Standing on the fence, waiting for clear signals

Markets remained in consolidation mode for major part of November. The Sensex and the Nifty are hovering around the October 2009 levels. We expect the sentiment to continue well into the closing year. While every good US data is now being viewed as an unwinding of the US carry trade, with the dollar strengthening, economic data is yet to suggest that economies are firing on all cylinders. Hence interest rate hikes in major markets can be ruled out for now. The Dubai Debt and possibly the Greece Debt crisis needs to be watched closely as to how it is managed and how much impact it has on investments in emerging markets. USD/INR is likely to track these trends and trade between 46-47 levels in the near term.

Market Developments

Global Outlook

• US GDP to rise by 3.3% Q4/Q4 in 2010, core PCE price growth to slow to 1.0%. Fed to leave rates unchanged until early 2011. GDP growth in early 2010 to be led by inventories, final sales to move above 3% only in Q4 2010, as robust employment growth finally emerges. 2011 to see stronger GDP growth of 4.5%, but fiscal tightening and still high unemployment to ensure Fed tightening is not aggressive. The non farm payrolls made things brighter declining on by 11K against expectations of -125K.

• The European Commission expects the euro-region to emerge from the recession and forecasts economic activity to expand 0.2% in the third quarter after contracting 0.2% during the three-months through June, and the improvement in the fundamental outlook may drive the exchange rate higher throughout the second-half of the year as the economy returns to growth. However, Central Bankers held a cautious outlook and expect to see a “rather uneven” recovery as households continue to face a weakening labor market paired with tightening credit conditions.

• Asian markets continued to be jittery along the recovery. Markets were hit by another shock in the form of the Dubai debt crisis. Dubai Crisis that unfolded at the end of November has brought to the front fears that many people had about the financial crisis and the after effects. Dubai, predominantly oil producing nation, about a decade ago was aspiring to move away from the oil business as it felt a need to diversify into other avenues. Dubai plays a pivotal role in the Emirate’s economic growth. It started investing into highly diversified spectrum of industrial segments around the world.

• This was done primarily through its investment agencies, one of which was Dubai World. It invested heavily into various countries taking huge exposure from banks and institutions around the world.

• With this uncertain outlook in mind Central banks in all the major developed economies, barring Australia, continued with easy monetary policy and have held policy rates steady in recent months. In the current cycle, the Reserve Bank of Australia raised interest rates for the second time in 2 months raising the Cash Rate by 25 basis points to 3.75% to diminished risk of serious economic contraction.

• Commodity prices have rebounded suggesting a recovery in the near term. Gold reached its highest levels at $1200/ oz, and currently trades at $1034/ oz level. Oil prices are hovering around 78$/ barrel.  Despite these trends consumer price inflation remains negative/ low in most countries barring India.

Domestic Outlook

• The domestic economy is exhibiting significant signs of recovery backed by growth in industrial production and better business outlook. The IIP for October 2009 grew by 10.3% higher compared to October 2008 but lower than market expectations of 12 % reinforcing the belief that the economy is still not firing on all cylinders. However services continued to be in the negative territory as trade related services are yet to pick up. As noted in the policy review another major area of concern has been the deceleration in private final consumption expenditure and gross fixed capital formation. Although government consumption has risen sharply, other indicators of consumer confidence are yet to pick up. With the rise in domestic industrial activity, credit off-take is expected to pick up in the coming months.

• The biggest area of concern in the coming months will be the supply driven inflation that has already hit our markets. Food inflation is touching its historic highest levels at 19.1% .While RBI holds interest rates for the time being it has sounded out market participants on possible time frame wherein they will exit the loose monetary policy.

• The rupee has been volatile for the whole month of November 2009. After appreciating sharply to 45.80 in early October it has hovered around the 46 – 47 levels for the whole of November 2009. INR has found a strong support and has not been able to break the 46 levels after numerous attempts. With all markets strongly in a consolidation phase we expect USD/INR would also remain choppy in the range of 46-47 for the month of December.

Popularity: 2% [?]

Related posts:

1. Currency markets at crucial point….
2. USD-INR retracing the fall
3. Indian Economy – Annual Review and Analysis