3rd Quarter Monetary Policy and its Internals.

                                3rd Quarter Monetary Policy and its Internals.
 •The GDP growth moderated from 7.7% in Q1 to 6.9% in Q2 mainly due to deceleration in industrial growth from 6.2% to 2.8%. However what is of importance is why this deceleration has happened. There was a contraction on fixed capital formation where in real fixed capital formation as a percentage of GDP fell from 31.2% to 30.5%.Fixed capital formation represents the acquisition of fixed assets by private businesses, government enterprises and households and hence in totality represents the addition of capacity in and economy. The contraction in fixed capital formation along with a slowdown in non-farm credit from 21.3% to 15.7% represents reluctance on part of companies to take up new projects and add capacity. This assumption becomes more plausible when one considers that the slowdown ion non-farm credit has been sharp in real estate, infrastructure, cement and engineering goods. This is particularly worrisome when one considers the fact that at least on the infrastructure front the India story is supposed to be insulated from the global economic slowdown. India is in dire need of infrastructure projects and needs more than a trillion dollars for investments in infra. The slowdown in infrastructure is hence not due to slowdown in the global economy but due to lack of clarity on the policy front. Eg the government being a coalition one seems to be taking one step forward and two backwards, point being the flip flop in FDI in retail. So as far as this aspect of the economy goes it can be easily solved by the finance minister by showing some courage on the policy front

. • Inflation Internals
The WPI inflation which averaged 9.7% during April October 2011 period moderated to 9.1%, however this moderation was more due to the fall in the food inflation which entered negative territory. This decline was more due to a sharp decline in the prices of vegetables and fruits, while other food articles especially protein articles showed only a marginal decline from 8% to 7.1%. The weightage of fruits and vegetables in WPI is 3.84 as compared to 2.41 for eggs fish and meat, hence as soon as winter season gets over and fruits and vegetables prices start rising we can expect a jump in the WPI as well. Even the non-food manufactured item inflation remained high at 7.9%, the fuel inflation remained high at 14.9% and considering that much of fuel consumption in India is subsidized there is a pent up inflationary pressure in these fuel items which may burst out as soon as government wakes up to the deteriorating fiscal situation and claws back the subsidies.

 Considering all the factors related to the WPI we should expect the RBI to adopt a wait and watch policy as far as repo rate is concerned and if inflation continues to remain high in the medium term the much expected softening of repo rate in March may remain an elusive dream for India Inc.

 • RBI cut the CRR by 50 bps to release 32k Cr in the markets.
 However this seems to be more of an act aimed at loosening the tight liquidity conditions faced by the banks than one aimed at stimulating the economy. The banks have been facing a very tight liquidity condition which is seen from the fact that average borrowing from LAF facility increased from 420 Bn Rupees during April September period to 920Bn Rupees during November and further to 1170Bn rupees in December i.e. an increase of 178% which is quite worrisome.

 • Pressure on Rupee may continue.
The current account deficit widened to 3.7% which is above the 3% comfort level of the finance ministry, also the upcoming demand for dollars by India Inc to repay the maturing FCCBs of around 5.8bn $ in 2012 and flight to safety of global investors towards dollar assets is likely to keep up the pressure on Rupee. Capital flows in to India will continue to be under pressure as European banks which account for 15% of all loans in Asia pacific will cut down on lending to shore up their balance sheets.

 Considering all the factors the first half of 2012 is going to be increasingly challenging, however turnaround can be easily achieved on investment fronts if the government comes out with a bold budget and introduces much needed economic reforms. As far as the monetary situation goes the RBI always had this mandate of controlling he inflation and attending to stability in the money markets, after having raised the rates 13 times in last 18 months we cannot expect the RBI to let go of the stranglehold so easily. The governor will most likely wait for the lag effect to kick in and will leave the responsibility of stimulating the economy on the government.

Dr Copper

Dr Copper

Copper is called as Dr Copper as it reflects the overall health of global economy. The varied industrial uses of copper means that at any point of time the movement in copper prices can act as an indicator of future movements in the equity markets. This phenomenon can be seen in the accompanying chart where most of the times rise and fall in copper prices precede similar movement in Dow jones. 

Now looking at the copper chart for past one year, we find that it had attained the ascending triangle target of 58.50 to 59 which then acted as strong resistance. Since then copper has fallen rapidly followed by a fall of equal magnitude in global equity markets. There is a strong positive divergence on the chart and in last few sessions volumes on down days have been very low when compared to volumes on up days, this indicate that copper may find strong support at recent lows 50.80-50. For copper to rally from now on it has to break strong resistance at 54.50 above which it can target 55.60-56.

Below 50 copper can easily touch 49 and lower levels which will mean that Dow and SnP will break their recent lows. However a rally above 55.50 will mean a relief rally is on cards in the global equity markets.

Gold and the US debts deal

Gold and the US debts deal

We know that politicians in US are still bickering over the intricacies of the debt deal which will allow US to raise its debt limit so that it can continue with its debt payment to its army, pensioners and most importantly international players holding US bonds. In an unlikely event where US government is not able to raise the debt ceiling we are likely to see US treasuries lose their prime rating as a risk free investment destination. People across the world will start to look for alternative  risk free investment avenues for themselves, and gold will feature prominently in that list.

Gold has historically acted as a hedge against inflation, and now it will act as a safe haven for investments in case US defaults on its debt payments. So it’s important to look at gold chart and ponder over the effect that US debt deal will have on gold.

Any substantial debt deal which promises to cut US deficit significantly and at the same time assures that US congress won’t have to negotiate on another debt ceiling raise in the short term will put pressure on gold and we will most likely see gold fall below its important support level of 1579$.

As it is gold is showing a huge negative divergence on the charts indicating that a US debt deal will be reached in nick of time so it is good to put a trailing stop loss at 1579$ when it comes to long trading positions, however investors who are in gold for long term can continue to hold on to their long positions as globally fiscal situation is still weak and in inflation scenario in India is still not under control.

If a US debt deal is not reached and US defaults we are likely to see a strong spurt in gold as investor will rush in to safe assets and at the same time short positions will be covered up in a hurry. Even a debts deal which is short term in nature and results in credit rating downgrade will result in a further rally in gold.

Right now the most probable scenarios is US congress is able to reach a significant debt deal and we see a softening in gold prices to at least 1579 $.. It is worthwhile to assume that a debt deal will be achieved considering that the US and global economy is at stake.

Why Nifty might just survive 5320.

Why Nifty might just survive 5320.
Nifty continued its fall in the last week and now stands at crucial support zone of 5400-5320. As seen in the chart support at 5400-5300 is provided by a long term trendline which has provided support in sever falls, there is a good chance that nifty might bounce from these levels itself. The OI in 5400 puts is significantly greater than 5400 calls implying put writing at 5400 and hence there is strong chance that nifty will try to go abo

ve 5400. If this trendline is broken in the coming days nifty is most likely to test its previous swing low of 5320 odd levels.
If nifty breaks 5300 then it might quickly test 5200 to 5115 as many stop loses will be triggered and traders will look to exit their long positions quickly.
The news flow in past month has been mixed; while the inflation continued to remain high the advance tax number grew by 15% over the same period last year thus signalling better corporate earnings in the coming quarter. RBI has indicated that it will go slow with its rate hiking programme amid global concerns.
Negative news flow also continued with no consensus in EU over the Greece problem, Headline inflation has increased to 9.1% in May from 8.7% in April; also the pause in policy and fiscal reforms is hurting the investment flow and is responsible for markets staying sluggish.
One of the sectors to watch out in the coming days is the Tea sectors as production in Africa is low due to draught; this has led to a rise in the tea prices with global demand staying strong. So investors can keep an eye on tea companies for outperformance.

Snp the mother of all equity markets stands on the edge.

Snp the mother of all equity markets stands on the edge.
SNP the large cap based index is most probably heading towards an important support area of 1250 after the uncertainty in the global financial markets increased with EU not able to come to a consensus over the Greece problem and the republican party in US coming out with statements that a temporary technical default by US on its interest payment on bonds would be tolerable.
The SNP has shown a failed inverse head and shoulder pattern which failed to take off after breaking past the resistance and has since then fallen down to what many consider a major support area near 1250.1250 represents the 200 day moving average as well as it is a important support area on the Fibonacci retracement levels. There is this small +ve divergence on the MACD which can offer some solace to battered bulls.
Going forward there can be two scenarios which can play themselves out.
The 1st is the most probable and the best case scenario; The SNP finds a much needed support at 1250 and then bounces back to its resistance levels of 1295 and then remains range bound till US Congress comes up with a suitable solution to its Debt limit problem.
There are positive news regarding US companies earning and other macro-economic data
1. Macy’s US second largest retailer has raised its 2011 profit forecast; similarly INTEL has also raised its profit forecast.
2. Since March 2010 private employers have added 2.4 M jobs which are about 25% of the 8.8 M lost in the recession.
3. Oil has fallen to 94.95$ from 100$ and looks set to test lower levels of 92.50$, this means lower cost for corporation all over the world
4. Housing foreclosure fell yesterday, but the housing market still remains weak.
All these positive news along with technical indicator makes the 1st scenario to be the most probable one.
The 2nd scenario is where the SNP breaks 1250 and 1225 and goes on to test lower levels of 1175 which means a further fall of 6%.
This can happen if Greece defaults on its bond payments and sets off a contagion effect in the Europe which results in a rally in Dollar.
The US Congress fails to come up with a suitable solution to its debt limit problem over the next one month.
The housing market in US shows further weakness and still the fed refuses to come up with QE3 programme.