• The US Dollar finished the week as the top-performing G10 currency, staging a rally against the Euro, Japanese Yen, and other key counterparts. The DJIA and S&P500 pushed out to fresh 16-month highs this week as the first quarter lurched towards its close. Fed Chairman Bernanke reiterated that the continued need for accommodative policies and economic slack warrants low rates for an “extended period.” The news was mixed for the US housing sector this week. US new home sales fell to their lowest level ever in February, while existing home sales data declined very slightly from January levels, in line with expectations. Another political storm brewing with the US Treasury likely labeling China as a currency manipulator in its next report. It remains to be seen what impact that will have on the Treasury yields which have gone up in the past week. Fourth quarter GDP came a touch lower at 5.6 % against expectations of 5.9 % nonetheless reinforcing the view that US is recovering much faster than expected.
• Uncertainty prevailed in the Euro-Zone with a somewhat workable package that includes the IMF being announced for Greece. Market reacted by a strong selling with the pair testing 1.3250 levels on Tuesday before staging a small recovery. The bail put plan for Greece is likely to work with support from IMF. However it remains to be seen how risk appetite pan out for the Euro. We all know that Greece is not the only country in the zone standing in line for aid. The bigger worries come from Spain, Portugal and Italy. Again we would continue to maintain our negative bias on the Euro until a strong resolution on the sovereign issues is reached. Rebounds in the Euro are likely to be met with sellers at 1.3500 levels and any further political unrest among the leaders or any news impacting risk appetite is likely to take the single pair downwards towards our 1.3000 levels.
• The British Pound was broadly in range and taking support at 1.4793 close to March low of 1.4782. While we continue to maintain a negative bias on the pair with upticks being sold, it might not slide rapidly in the near term. Comments from the Chancellor about declines in unemployment and increase in public may be true but with all other major indicators pointing downwards the UK economy is far fro being out of the woods. We continue with a negative bias on the currency with key support at 1.4783 after which 1.4400 levels should not be far away.
• The economic calendar is packed for United States in the week ahead. Personal income/spending and the core PCE price index on Monday while Tuesday brings consumer confidence. ADP employment report, Chicago PMI and factory orders on Wednesday. Thursday being the important with initial jobless claims, ISM manufacturing, construction spending and vehicle sales while the nonfarm payrolls rounds off the look weekend on Friday. Eurozone has the business climate indicator, consumer confidence and German consumer prices coming out on Monday. French gross domestic product (Tuesday). The UK calendar is on the light side. For UK Consumer credit and mortgage approvals on Monday and the final cut of 4Q GDP on Tuesday with PMI manufacturing closing the week on Thursday. In other regions Japan is up for employment, industrial production, small business confidence, housing starts and the Tankan business indices on Tuesday.

Domestic Outlook

• Capital inflows due to high yields and a strong view on an appreciating INR in 2010-11 saw the pair being volatile during the week. After consolidating for the first two around the 45.60 levels the pair saw a false break out of the 45.60 levels to open at 45.70 levels on Thursday on the backdrop of risk sentiments in the Euro zone. However the upside momentum did not last much with the pair dropping nearly 50 paise in 2 trading sessions. SENSEX gains and potential bond inflows were watched. RBI hikes also set the INR on a positive footing on rate differential plays.
• Equity market inflows continued to be robust despite patches profit-taking. Speculation that cap on infrastructure related corporate bond buying limits for FII will be raised also added to the sentiment for more inflows coming in the Indian shores. Overall the INR has been bolstered from these sentiments and could remained heavy, but support on further dips could come from two fronts firstly from importers month-end USD demand, and secondly from any episodes of risk aversion that could prompt broad-based back-flow into the USD assets. We expect that the USD INR to trade between 45.10-45.60 in the coming week.

Related posts:

1. USD/INR Downside Prevails
2. USD-INR retracing the fall
3. USD-INR Choppy and Uncertain

Years back when the South African Government opened their country for outsiders to come and do mining for diamonds, entrepreneurs form all over the world rushed to South Africa in the hope of finding diamonds and changing their fortunes. Of them only very few were able to do so and become rich. But there was one African business man who instead of joining this rat race to discover diamond started the business of selling/renting hammers and other mining material whoever was coming to discover diamond. He eventually became a millionaire and one of the most successful entrepreneurs of this Diamond run.

I hope some of you must have realized the point I am trying to put here. In India currently most of the companies are running to set up the power plant to generate power and other half are running to build the great power generating turbines or boilers. But very few are there in the business of building the Balance of Plants (BOP) which accounts for more than 35% of the total money spent in building up a power plant.

Thus, I strongly believe that there is a huge potential in this sector and BGR energy being the undisputed leader with a strong order book and execution track record offers great long term investment opportunity.

I would recommend one to start a SIP form of investment in this stock for a minimum of 2.5-3 years period, since at the current levels investing lump sum might be a little dangerous given the market conditions.

Happy Investing…!!
Author: Rahul Sonthalia, Analyst, Kredent Group

Related posts:

1. BGR Energy: Recommendation Buy
2. Purchasing Power Parities (PPP) explained
3. SRF Limited – A Good Value Pick

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.

Related posts:

1. USD-INR Charting its own course…
2. Fortnightly Market Update
3. Currency markets at crucial point….

Market Developments
Global Outlook

• The US Dollar fell against all majors except the Japanese Yen, breaking out of its tight range against the Euro and testing its recent lows. A limited week of economic event risk initially left the heavily-traded currency relatively motionless, but the latter half of the week saw the Greenback considerably lower through Friday’s trade. The declines were perhaps surprising given a significantly stronger-than-expected US Retail sales report on Friday morning; robust spending gave modest hope that the US consumer may prove more resilient than previously predicted. CFTC data is mixed with Dollar’s net long positions fell from $5.58 billion to $3.99 billion, however Euro shorts rose to another record of 74551 contracts suggesting that 1.3800 would be hard to break. After the break of 80 levels in the dollar index we feel that 78.56 would a decisive level to watch. A busy week of economic event risk likewise promises considerable volatility in the days ahead.
• EUR/USD was encouraged by better equity market and stronger than expected EU Industrial Production to hunt for stops through 1.3750, despite initially hampered by Russian selling. Prices made a run close to 1.3800, but lost momentum. Equity markets were majorly buoyant for the major part of last week with S&P 500 breaking January’s high of 1150. Nikkei managed to rise 382 pts to close at 10751. Markets are cautiously looking at the upside after the consolidation which has lasted for almost two months. However only a weekly close above the 1.3800 levels should show more upside. Market is still short ahead of FOMC next week and that’s going to limit dips within a range of 1.3600-1.3800.
• The British Pound rose to 1.5200 levels and may continue to rise if the Bank of England is able to convince the markets about its current stance The British Pound may benefit if the BOE succeeds in branding themselves as standing truly at the center of the policy spectrum. Rating agency Fitch said the UK’s AAA credit rating may be jeopardized if it doesn’t do more about its fiscal shortfall reminding us that political risk could be a major factor in the United Kingdom.
• Commodity currencies continue to be bullish on the backdrop of strong economic data from Canada, Australia and New Zealand. Australia is the first country to raise rates to 4%. RBNZ left rates unchanged at 2.5% and reiterated the already stated stance of removing stimulus in the middle of 2010. The key risk for commodity currency comes from the tightening policies to cool down China.
• Key Data for the coming week are Euro-Zone Employment and US industrial production on Monday. Tuesday would be crucial with Euro-Zone CPI, ZEW survey, US Housing data and the most important FOMC rate decision (rate may not be hiked but the wordings need to be watched). On Wednesday we would see the UK Jobless and other unemployment figures for the UK with Thursday bringing focus back to the weekly jobless claims. Friday would see housing, retail sales coming out of various regions.

Domestic Outlook

• USD/INR saw downside for most of last week, though dips below the 45.40 saw importer buying interest amid intervention fears as well. As a result of such buying interest some the pair staged some sharp rally towards the upside all of which faltered at the 45.63 level. SENSEX gains aided with the INR upside though stock market gains were trimmed on fears of rate tightening on strong Jan Industrial Production for a second month in a row.
• Inflation data next week is to be the focal point and is likely to be higher on the backdrop of high weekly food prices. However we expect food inflation has peaked out and the same effect would be reflected on the WPI in the coming month which could settle in the range of 7-8%. The borrowing programme still being largely front loaded with almost 70% of the government borrowing being done in the first half is likely to keep yields in the 7.8 % levels for some time. On the whole we expect that the USD/INR to gradually tilt lower, but dips would not be very rapid till exporters start panicking. Broader range of 45.28-45.75 is seen being traded for now as the USD/INR consolidates with eyes on policy at home as well as external risks. Intraday range of 45.38-45.63 should hold as state bids and underlying strength of the INR unlikely to let the pair go either way. One more factor that might be a food for thought is that markets have started looking at the Real Effective Exchange Rate (REER) which is hovering at 112 against a historic high of 116. It remains to be seen how far the central bank stays on the side lines.

Related posts:

1. Currency Outlook – Fortnightly Currency Review November
2. Weekly currency update June 5, 2010
3. Rating upgrade, rate hike – Growth on track

Market Trends

Major Indicators

Key International Indices and Commodities

Market Developments

Global Outlook

• US Dollar finished the week on a strong note on the inherent weakness in the Euro area. On the data front it was a fairly disappointing week with a drop in Non-Farm Payrolls, continued fall in retail sales and a record US Federal Budget deficit. For now the US Dollar and mostly all currencies remain in tight range and lack of directions makes any forecast vulnerable. The coming week is expected to see housing stats and Initial Jobless Claims posing the major event risk.

• The EUR/USD traded in a tight band and overall fell during the week amidst worries of a strong dollar and other sovereign concerns. While the ECB kept rate unchanged, Prisident Trichet stated in no uncertain terms the underlying sovereign worries in the European Union. These sovereign concerns are posing a threat to the countries in the union. While countries like Germany and France have been quick  to show recovery, Greece and Ireland are reeling under their respective crisis. While the wider range of 1.4250 has still not been broken, a move to 1.4580 looks difficult.

• Gold currently trades at USD 1130 levels. Oil prices are hovering around USD 76.52 / barrel down from USD 80/ barrel and gaining demand is expected to keep prices upward biased. As the economy recovers commodities are expected to gain more strength in the coming months.

Domestic Outlook

• The domestic outlook looked set for further recovery with Industrial Production (IIP) posting a rise of 11.3% against expectations of 10%. Further, January has seen credit growth picking up to 13.2 % highest level for almost a year.

• Similar to last steep fall in October 2009, the steep fall in 2010 seems to be contained for now with the Rupee falling from the 45.28 low to current levels of 45.78. Equity flows are still strong and helped contain the retracement for the time being. Although at one side foreign flows continue to be strong, state bids and import demand would probably keep the pair in tight range for now. While major market participants expect levels of around 44.50 -45 around March, it remains to be seen how fast that happens. We expect this consolidation phase to last for some time.
• Inflation surged to 7.31% on the back of rise in food prices, making a CRR hike of around 50 basis imminent. With no major data expected for the week the focus in going to be on the month end policy review. We expect that the USD/INR could be seeing mixed impact from rate differential expectations on one hand and asset market impact on the other. On the whole though, equities remain as a strong direction provider for the INR and a range of 45.40-46 can be expected.

USD/INR (Last 3 Months)

Related posts:

1. USD/INR Downside Prevails
2. USD-INR Choppy and Uncertain
3. USD-INR Charting its own course…

Equity- BSE Sensex

Stocks started the month with a 200+ points gain on the first day but later started retreating touching a monthly low of 16601. Towards the end, stocks regained bullish momentum and in 6 trading days zoomed 863 points to close the year 2009 at 17464, gaining 3.18% since November’09.

Sensex

Stocks started the year 2009 with a pessimistic note amid fears of global recession. Consequently Sensex remained subdued in the beginning of the year and touched a low of 8047 in March, 1600 points down from 9647 as on December 31. While the world economy is still trying to recover from the slowdown, Indian stock markets picked up quite early and since March, stocks have been on a rising path. Sensex closed the year at the highest closing for the year, 17464, returning 81% since December last year

G-Sec yields

After remaining mostly range-bound for October and November, benchmark 10 year G-Sec yields witnessed selling which drove up yields to their yearly highs. Yields were rising since start of the month touching a high of 7.75% but thereafter retreating to close the year at 7.68%.

G Sec Monthly Chart

After witnessing huge buying in the second half of 2008 which drove the yields down to 5% on benchmark G-Sec, year 2009 saw yields rising since the beginning. Only a major correction was witnessed during the month of March when yields fell from 7.07% to 6.18%. Thereafter again yields continued their rising trend and closing the year at 7.59% after touching a yearly high of 7.75%.

G Sec Yearly Chart

USDINR

From the close of 46.51 on November 30, INR depreciated further to touch 47.06 as intraday high. But in the later half of the month, INR started appreciating steadily and closed the month at 46.40, 11 paise stronger than November.

USD-INR Monthly Chart

For the year 2009, INR started with its continued depreciating rally from 2008 to touch the low of 52.35, but post march, INR went into an upward spiral driven by surging foreign flows and closed the year at 46.40, 4.48% stronger over December 2008.

USD-INR Yearly Charts

Gold

After rising for the whole of November, Gold prices for February delivery declined during December. Prices were on a correcting mode all through the month and touched a low of $1075.2 per Oz from $1181.1 per Oz as on November 30. Gold closed at $1096.2 on December 31

Gold Monthly Chart

As observed during December 2008, gold prices continued their upturn well into 2009 as well. From a closing of $884 in 2008, prices continued to move up through out the year due to recessionary fears in the US and touched a high of $ 1226 towards the end of year. Gold ended the year at $ 1,026 per Oz, rising 16% during the year.

Gold Yearly Chart

Crude Oil

As observed during December 2008, gold prices continued their upturn well into 2009 as well. From a closing of $884 in 2008, prices continued to move up through out the year due to recessionary fears in the US and touched a high of $ 1226 towards the end of year. Gold ended the year at $ 1,026 per Oz, rising 16% during the year.

Crude Monthly Chart

Crude oil prices started the year in the backdrop of huge fall from $146 to $44.6. The year 2009 saw prices stabilizing with a bullish tone. Crude touched a high of $81.99 in October. Subsequently prices reduced and closed the year at $79.36 per barrel, rising 78% during the year.

Crude Yearly Chart

Related posts:

1. Indian Economy – Review and Analysis, November 2009
2. Indian Economy – Review and Analysis, October 2009
3. Indian Economy – Review and Analysis, February 2010

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.

Related posts:

1. Fortnightly Market Update
2. Indian Economy – Review and Analysis, November 2009
3. RBI likely to raise rates in todays monetary policy review

Exchange Rates

Key International Indices and Commodities

USD/INR Weekly outlook

The USD INR broke the 46.77 support level during the week and was bearish for major part of the week. Every uptick continues to add more shorts to the market and upside remains far off at 46.77 levels. Upside can only be confirmed if it breaks above these levels. More downside would be confirmed if break above 46.35 levels is confirmed.

Related posts:

1. USD-INR Choppy and Uncertain
2. USD-INR retracing the fall
3. USD-INR Charting its own course…