The first week of the year 2018 was a positive start for global equities, which extended gains amid continued evidence of a synchronised upturn in global economic growth. The US bellwether stock index Dow Jones raced past 25000 mark for the first time in history while Nikkei, the Japanese stock index, surged past a six-year high. 

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The combination of strong global growth, softer interest rates and tepid inflation has bolstered share markets in recent months. The yield on the US 10-year Treasury note rose five basis points to 2.46%, while the price of a barrel of WTI crude oil rose about $1.25 a barrel on supply concerns resulting from civil unrest in Iran and a large drawdown in inventories. VIX, the widely followed volatility index, remained soft and below 10.

In other key data releases, eurozone inflation fell sharply to 1.4%, way below the ECB target of 2% and this could be seen incongruous to the ECB plan of reducing monetary accommodation via asset purchases. A sustained decline may put to question the ECB’s ability to fully wind down the programme.

Indian markets continued to favour the equity trader rather than the bond  investor as benchmark yields quickly reversed the one-off select-bond rally of the last few days of calendar 2017. The 10-year bond yield almost tested 7.42% before cooling off as news that a section of market participants was seeking some concessions on bond valuations gathered momentum. 

The new 10-year benchmark that was issued on Friday saw strong bidding interest and the coupon at issuance was set at 7.17%. It may be a tad too early to call it end-of-uncertainties as near-term negatives outweigh medium-term positives for the bonds. 

Benchmark bond yields have risen more than 90 basis in 2017 merely on expectations of higher inflation via food and crude prices and the average investor has priced in almost all known negatives. 

Two of the critical factors that require attention is the fiscal deficit number and the trend of global crude prices. My reading suggests both could give a positive surprise as we head into the February RBI monetary policy committee meeting. 

The small savings collection is likely to exceed the Rs 1 lakh crore  budgeted number and that should provide some headroom for moderation in deficit. 

There is also a talk of further dividend payout to the government, which may also be a positive trigger. 

Overall, the discussions will centre around this year’s final deficit percentage and next financial year’s estimates. The new benchmark 10-year paper should settle around 7.15-7.20% range for a while before reacting to more positive news.

COOLING OFF 

  • Two critical factors that require attention are fiscal deficit and the trend of global crude prices   
  • Both could give a positive surprise as we head into the February RBI MPC meeting

The writer is a market expert