theme now is the dismay arising from the much-hoped trade ceasefire between the US-China as both sides toughen respective stands and a breakthrough looks distant. While Brexit appears to be a new hope, the new disappointment is diminishing odds of three hikes in 2019 by the US rate-setting committee, FOMC. Data released last week suggested economic activity in major economies remained a cause for worry.

The US durable goods, Michigan sentiment and weakly jobless claims – all mirrored slack in activity. Even if one were to shrug these off as an aberration in the big picture trend as US growth remains fairly robust, the pace of global growth continues to slow. Flash European PMI declined to their lowest levels since late 2014, and falling crude oil prices appear to signal weakening demand in addition to a supply overhang. The collapse of US tech stocks, especially the FAANG, will be possibly the key factor if 2008 redux were to happen

Crude importing countries had their best moments as oil prices slumped to a yearly low. The dollar stayed weaker against both majors and EM currencies and gold prices and commodities remained offered. Gold to Oil ratio, which plays a key role in assessing risk sentiments, recovered from the key 20 to 1 ratio and is indicative of more oil-price weakness.

The Indian rupee ended strongest in nearly three months as a combination of falling crude prices and the declining US yields triggered a bond rally and the rupee benefitted the most. November turns out to be a lucky month for the Indian importer as the rupee has gained nearly 3% from its October lows and in one stroke, a strengthening domestic currency should help address many key issues for both the government and the central bank. Trade deficit and imported inflation will cease to be a worry in the medium term. From being the worst performing emerging market (EM) currency, the Indian rupee has moved to the third spot from the top in November.

Indian bonds had their moment under the Sun, too as benchmark 10-year moved to its lowest level this quarter and should help Banks show better valuation results if the trend continues. A windfall gain from a rallying bond price will help capital starved entities better and relieve the Government of recapitalisation commitment to some extent. With December release of inflation data, especially the retail inflation, likely to show further softening, the risk-reward favours going long the bonds.

The benchmark 10-year bond may see some profit taking at the start of the week. The bias, however, is of continuing rally towards 7.60 if yields remain below 7.85 from current 7.71.

PROFIT TAKING

• The risk-reward favours going long the bonds, yields seen at 7.60 
   
• A windfall gain from a rallying bond price will help capital starved entities better

The writer is a market expert