Equity market rally and a bond market rally. Such a goldilocks scenario is what is happening in the Indian market at present and it is expected to continue is all likelihood. Stocks and bonds can rally against all expectations unless one of the negative factors currently present in the environment rears its ugly head to derail the rally. The Sensex has rallied 7% from lows of 17500 seen in February while benchmark bond yields are down 20bps from highs seen in February. This rally has been in the face of many negatives including corruption scams, inflation, oil prices, Japan disaster, Eurozone debt crisis and China tightening. Corruption scams and inflation are domestic issues while the rest are global issues. The market look to be in a mood to look beyond the negatives and focus on positives. On the domestic front, while scams are still being investigated, most of the surprises in terms of fresh scams or new corporate names emerging in the scams look to be over. Inflation, running at over 8% is still a threat but markets have largely factored in more policy rate hikes by the RBI. Bond yields are in fact looking at a positive trend in the coming weeks given that the bond supply starting April is not a threat any longer. The government is scheduled to borrow Rs 250,000 gross or Rs 190,000 crore net of redemptions in the first six months of fiscal 2011-12. The supply is lower by almost Rs 35,000 crore than what it was last year and will not see much of an absorption issue. Liquidity, which has been negative for all the while with banks borrowing from the RBI on a daily basis, is also likely to ease going into April on the back of government spending. The government is expected to spend Rs 70,000 crore of its Rs 90,000 crore surplus by the end of March. Easing liquidity coupled with an easily absorbable government bond supply will bring down bond yields. The Middle East tensions are more worrying as it is leading to a war like situation in the region. Oil is trading at higher levels of USD 116/bbl (Brent crude) and outlook for oil prices are bullish. Oil can derail economies especially oil importing ones like India which imports 70% of its oil requirements. However, given the level of oil prices (up over 30% over the last six months), the rupee has rallied by 1% against the US Dollar. There does not seem to be any fear in the currency though the rupee is definitely vulnerable to oil. The markets, however, may see oil price as negative that one would have to live with and look further ahead on potential supply alleviators. Oil is a positive in the sense of oil producing countries earning above average revenues leading to high levels of cash accumulation in these countries. This cash has the potential to flow into markets. The Japan nuclear threat, while not gone yet, is slowly losing its intensity. Once the threat dissipates, Japan will start focusing on replacing the lost power capacity and that could provide opportunities in plenty to suppliers of power equipment. Japan also has to rebuild its infrastructure, the cost of which is estimated at USD 235 billion. While one worries about where the money will come from given Japan’s debt is twice its GDP, the money spent will provide business opportunities all around. The fact that Japan will keep monetary policy highly accommodative, will lead to high Yen liquidity in the system leading to fresh carry trade positions being built. The immediate movement of the Yen after the earthquake and tsunami was higher against the USD, on speculation that Japanese institutions will bring back money invested abroad. The Yen gained 6% against the USD on the back of the speculative purchases, but lost all its gains on G7 intervention. The outlook for the Yen is bearish given that Japan will have to weaken its fiscal policy and keep its monetary policy accommodative to ride over the disaster. The markets also seem sanguine on China despite the country raising bank reserve requirements. China is looking to fend off inflation which is trending at 5% levels and are tightening fiscal and monetary policy. However, China’s bank reserves requirements at 20% of deposits, is also a positive as China can always free the reserves when required especially in times when inflation slows down and growth trends down. The Shanghai equity index is still marginally positive year to date despite three rate hikes this year. On the other hand, economic indicators in the developed world are showing strength. Manufacturing growth across US, Germany and China have been showing month on month growth while employment in the US is picking up with jobs being created for the last few months. The central banks of US, Eurozone and UK have all maintained rates at all time lows despite inflation trending at higher than target levels. While the ECB (European Central Bank) may raise rates next month to signal their inflation worries, the impact is not likely to be high. The Euro has gained over 20% to the USD from lows on the back of rate differentials as the US Fed is far from tightening their policy. The US is continuing to flood the system with money by continuing with its USD 600 billion bond purchase program. This will end in June 2011. Markets will continue to search for yields in the light of the high liquidity and will take higher risk in the process. Higher risk taking is good for emerging markets like India.http://www.tradetoprofit.inhttp://performance-report-2011.blogspot.com/
Equity market rally and a bond market rally. Such a goldilocks scenario is what is happening in the Indian market at present and it is expected to continue is all likelihood. Stocks and bonds can rally against all expectations unless one of the negative factors currently present in the environment rears its ugly head to derail the rally. The Sensex has rallied 7% from lows of 17500 seen in February while benchmark bond yields are down 20bps from highs seen in February. This rally has been in the face of many negatives including corruption scams, inflation, oil prices, Japan disaster, Eurozone debt crisis and China tightening. Corruption scams and inflation are domestic issues while the rest are global issues. The market look to be in a mood to look beyond the negatives and focus on positives. On the domestic front, while scams are still being investigated, most of the surprises in terms of fresh scams or new corporate names emerging in the scams look to be over. Inflation, running at over 8% is still a threat but markets have largely factored in more policy rate hikes by the RBI. Bond yields are in fact looking at a positive trend in the coming weeks given that the bond supply starting April is not a threat any longer. The government is scheduled to borrow Rs 250,000 gross or Rs 190,000 crore net of redemptions in the first six months of fiscal 2011-12. The supply is lower by almost Rs 35,000 crore than what it was last year and will not see much of an absorption issue. Liquidity, which has been negative for all the while with banks borrowing from the RBI on a daily basis, is also likely to ease going into April on the back of government spending. The government is expected to spend Rs 70,000 crore of its Rs 90,000 crore surplus by the end of March. Easing liquidity coupled with an easily absorbable government bond supply will bring down bond yields. The Middle East tensions are more worrying as it is leading to a war like situation in the region. Oil is trading at higher levels of USD 116/bbl (Brent crude) and outlook for oil prices are bullish. Oil can derail economies especially oil importing ones like India which imports 70% of its oil requirements. However, given the level of oil prices (up over 30% over the last six months), the rupee has rallied by 1% against the US Dollar. There does not seem to be any fear in the currency though the rupee is definitely vulnerable to oil. The markets, however, may see oil price as negative that one would have to live with and look further ahead on potential supply alleviators. Oil is a positive in the sense of oil producing countries earning above average revenues leading to high levels of cash accumulation in these countries. This cash has the potential to flow into markets. The Japan nuclear threat, while not gone yet, is slowly losing its intensity. Once the threat dissipates, Japan will start focusing on replacing the lost power capacity and that could provide opportunities in plenty to suppliers of power equipment. Japan also has to rebuild its infrastructure, the cost of which is estimated at USD 235 billion. While one worries about where the money will come from given Japan’s debt is twice its GDP, the money spent will provide business opportunities all around. The fact that Japan will keep monetary policy highly accommodative, will lead to high Yen liquidity in the system leading to fresh carry trade positions being built. The immediate movement of the Yen after the earthquake and tsunami was higher against the USD, on speculation that Japanese institutions will bring back money invested abroad. The Yen gained 6% against the USD on the back of the speculative purchases, but lost all its gains on G7 intervention. The outlook for the Yen is bearish given that Japan will have to weaken its fiscal policy and keep its monetary policy accommodative to ride over the disaster. The markets also seem sanguine on China despite the country raising bank reserve requirements. China is looking to fend off inflation which is trending at 5% levels and are tightening fiscal and monetary policy. However, China’s bank reserves requirements at 20% of deposits, is also a positive as China can always free the reserves when required especially in times when inflation slows down and growth trends down. The Shanghai equity index is still marginally positive year to date despite three rate hikes this year. On the other hand, economic indicators in the developed world are showing strength. Manufacturing growth across US, Germany and China have been showing month on month growth while employment in the US is picking up with jobs being created for the last few months. The central banks of US, Eurozone and UK have all maintained rates at all time lows despite inflation trending at higher than target levels. While the ECB (European Central Bank) may raise rates next month to signal their inflation worries, the impact is not likely to be high. The Euro has gained over 20% to the USD from lows on the back of rate differentials as the US Fed is far from tightening their policy. The US is continuing to flood the system with money by continuing with its USD 600 billion bond purchase program. This will end in June 2011. Markets will continue to search for yields in the light of the high liquidity and will take higher risk in the process. Higher risk taking is good for emerging markets like India.
http://www.tradetoprofit.in
http://performance-report-2011.blogspot.com/
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