Economic data to sway markets

K. Raghavendra Rao Updated - March 12, 2018 at 02:41 PM.

Benchmarks may rise on momentum gained last week

Financial markets this week will dance to the tune of a slew of data coming from across the globe.

Expect high volatility as April IIP number (Tuesday), inflation (Thursday) and advance tax (Friday) will keep market-men busy. All the three numbers will show the direction in which the first quarter corporate earnings are headed.

They will also impact RBI's stance during its mid-quarter review of the monetary policy early next week. A 25 basis point rate cut has already been discounted by the stock market.

Both the Nifty and Sensex could go up another three per cent in anticipation, continuing last week's trend.

The new benchmark 10 year G-Sec (which was introduced at 8.15 per cent) is likely to remain volatile.

RBI's special Rs 12,000-crore open market operation this week is likely to counter advance tax outflow's pressure on liquidity. Eventually, yields could settle down between 8.1 and 8.2 per cent levels.

Though strategists expect pressure on the Indian rupee to continue, it could surprise by breaching 54.5 levels to a $.

Last week, Spain asked fellow Euro zone nations €100 billion to recapitalise its banking sector.

The European Financial Stability Facility's (EFSF) corpus of €440 billion was utilised for bailing out Ireland (€17.7 billion) Portugal (€26 billion) and Greece (up to €144.6 billion). If this is used for Spain, the EFSF will be left only with €148 billion. This is 30 per cent of the envisaged effective lending capacity of €500 billion when EFSF becomes European Stability Mechanism effective July 1.

Market-men are expecting the Euro to remain flat this week against the $. However, it could see an upside, contrary to expectation and breach $1.2650.

US 10-yr treasury will be volatile with a softening bias and stay between 1.5 per cent and 1.7 per cent levels this week.

Future direction will emerge only after the outcome of Greece's election and the Federal Open Market Committee's meeting on June 19 and 20. However, chartists see a long term trend reversal in US treasuries after a three decade rally in bond prices come to an end. Bond prices are inversely related to yield.

Nymex crude futures are likely to rally to $89 to a barrel this week. Gold is expected to remain bearish and could lose another two per cent from last week's close of $1591.4 to an ounce.

Finally, in a testimony to the US senate last week, the US banking regulator OCC (Office of the Comptroller of the Currency) said it would replace existing based capital rules with Basel III capital standards.

The regulator said that its supervisory team at JP Morgan consisted of 65 onsite examiners. The OCC testified that JP Morgan's $ 2-billion loss affects the bank's earnings. However, it neither presents a solvency issue to the bank nor a threat to the broader financial system.

The OCC said that JP Morgan had revised its strategy. The bank used credit default swaps as protection from potential credit losses in 2007 and 2008. However, when the bank decided to offset its original position (in late 2011 and early 2012) and reduce the amount of stress loss protection it chose instruments which were not identical to the instruments used in the original position. This introduced basis liquidity and other risks, said OCC.

When OCC examiners were in the process of evaluating the bank's current position and strategy, the value of the position deteriorated rapidly in end April and early May.

The OCC stated it will undertake a two pronged review of its supervisory activities and response.

The first would focus on evaluating the adequacy of risk controls and risk governance at the bank.

The second would be done by evaluating lessons learnt from this episode that could enhance risk control and risk management processes in banks as well as improving its approach to supervising banks.

> raghavendrarao.k@thehindu.co.in

Published on June 10, 2012 16:36