Nifty June Futures - Important Levels for Friday, 21.06.2013.

TREND DECIDING LEVELS : Today, the Important Trend Deciding Levels on Lower side is 5635.  Below this, next important level is  5615-5585. (This levels, Either Acts as a support while Nifty is moving in downward direction orActs as a down side Break out/Break down Trigger level which fuels further downward movement from here).

Today, the Important Trend Deciding Levels on Higher Side is 5665-5685.  Above this, next important level is  5700-5715. (This levels, Either Acts as a hurdle while Nifty is moving in upward direction or Acts as a Upside Break out Trigger level which fuels further upward movement from here).
Stock Tips For Friday, 21.06.2013.
Tata Motors : : Buy This Stock Near 286-284. Stop Loss 282. Targets 288, 290, 292, 294, 296.(Break-Out Levels: Buy Above 292. Sell Below. You can also Buy Above or Sell Below Near the Given Break Out Levels to Earn Some Sure Shot, Quick & Small  Profits).

Liquidity Update And Takeaways

System liquidity has improved significantly over the past few days. As at end of last reporting fortnight (14th June), the system liquidity deficit had slipped to less than INR 60,000 crores; well under the 1% NDTL comfort zone of the RBI. While there is some near term deterioration due to advance tax outflows, liquidity is expected to improve even further towards early July once advance tax returns to the system as government spending. There are two reasons for this expectation:
1. The biggest driver for liquidity since the start of the financial year has been a sharp pick up in government spending. As at last data, the government’s surplus with RBI had practically vanished on account of aggressive spending. This surplus had averaged almost INR 90,000 crores between Jan – March of the current year; thereby frustrating RBI’s liquidity efforts and triggering OMOs. Given the finance minister’s repeated assurances that government will not curtail spending this year, it is likely that the government does not rebuild any significant positive cash balance with the RBI in the time ahead. This may be especially true for the near term as the government is also in the process of paying INR 45,000 crores of last year’s oil subsidy to oil marketing companies.
2. There are seasonal paybacks from currency in circulation between now and September to the extent of INR 30,000 crores that adds to system liquidity. After September this effect reverses, and there is draw-down from the system of approximately INR 90,000 – 1,00,000 crores over October and March.
Interpretation As the liquidity deficit narrows further, it is likely that it leads to speculation that better liquidity is here to stay and is consistent with RBI’s efforts to improve transmission on monetary policy. Indeed, as we have noted before, there are sections of the market who are calling for RBI to engineer a positive liquidity scenario in order to better monetary policy transmission. We have also noted before the difficulties of doing so on a sustained basis (refer “Can aggressive monetary easing create a funding problem in India”, dated 29th May for further details). It is imperative to note that the current improvement in liquidity is owing to heightened government spending and seasonal reversals in currency in circulation and not due to any design by the RBI. The RBI’s laying off OMOs and CRR cuts more than adequately demonstrates this point. Also, the improvement in liquidity will be temporary and will likely reverse from September. Of course, in this whole discussion the RBI’s forex operations is a wildcard. Should the RBI be forced to intervene aggressively to defend the rupee, then the anticipated easing of liquidity may get muted. Market Implication All things equal, this phenomenon should lead to incremental steepening of the yield curve. Better liquidity will provide more incentive to buy front end rates. Whereas absence of OMOs may focus market attention on supply pressures for the long end (net supply of government bonds till August end is more than INR 150,000 crores). However, an important caveat here will be with respect to the rupee. Should the broad global anxiety remain and led to continued rupee pressures, it may negatively impact all parts of the yield curve. Investors should continue to match risk appetite and investment horizons with product selection.

Interpretation and View Forward

There are 2 components to what impact recent developments can have on the market:
1. What happens to RBI rate expectations: Market is likely to start anticipating a greater emphasis from RBI on mitigating external vulnerabilities and addressing current account risks. Also, the cumulative effect of currency depreciation may reduce the extent of inflation fall to some extent. Given these considerations, the market has already priced out a July rate cut expectation. The risk will be that if the current theme continues, participants may be forced to pare down future rate cut expectations as well. Importantly, this factor alone should impact those parts of the yield curve that are most sensitive to rate cut expectations today. For instance, government bond yields recently have been running on rate cut expectations alone and not worrying as much about the net supply of INR 150,000 crores plus that is due over the next 2 months or so. Should rate cut expectations get further dampened, the focus will shift to supply absorption and yields may start to drift higher. On the other hand, the „front end‟ of corporate curve (or for that matter the government bond curve) does not need near term rate cuts as the term spreads are already quite attractive.
2. The Current Account Deficit discussion may become a Balance of Payment debate: Thus far the RBI‟s concerns have been on vulnerabilities that may potentially arise owing to India‟s high current account deficit. Hence, a reduction in the CAD was conditionality for further meaningful rate cuts. Funding the CAD in the current environment was never perceived as an issue given the strong portfolio, ECB, and NRI flows that have been coming into the country. However, should the current global construct not improve, the concerns may shift towards financing the CAD. In other words, the worry may shift from a high CAD to a possible balance of payment (BoP) risk should it be deemed that capital flows may prove to be insufficient to fund the CAD. It has to be stressed here that given India‟s substantial forex reserves, there is no scope for a crisis on this account. What is only being debated here is whether policy concern will have to shift towards financing the CAD without touching our forex reserves. Should such concerns arise and become subject of generalized debate, then all parts of the yield curve can potentially come under pressure.
If investors agree with the above framework, this also gives clues towards portfolio strategy. If events change market‟s expectation of RBI rate cuts back towards bullishness, then it would make sense to start buying government bonds again. A clear trigger that can make this happen is that if a strong dollar and weak global growth start pulling oil prices down as well. If policy efforts can stabilize the rupee, that can cause a change in sentiment as well. Should such triggers not materialize, then our bias will be to wait for better risk premiums on the government bond curve that account for lack of near term rate cuts. Importantly, front end rates can be bought irrespective as long as the debate is only on whether RBI will cut now or not.
The second point about a BoP debate can be mitigated by visibility of flows. Should policy makers react with near term solutions like an NRI bond that can potentially solve the problem of flows and thus put the debate to rest; at least for some time. Alternatively, should the RBI manage to stabilize the rupee at some level, it may get FII interest back into the country and automatically put to rest the funding debate. Even though the potential disruption from point 2 above can be huge, our bias is to expect that this fear will not materialize. Either policy efforts or market forces or both should eventually lead to some currency stability (although at what level remains open for debate at this point). Hence, we continue to hold on to our front end rate positions. On the issue of point 1 above, there is a chance that market interest rate expectations may take time to settle. In the meanwhile, market will have to contend with weekly supply pressures on government bonds. For these reasons, we may add back government bonds (or the long end of corporate curve) more slowly waiting either for better pricing of risk premiums or some change back in market‟s forward rate expectations.
The recommendation to investors remains exactly the same. It is prudent to allocate 50% of new allocations to short and medium term funds, and the balance into dynamic and income funds. The rationale for this has been discussed before (refer “Recent market developments and investor takeaways”, dated 11th June for details). We continue to run dynamic and income funds actively in line with our evolving assessment of the macro-economic environment. At this juncture these funds are running conservative maturities and higher cash levels. We will look to increase maturities, based on triggers mentioned above.

US FED Meeting: Takeaways for our bond market

The Event 
The highly anticipated meet of the US Federal Reserve concluded yesterday. The outcome as interpreted by markets is not the most desirable insofar as it cements expectation of a „tapering‟ in the Fed‟s QE program starting sometime late this year. The Fed‟s outlook on the US economy as well as statements assessing receding in downside risks seemed to indicate greater confidence in the strength of recovery. Also, in the post policy conference Chairman Bernanke indicated a much lower threshold for tapering asset purchases; even though he indicated a much higher threshold for an actual hike in policy rates. Should the Fed‟s current economic projections pan out, the Chairman indicated tapering in QE starting later this year and a complete halt by mid of next year. Importantly, however, this is based on economic forecasts panning out. Should they undershoot expectation, the tapering may get delayed or the program may in fact be hiked as well. Furthermore, the Fed is likely to continue to reinvest maturing assets so as to keep overall size of their balance sheet from reducing even when new asset purchases stop.
The Effect
Emerging markets across the world have been volatile ever since the first hint of QE tapering was picked up from Fed comments in May. Currencies and bonds have been sold across these countries as investors have started portfolio rebalancing in light of Fed expectations. The rupee has borne its share of brunt as we are amongst the highest current account deficit countries in Asia, and hence deemed the most vulnerable. On the other hand, given limited FII participation in Indian bonds, rise in bond yields has been very muted when compared to more „open‟ countries like Indonesia. Today, post the event, the rupee has depreciated further towards the 60 mark while bond yields have risen by around 10 bps.

Nifty June Futures - Important Levels for Thursday, 20.06.2013.

TREND DECIDING LEVELS : Today, the Important Trend Deciding Levels on Lower side is  5800.  Below this, next important level is  5770. (This levels, Either Acts as a support while Nifty is moving in downward direction orActs as a down side Break out/Break down Trigger level which fuels further downward movement from here).

Today, the Important Trend Deciding Levels on Higher Side is 5825.  Above this, next important level is  5845. (This levels, Either Acts as a hurdle while Nifty is moving in upward direction or Acts as a Upside Break out Trigger level which fuels further upward movement from here).
Stock Tips For Thursday, 20.06.2013.
Tata Steel : : Buy This Stock Near 290-289. Stop Loss 287. Targets 291, 293, 295, 297.  (Break-Out Levels: Buy Above 293.  Sell Below 289 and Below 287.

The Wealth Effect Restoration

The Wealth Effect Restoration
Part of the story of improving U.S. growth later this year and next is the restoration of household net worth to, or above, its’ pre-recession high. While markets are uncertain about what data will be the tipping point for the start of QE tapering, asset refl ation has been one of the goals of the Fed’s ultra-accommodative monetary policy, which until very recently had kept real yields across much of the Treasury curve in negative territory. Indeed, real yields on 10-year Treasuries had been negative for 18 consecutive months until fi nally turning positive about a week ago.
Those negative real yields were intended to encourage investor capital to fl ow into risk assets and subsequently drive up asset prices, which for the most part they have. Admittedly, the forces of asset refl ation have been somewhat uneven across asset classes (with commodities no longer participating in refl ation and single family home prices a late arrival to the refl ation party) and across American households. But, in aggregate, the wealth effect is back, even after taking into account that it is not adjusted for population growth. Not that the restoration of the wealth effect is a key policy benchmark for the Fed -- unlike, say, a 6.5% unemployment rate – but is,nevertheless, something that the Fed almost certainly views as a favorable development.Stocks and houses: The trajectory of the decline and recovery in household net worth can be seen in Exhibit 1. After a sharp loss of some US $15 trillion over the course of six calendar quarters, household wealth has recovered over the 16 quarters since its trough in March 2009. However, as can be seen, the recovery has not been linear.Indeed,there has been a recent J-curve effect as a strong stock market recovery has been joined by single family homes finally gaining some pricing traction.
As a result, 2012 was the strongest year, thus far, in household wealth recovery, with a gain of over US $6 trillion recorded last year. Of that, US $2 trillion came from mutual funds and corporate stock holdings. An additional US $800 billion came from pension fund assets (both defi ned benefi t and defi ned contribution). And, after several consecutive years of decline, single family homes fi nally made a positive contribution to the asset side of household balance sheets, adding US $1.5 trillion to the wealth effect last year.

TOPIC SUMMARIES Economic Insights

SAME OLD, SAME OLD: Economic data this week showed trends similar to the last several months: the U.S. returning to health; a recession starting to fade a bit in Europe; headwinds for emerging markets as China rebalances toward consumer spending as the growth driver.

• THE TAPER CONUNDRUM: The Fed will likely tamp down hard on taper talk at this week’s meeting. While it doesn’t want interest rates to rise, it does want sustainable growth, which is likely coming; yet, faster growth will bring higher interest rates.

• TIMING THE CRISES: Global growth trends are diverging: a U.S. recovery is underway, Europe is still in recession, and emerging markets face headwinds. The timing of crises is the differentiating factor.

• RESTORING THE WEALTH EFFECT: Gains in stock and home prices helped boost household net worth above its pre-recession peak. Improved confi dence from better financial positions is providing a boost to consumer spending, part of the Fed’s strategy for recovery. Some businesses are taking advantage of the ultra-low interest rates and re-leveraging.

Weekly Data…Same Old, Same Old
It was a slower data week for much of the world, but the reports that emerged showed trends similar to the last several months: the U.S. economy is gradually returning to health; better data suggests the recession in Europe may be starting to fade; and, there are headwinds for emerging markets along with what is likely a “new normal” in China.

Nifty June Futures - Important Levels for Wednesday, 19.06.2013.

TREND DECIDING LEVELS : Today, the Important Trend Deciding Levels on Lower side is  5810-5790.  Below this, next important level is  5765-5745. (This levels, Either Acts as a support while Nifty is moving in downward direction orActs as a down side Break out/Break down Trigger level which fuels further downward movement from here).

Today, the Important Trend Deciding Levels on Higher Side is 5825-5845.  Above this, next important level is  5865-5880. (This levels, Either Acts as a hurdle while Nifty is moving in upward direction or Acts as a Upside Break out Trigger level which fuels further upward movement from here).
Stock Tips For Wednesday, 19.06.2013..
Tata Motors :  : Buy This Stock Near 297-295. Stop Loss 293. Targets 299, 301, 303, 305.  (Break-Out Levels: Buy Above 299. Sell Below 293. You can also Buy Above or Sell Below Near the Given Break Out Levels to Earn Some Sure Shot, Quick & Small Profits).

Mid Quarter RBI Policy - Review and Implications

The Event
The RBI kept all rates unchanged as was the broad consensus. The assessment was broadly consistent from before. On growth, the role of government policy in accelerating investments was emphasized yet again. On inflation, while the central bank acknowledged the recent softening due easing global commodity prices and weaker local pricing power, food inflation has been highlighted as a clear source of worry. Also pressures from suppressed inflation release on account of hike in administered prices as well as effect of recent rupee depreciation may pose upside risks. On the current account, while the RBI estimates some improvement this year, the main challenge still is to bring overall CAD to a ‘sustainable level’ and in the meanwhile finance it through stable flows. In terms of forward guidance, the RBI is fairly open ended saying stance will be determined by how growth, inflation and balance of payment situation evolve in the months ahead. Importantly, it emphasizes that it is only durable receding of inflation that will open up space for monetary easing. The vigilance on external risks is also intact with the RBI saying it stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse development. However, the explicit mention that policy can move in either way to respond to external risks has been deleted.
Interpretation
While a status quo on rates was very much expected, market has interpreted the open ended guidance as being lesser hawkish than the last policy. That coupled with the technical reason that most participants were light on duration, has led to a rally in bonds. In our view, the tone suggests more of a wait and watch approach which may extend should the balance of data deteriorate. The reference to ‘durable receding of inflation’ suggests that the RBI wants to look at more than one data point from here in order to ascertain that the risks mentioned don’t change the inflation trajectory. A similar stance seems to be in evidence when assessing external risks as well. The focus on ‘adverse developments’ argues against an immediate hurry to ease on some marginal easing of external (chiefly rupee) pressures.
Going Forward
The next immediate trigger will clearly be the US Federal Reserve meet this week. Should the Fed move decidedly to soothe fears on policy and hence trigger a strengthening of the rupee, then the market may extend today’s gains. Conversely, should the currency depreciate as an outcome of the Fed meet, the market may again adopt a cautious stance in the near term. However, what matters more for investors is the medium term outlook and takeaways. From that standpoint, nothing changes from the assessment that we have described earlier. Broadly speaking there is now greater appreciation of two-way risks and hence likelihood of greater two-way price volatility till some of the macro-risks described here and before iron out. The government bond market enters a period of more than INR 150,000 crores of net supply between here and end August. Besides, most of the current actively traded bonds will soon go off-run which will also have to be factored by the market. Against these, the liquidity outlook argues against OMOs in the near term as government spending has picked up and the system sees some seasonal reversal in currency in circulation during this period. Overall, market may continue in a trading range given these triggers, with rupee and the external account clearly posing the largest near term vulnerabilities. Shorter end rates don’t need RBI rate cuts to be well supported. However, currency stability is a key requirement for performance of all parts of the bond curve.