Equity markets continued the uptrend with all major markets closing in the green for the week. The Sensex was up 500 points. On the global front, nothing much changed vis-a-vis risk appetite as stand-off over Greece continued to haunt the Euro, which shed 300 pips during the week. The week also saw concerns over asset bubble in China and more pressure being put on China to appreciate its currency. While the global outlook continues to be bleak over the sovereign risk, the domestic outlook gained a fillip with S&P raising India’s rating from negative to stable. This seems to be a reward for the fiscal prudence being followed by the government and also the stable economic and political environment. Inflation crossed RBI target of 8.5 % and was 9.89% for Feb 2010 prompting RBI to raise policy rates by 25 basis points. USDINR was in range for the week and did not break 45.60 and 45.33 on either side. We see continued consolidation in this range with importer buying and state-bids conflicting with the positive sentiment that would otherwise take the pair downwards.

Market Developments
Global Outlook

  • Equity markets sustained their upward move this week, with the S&P500, DJIA and the NASDAQ at new 16-month highs. The US economy is seen ahead of the curve and an interest rate hike may be looming large. The Dollar Index has resumed its uptrend and would probably see 82 levels in the medium term. The problems in Greece and speculation of asset bubble in China would reassert the status of Dollar as the safe haven. The week saw rhetoric from the all quarters on putting pressure on Yuan appreciation while on the Chinese side any further appreciation seems unlikely. It remains to be seen how this political risk unfolds.
  • The Euro was the worst-performing G10 currency through the past week of trade and resumed its downfall with its worst week in a while. The single pair dropped 300 pips during the week. The initial buoyant mood which took the currency with 1.3800 levels met with sellers and the currency suffered once again due to continued struggles with the Greek fiscal crisis and questions on the stability of the European Monetary Union. The lack of clarity on the situation and conflicts of opinion within the Euro Leaders is not helping the currency. Whether or not Germany can agree to any plan involving European funds may be of chief importance. Technically the Euro looks weak with up ticks still being sold. It has reached dangerous levels and if 1.3436 is broken simultaneously with indecision persisting on Greece then we would looking at 1.3000 and 1.2700 levels on the downside. Any level above 1.3750 continues to be good levels to sell the currency. Only a break of 1.3800 on a weekly basis would suggest any upside for now.
  • The British Pound also fell sharply during the week after rising momentarily to 1.5300 levels. The Cable saw across the board losses with comments from hawkish MPC members and also Andrew Sentence (BOE Member) warning a double dip recession. Jobless claims dropped by 36,000 vis-à-vis expectations of a rise of 6,000. Increase in upside inflation risks is being seen as a risk which might force the central bank to initiate end to quantitative easing. On the other data front, Mortgage approvals declined for a third month in a row, lending standards saw tightening with new loans declining from 48000 from 49000. Restrictive lending continues to a concern blocking growth. Another area of concern is the public net borrowing increasing by 12.4 billion. The overall deficit continues to grow and considering the concerns over troubled counterparts in the Euro-Zone UK could see its AAA rating at risk. Our outlook continues to be negative for the GBP with downside support at 1.4866 and 1.4784. A break of 1.4784 would set us up for a steep fall towards 1.4400 levels in the medium term.
  • Key data and events for the US are Chicago Fed National Activity (Monday), Existing home sales (Tuesday). On Wednesday markets would expect durable goods and new home sales. Initial jobless claims would be the highlight on Thursday while the final cut of 4Q gross domestic product and the University of Michigan sentiment index round out the week on Friday. In between Bernanke’s testimony on Wednesday would be the one to watch out for. Euro zone sees Consumer confidence (Monday) while French business confidence is due Tuesday. PMI indices, industrial new orders and the German IFO surveys are due Wednesday. Consumer prices –UK on Tuesday, UK budget release on Wednesday, retail sales on Thursday and business investment is scheduled for Friday.

Domestic Outlook

  • As discussed last week inflationary concerns continued to plague the policymakers and once the figure was out crossing 9%, the central bank wasted no time in raising the policy rates by 25 basis points. In the hindsight the timing seemed right with S&P upgrading India’s rating from negative to stable. The interest rate hikes, sustained economic recovery and capital inflows suggests more appreciation for the INR we continue to expect that 45.28 should hold in the near term. A confirmed break of 45.28 would set us up for 45.00 levels. Having said that year end importer buying and continued risk in the Euro –Zone could see the USD strengthening from these levels.

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