It is not the strongest or the most intelligent who will survive but those who can best manage change.

– Charles Darwin 

Month of February did manage to show the consistent trait of financial markets – CHANGE –  as it saw various asset classes moving without a correlation and no single theme running through them.  Policy outlook uncertainty ruled the sentiment as last mile journey towards inflation goal was proving tough.  Highest volatility was seen in cryptos while it was the least in the currencies.  But some direction seemed to be emerging towards the end of the month, though bigger breakouts were not visible in the currencies. 

The major themes that guided the markets were- 

1. Divergence between market expectation on rate cuts and FED statements on the same narrowed down 
2. Stickier inflation numbers  confirmed by CPI, PPI and PCE data in the U.S.  In Europe, they were mixed across countries  
3. Stocks continued to make new highs in various regions.  Nikkei made a new all-time high after 35 years surpassing 40000 marks 
4. New age tech stocks, AI companies led the rally in US markets, while investors in other markets followed US cues  
5. Economic picture in the U.S. remained strong on employment, but was on the slowing side in manufacturing and forward-looking indicators 
6. Europe showed more stabilizing picture which encouraged investors to diversity more into European assets.  UK Pound remained attractive due to its highest policy rate after U.S. 
7. China markets were on the other extreme, dropping to lows seen during the Covid time.  Government measures of cutting policy did not result in sustainable rallies leaving more expectations for structural reforms unfulfilled.  Policymakers were intervening in stock and currency markets continuously.   
8. Emerging markets were less exuberant having rallied hard for several months, but India stood out with robust data on GDP, manufacturing and inflation slowly inching down.  Equities continued to make new highs regularly.   
9. Crypto market saw record rally, with Bitcoin gaining nearly 62% in the last one month.  The fresh rally was aided by the new ETFs launched in the U.S. with huge demand from small investors and big alike. 
10. Gold was the other asset class to rally 8% in one month as investors diversified marginally from equities and bonds and on conviction that rates had peaked across economies, though uncertainty about timing of cuts remained.   
11. February marked the third straight month of no hikes from G10 central banks – the longest such streak since summer 2021. Central Banks of Australia, New Zealand, UK, Sweden and India met during the month of February but decided to leave policy rates unchanged. 

KEY ECONOMIC DATA FOR MAJOR COUNTRIES 

During the month mixed data has been observed from U.S. but quite some numbers from Europe improving.  UK was steady but China continued to struggle, still awaiting big policy moves from the Government.   

U.S. employment data surprised to the upside with Non-Farm Payrolls rising by 353000 during January vs. market forecast of 180000, but the household survey actually indicated employment dropping.  Also rise in jobs was due to more part-time jobs being created.  Another indicator of weakness was average weekly hours worked that came at 34.1 vs. 34.3 which means more people were employed by reducing the working hours in general.   

Leading Economic Index – It was the 23rd straight monthly decline, just one month short of the record-long slump that began in April 2007 and ran through March 2009 during the global financial crisis.  The LEI is a forward looking indicator which gives a sense that in the months ahead the economy may be slowing. 

Manufacturing PMI in the U.S. economy fell from 49.1 to 47.8 and it was the 16th straight month the PMI remained below 50, which indicates contraction in manufacturing.   The ISM Services PMI for February dipped a bit to 52.6 vs. 53.0 forecast and 53.4 in January. Employment fell dropping back into contraction to 48.0 from 50.5 in January, which was the second lowest since Q3 2020. Factory orders in the U.S. in January saw the biggest contraction since April 2020.   

	U.S.A	EUROPE	U.K.	JAPAN	CHINA	INDIA
Particulars	current vs. prev	current vs. previous	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.
GDP QOQ	3.2 VS. 3.3%	0% vs. -0.1%	*-0.3% vs. -0.1	*-0.1 vs. -0.8	1.0 vs. 1.3%	8.4 vs. 8.1%
Ind. Prod YOY	0 vs. 1.2%	1.2% vs. -5.4%	0.6% vs. 0.1%	*-1% vs. -1.4%	6.8% vs. 6.6	3.8 vs. 2.4%
PMI MFG	52.2 vs. 50.7	46.6 vs. 4.4.	47.3 vs. 46.2	48 vs. 47.9	49.1 vs. 49.2	56.9 vs. 56.5
PMI SERV	52.9 vs. 51.4	50.2 vs. 48.4	53.8 vs. 53.4	53.1 vs. 51.5	51.4 vs. 50.7	60.6 vs. 61.8
Jobless Rate	3.7 vs. 3.7	6.4 vs. 6.5	3.8% vs. 3.9%	2.4 vs. 2.4	5% vs. 5%	3.1% in 2023
Inflation
Headline	3.1% vs. 3.4%	2.6 vs. 2.8	4% vs. 4%	2.2 vs. 2.6	*-0.8 vs. -0.3	5.1 vs. 5.69%
Core	3.9% vs. 3.9%	3.1 vs. 3.3	5.1 vs. 5.1%	2% vs. 2.3%	0.6 vs. 0.8	3.6% vs. 3.9%
Consumer Confidence	106.7 vs. 110.9	*-15.5 vs.-16.1	*-22 vs. -24	39.1 vs. 38	87.6 vs. 87	92.2 vs. 92.2
Leading Eco. Index	*-0.4% vs. -0.1%	*-0.8 vs. -0.7	*-0.1 vs. -0.3	110.2 vs. 108.1	*-0.1 vs. -0.3
POLICY RATE	5.25-5.5%	4.50%	5.25%	-0.10%	3.45%	6.50%

EUROPE: The current account surplus in the euro area grew to €32 billion ($34.5 billion) in December, up EUR 22 billion surplus in the previous month.  In 2023, the current account balance posted a surplus of €260 billion or 1.8% of euro area GDP, shifting from a €82 billion deficit or 0.6% of euro area GDP in 2022.  The strong performance on the Current Account is a big positive macro particularly when you compare it with the U.S. which runs around USD 200 bio deficit annually.  This remains a big support for Euro Area macros remaining stable. 

On the cyclical side, Eurozone’s key services sector picked up to a seven-month high in February, coming at 50.2 (yes, expansion) vs. 48.4 in January, while composite index also moved closer to expansion at 49.2.   

CHINA: After China made a big move to stimulate the economy by cutting the Reserve Rate Requirement by 1% which released 1 trillion Yuan of additional liquidity to the system, they cut the 5-year loan facility rate by 0.25% (largest measure of cut) to boost the economic activity, but markets were disappointed as they looked longer term rate cut.   

INDIA: The GDP number was a massive surprise to markets and analysts, coming at 8.4% vs. 6.6% expected.  However, if you look at the GVA (Gross Value Added Product), the number at 6.5% was mildly moderating.  This is because GDP included higher tax collection as well as cut in subsidies.   

BOND MARKET: Bond market was again volatile during the month driven by alternate bouts of good and modest data from the U.S. and also influenced by frequent verbal intervention from Fed Speakers.  Broadly, yields remained capped near the recent highs on market’s belief that FED will sooner or later cut rates, though exact timing still remains debatable.   

After the initial big move lower when budget was announced in February, yields in India have remained well supported above 7% for 10 year awaiting more clues on inflation and global rate moves.   

Equity Markets 

It was a record month for many markets across the globe in February as many of them hit alltime highs, mainly driven by liquidity.  In U.S. the charge was led by big rise in AI related stocks after their numbers beat street estimates. European assets were in demand due to hopes of economy bouncing. Japanese Nikkei hit a new all-time high after 35 years (last seen in 1989 at 37887 and now new high at 40499). 

Indices	29th Feb 2024	31st Jan 2024	Abs Change	% Change
Dow Jones	38,995	38,150	845	2.22
S&P 500	5,096	4,848	248	5.12
Nasdaq	16,091	15,164	927	6.11
German DAX	18,678	16,903	1775	10.50
UK FTSE	7,630	7,630	0	0.00
China Composite	3,015	2,788	227	8.14
Japan Nikkie	39,166	36,286	2,880	7.94
India Nifty 50	21,982	21,725	257	1.18

China continued to underperform others although it did show some bounce after rate cuts and moral suasion by the Chinese authorities asking their institutions to buy shares and also restrictions on selling.  India had a rare underperformance during the month ending almost unchanged from previous month.  Technically, it has formed a DOJI candle at the multi-year top and after rising almost 200% from its Covid Lows.  Just for a comparison, it can be observed that the Chinese Market is still languishing near the Covid lows.   

Stocks seem to be trading with very rich valuations in most markets and one can expect a sudden bout of corrective fall in the coming months, quite likely in March as one heads into quarter end repatriations.   

Currency Markets 

Currency	29th Feb 2024	31st Jan 2024	Abs Change	% Change
USD Index	104.16	103.27	0.89	0.85
EURUSD	1.0803	1.0816	-0.0013	-0.12
GBPUSD	1.2623	1.2685	-0.0062	-0.49
USDJPY	149.98	146.88	3.1	2.07
USDCNH	7.2065	7.1849	0.0216	0.3
USDINR	82.9	83.095	-0.195	-0.24

Currencies remained mostly rangy during the month awaiting stronger clues from the Central Bankers on rate moves.  As US yields remained capped, Dollar carried slightly bearish bias except against the JPY which retested highs near 151.  However, Japanese officials promptly came out with verbal warnings on excessive moves.   

EURO was supported due to rising hopes of economy bouncing and also its strong current account surplus.  Even a rate cut by ECB eventually has been discounted.  In fact, in a survey, roughly one in five of the 75 central banks surveyed by the London-based OMFIF think-tank anticipate increasing euro holdings over the next two years, its recently published 2023 report showed. While 7% looked to decrease euro holdings, net demand was higher than for any other currency during the period and a jump from the 2021 and 2022 surveys of reserve managers controlling nearly $5 trillion (Reuters) 

Recent Rupee moves have been in the same direction as DXY although the same is of much lesser magnitude.  Flows have been strong for Indian Bonds and even restarted for equities after a lull period.   

China Yuan still trades near the weaker end of its range despite Central Bank actions to support it as foreigners have taken a sober attitude towards investing in China until the next US elections, despite valuations looking very attractive. 

Key themes/market drivers in India – 

1. Strong growth picture continuing as per the GDP data and PMI surveys 
2. Equity markets have been attracting fresh investments despite some expressing concerns on valuations. 
3. Bonds attracted large flows of over USD 5 bio in this calendar year. 
4. RBI is unlikely to cut rates until fourth quarter of this year thus keeping rupee yields attractive for inflows. 

Outlook:  Global 

The emerging view of U.S. Exceptionalism to take a backseat as more and more data is coming on the slowing side.  Eventually FED will cut rates as soon economy experiences recessionary tendency. The structural deficit of USA (Debt to GDP of 135%), fiscal deficit of 6.5% and trade/current account deficits make it vulnerable without foreign funding.  Any monetisation of debt due to lower foreigner demand will weaken the Dollar substantially.  Thus, both structural and cyclical factors are turning against the Dollar. 

Expect Dollar Index to break 102.50 in the coming days/weeks setting up a retest of 100 psychological marks.  Accordingly, EURO should move towards 1.12, JPY towards 145 and GBP towards 1.30.   

Outlook:  India 

Looking at the various macro developments in the Indian economy, one would be tempted to call it INDIAN EXCEPTIONALISM.  High growth, fiscal prudence, moderating external balances and strong flows from global investors puts India on a different plane which is already reflected in a super-strong performance of the equities.   

Inclusion of Indian Bonds in major EM Bond indices was a big recognition of India’s place, but an upgrade by the global rating agencies may be due as well.  Continue to expect a period of outperformance by the INR in the coming weeks/months as much of the good news is not in the current levels and as flows rise steadily, a stronger rally is on the cards. 

Expect 82.40 to 83.10 ranges in the coming month, but will expand to downside after the current bout of up move in the Dollar Index ends.  Financial Year end in March will add to flows and selling pressure.  However, currency policy of the RBI will be a determinant of how far it can appreciate.  It is believed they will be comfortable with modest appreciation when the Dollar Index drops to 100 or lower. 

Technical Outlook 

USDINR although continues to trade narrower but has shown interesting developments in its technical setup. The currency pair continues to experience a lower shift in its trading range slowly with resistances moving from 83.40 to 83.25, 83.15, 83.05 & recently 82.95. Weekly chart setup also shows convincing break of the months long supporting trendline in USDINR. Even the central bank influence is looking limited for the time being.  

Considering this, we can expect the down move to further stretch towards 82.55/82.45 levels while the resistances continue to be at 82.95/83.10 levels initially. Further breakdown of these supports can lead the currency pair to 82.10 levels. Current technical setup looks slightly biased towards end of months long ranged action in the currency. 

Commodity Outlook (Gold) 

GOLD: COMEX: XAUUSD: CMP: USD 2156 

Gold finally broke above the long-standing resistance zone of 2070 convincingly and continues to stay higher as against the previous break which saw retracement the same day. Bullish run in Gold to sustain with minor correction in place. Current support zone can be expected around the previous multiple tops observed i.e. USD 2070 (levels if seen should observe FOMO buying action by market participants). 

Medium term target for Gold is around USD 2300 but immediate move towards these targets are less likely for the lack of triggers (although technically the chart setups are primed for a move upwards). 

Price dips towards USD 2100/2080 to be capitalised for building long positions with stops around USD 2040 (below the yellow metal to get into ranged action again). 

The yellow metal against INR on MCX made new highs in the past few days trading above INR 65000. The recent rally has been quite one sided with no meaning full correction in the past week, thereby opening chance for corrective actions towards INR 63900/64100 levels initially. Break of INR 63800(less likely) should lead to a move toward INR 63400. On the upside the targets continue to be above INR 67000/67500 levels in the medium-term time frame. 

Prepared by: 

Mr. Jayaram Krishnamurthy, 

Co-Founder and COO – Almus Risk Consulting LLP 

Mr. Shikhar Garg, 

VP – Treasury Markets – Almus Risk Consulting LLP

Time is your friend; impulse is your enemy – Jack Bogle

Just what the first month of the calendar year tested as it was less eventful for the markets than it usually is without hinting emergence of any new direction. Still abundant liquidity, fluctuating data points from major economies, uncertain geopolitical situation and Central Bank guidance were the focus of investors and traders trying to discern a sustainable trend.   The major themes that guided the markets were: 

1. Inflation seemed to be attaining some stickiness and maintained a gap with the target rate which Central Banks were not comfortable with 
2. All the major Central Banks had their policy meeting and maintained status quo as expected 
3. No major theme emerged from the yearly Davos meet in Switzerland where the elite politicians/businessmen/analysts met   
4. Forward guidance from the policymakers continued to push back against market’s overly optimistic expectation on rate cuts 
5. A good number of countries are going into elections this year which kept the analysts busy assessing the prospects.  Taiwan elections saw the existing regime continuing. 
6. The outperformance of the U.S. economy, now termed as U.S. EXCEPTIONALISM, continued while Europe did not show any decisive turn for the better   
7. China has continued to be the laggard even with big policy move and their largest real estate company Evergrande was directed to liquidate by the Hong Kong court  
8. Geopolitical situation in the Middle East neither escalated majorly nor showed any signs of ending.  Attacks continued from both sides in the Red Sea affecting ship movements, but did not affect the markets significantly including oil.   
9. Indian Government presented interim budget which continued to focus on strong growth while maintaining fiscal prudence and imposed no fresh tax burdens either direct or indirect.  Due to elections, the detailed budget will be presented after the new Government assumes office.  Markets received the Vote on Account very positively.  
10. EMs continued to be at various stages of monetary policy – Turkey hiked policy rate by 2.5% (their eight hike in as many months) to 45%, taking total hikes since June 23 to 36.5% (their inflation rate is 65%); On the other hand Brazil cut their policy rate by 0.5%, their fifth reduction since July 2023.  Rates have fallen from 13.75% to 11.25% in this period.  Other EMs maintained their policy rates unchanged.   

	U.S.A	EUROPE	U.K.	JAPAN	CHINA	INDIA
Particulars	current vs. prev	current vs. previous	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.
GDP QOQ	3.3% vs. 4.9%	0% vs -0.1%	*-0.1% vs. 0	*-0.7% vs. -0.5%	1% vs 1.5%	7.6% vs. 7.8%
Ind. Prod YOY	1% vs. -0.6%	-6.8% vs -6.6%	*-0.1% vs. -0.5%	*-0.7 vs -1.4	6.8% vs. 6.6%	2.4% vs. 11.6%
PMI MFG	50.3 vs. 47.9	46.6 vs. 44.4	47.3 vs. 46.2	48.1 vs. 48.7	49.2 vs. 49	56.9 vs 54.9
PMI SERV	52.9 vs. 51.4	48.4 vs. 48.8	53.8 vs. 53.4	51.5 vs. 50.8	50.7 vs. 50.4	61.2 vs 59
Jobless Rate	3.7 vs. 3.7	6.4 vs. 6.4	4.2 vs. 4.2	2.4% vs. 2.5%	5% vs. 5%	10.5 vs. 7.09
Inflation
Headline	3.4% vs. 3.1%	2.8% vs. 2.9%	4.0% vs. 3.9%	2.6% vs. 2.8%	-0.3 vs -0.5	5.69 vs 5.55
Core	3.9% vs. 4%	3.3% vs. 3.4%	5.1% vs. 5.1%	2.3% vs. 2.5%	0.6 vs 0.8	3.89% vs 4.1%
Consumer Confidence	114.8 vs 108	*-16.1 vs. -15.1	*-22 vs. -24	38 vs. 37.2	87 VS. 87.9	92.2 vs. 88.1
Leading Eco.Index	-0.1 vs. -0.5	*-0.8 vs. -1.1%	*-0.5% vs. -0.4%	107.6 vs 108.9	*-0.1 vs -0.3
POLICY RATE	5.25% – 5.50%	4.50%	5.25%	-0.10%	3.45%	6.50%

In the U.S. Consumer Confidence surged strongly, but the forward looking Leading Economic Index of the Conference Board continued to drop.  The Board expects GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.  But with inflation remaining sticky and job market continuing to be strong (unemployment rate low and wages rising strongly) FED Chairman Powell said that they need more confidence on inflation sustainably falling to target of 2% before they dialled back high interest rates.  FED is also likely to discuss lowering their quantitative tightening programme in the meeting in May.  ECB and BOE also remained noncommittal on rate cut timing although they also agree that the next move will be a cut.  Markets expect rate cuts to start in all three in the second quarter of 2024.   

China made a big move to stimulate the economy by cutting the Reserve Rate Requirement by 1% which released 1 trillion Yuan of additional liquidity to the system. However, the effect of the same on the market was temporary.  China requires more structural reforms to lift the economy.  As far as Japan, consensus is that they will move out of negative rate of interest in April.  They have linked monetary policy change to wage hikes which are likely to be substantial.   

IMF’S WORLD ECONOMIC REPORT JANUARY, 2024 

IMF raised forecast for global economic growth to 3.1% in 2024 vs. 2.9% in October, keeps 2025 outlook unchanged at 3.2% and forecast global headline inflation to be unchanged at 5.8% in 2024, lowers 2025 forecast to 4.4% vs. 4.6%.  US Growth has been upgraded to 2.1% in 2024 vs. earlier 1.5%, but for Europe revised down to 0.9% from earlier 1.2%.  It lifted China GDP forecast to 4.6% in 2024 vs. 4.2% in October; leaves 2025 forecast unchanged at 4.1% 

IMF said global economy displaying ‘remarkable resilience,’ on final descent toward ‘soft landing’ while trade frictions, geo-economic fragmentation could weigh on growth.  

BOND MARKET: 

Bond yields have been quite volatile, but within a range.  Interestingly, US yields which retraced higher in early part of the month based on steadier inflation and strong jobs report, later continued to fall notwithstanding impressive GDP growth and other improved indicators.  Direction of Yields in other major countries shadowed that in US, while Japanese yields were steadily higher on expectation of a policy change.    

Bond yields in India for 10 year have since moved lower by 10 basis points to 7.04, after the Government submitted interim budget for FY25 where they projected much lower fiscal deficit target of 5.1% vs. 5.8% for FY24. Total borrowings are expected to be well manageable, particularly as we are entering an era of lower interest rates starting quarter 2 of this year.   

Equity Markets 

Equity markets have chugged along in the month of January as liquidity was still the main driver with investors looking more at the outperformance of the US Economy and Europe showing tentative signs of recovery.  The other positive factor was the expectation of rate cuts between 1% and 1.5% from the BIG THREE Central Banks.    

Indices	31st Jan 2024	31st Dec 2023	Abs Change	% Change
Dow Jones	38,150	37,689	461	1.22
S&P 500	4,848	4,769	79	1.66
Nasdaq	15,164	15,011	153	1.02
German DAX	16,903	16,751	152	0.91
UK FTSE	7,630	7,733	-103	-1.33
China Composite	2,788	2,974	-186	-6.25
Japan Nikkie	36,286	33,464	2,822	8.43
India Nifty 50	21,725	21,731	-6	-0.03

As can be seen, Japan and China had extremely contrasting performance, the former hitting new 40 year high and attracting fresh investors due to its attractive valuation while the Chinese Composite Index could not sustain any recovery despite the 1% RRR cut by the Central Bank.  Investors are looking for stronger measures by the Chinese authorities.   

India had a rare underperformance during the month ending almost unchanged from previous month.  Technically, it has formed a DOJI candle at the multi-year top and after rising almost 200% from its Covid Lows.  Just for a comparison, the Chinese Market still languishing near the Covid lows.   

The expectations are not very bullish on stocks going forward in the year 2024 due to  

1. valuation concerns;  
2. liquidity reduction as CBs continue quantitative tightening;  
3. Lagged effect of hefty rate hikes impact companies’ performance and possible slowing of U.S. economy.  

Currency Markets 

Dollar recouped part of its losses of December as market looked oversold and moved higher along with recovery in yields.  Once again, Japanese currency weakened more due to its widened yield difference.  However, in the latter part of the month, it was seen the Dollar was moving in a narrower range with uncertainty about the timing and extent of rate kept moving.  It was also not surprising to see the Chinese Yuan resume its weakness as market continues to see outflows and Chinese assets are not finding any sustainable interest.  Weakness in the Chinese Yuan also kept the Asian currencies on the weaker.  

Currency	31st Jan 2024	31st Dec 2023	Abs Change	% Change
USD Index	103.27	101.38	1.89	1.83
EURUSD	1.0816	1.1037	-0.0221	-2.04
GBPUSD	1.2685	1.2732	-0.0047	-0.37
USDJPY	146.88	141.04	5.84	3.98
USDCNH	7.1849	7.1252	0.0597	0.83
USDINR	83.095	83.24	-0.145	-0.17

A rare outperformance by the Indian Rupee with Dollar being on the losing side, albeit by a small percentage.  Rupee was stronger despite net outflows from FIIs to the extent of USD 1 bio in January.  While there were large outflows from FIIs for stocks, it was largely offset by inflows for Bonds and other fund raising by corporate through Bonds as well as ECBs.  It was also noticeable that RBI was less active in the market.   

Key themes/market drivers in India – 

1. Positive vibes after the state election results were carried into the month of January, helping the market to hold on to its highs 
2. India’s merchandise trade deficit narrowed to below USD 20 bio once again, with rise in imports being offset by good increase in exports 
3. Indian Government presented its interim budget for FY 25 with continued emphasis on infrastructure investment that helps higher growth and employment, important socioeconomic measures important for a diverse country like India, proposed no changes to the taxation rates (both direct and indirect) and planned to reduce fiscal deficit by 0.7% for FY25 
4. Lower fiscal deficit will be taken by the global investors very positively and more importantly, global ratings agencies may even look at upgrading us 
5. The huge positive of the budget has helped the markets to rally strongly.  Key stock indices touched their all-time high while bond yields dropped due to comfortable borrowing programme 
6. For the first time, S&P published flash PMIs for India showing both manufacturing and services picking up further momentum and placed India at the top of the pack as far as economic activity growth is concerned. 

Outlook :  Global 

IMF expects country to grow by 6.7% from earlier projection of 6.3%.  For FY25 and FY26, India’s GDP growth is seen steady at 6.5%, a 20 basis point upgrade from its October 2023 forecast, the IMF said in its latest report released.  Of course, at 6.7% GDP growth forecast for India in FY24, the IMF’s forecast is lower than both the Reserve Bank of India’s 7% estimate and the National Statistics Organisation’s (NSO) first advance forecast of 7.3% for the financial year ending March 2024. 

The blockbuster jobs report for January from US has re-established resiliency of the economy even in the face of high interest rates.  As a result bond yields had risen and so did the Dollar through key resistance.  The question before investors is whether the FED will change their earlier plans of cutting rates by 0.75% this year due to the upbeat picture of the economy (both GDP and employment).  That will be answered in the days to come when there’s more data on inflation.  Expectations are that FED will cut rates if inflation stays subdued as high rates are eventually likely to affect growth.  Near term we look for the Dollar to recover based on attractive yields and also positioning of the market which seems to be heavily short on the Dollar. 

However, in medium term expectations are for the Dollar to weaken quite substantially as the fiscal and debt issues will be a macro headwind.  As per data, foreigner holding of US Securities is steadily declining and this means authorities will have to weaken the Dollar eventually to attract capital.   

We expect Dollar Index to move between 103 and 105.50 during the month. 

Looking at the various macro developments in our economy, one would be tempted to call it INDIAN EXCEPTIONALISM.  High growth, fiscal prudence, moderating external balances and strong flows from global investors puts India on a different plane which is already reflected in a super-strong performance of the equities.   

Inclusion of Indian Bonds in major EM Bond indices was a big recognition of India’s place, but an upgrade by the global rating agencies may be due as well.   

Expect a period of outperformance by the INR in the coming weeks/months as much of the good news is not in the current levels and as flows rise steadily, a stronger rally is on the cards. 

USDINR should remain range bound between 82.50 to 83.40 in the current month, but can expand on downside after the current bout of up move in the Dollar Index ends. 

Technical Outlook 

The ranged action for the currency pair continues although there has been a slight increase in the daily range. Several attempts at breaking the 82.80/82.90 support zone for USDINR has been seen, break of which should provide further downside action in the pair towards 82.50 although speculative buying, public sector bank buying and importer purchasers have kept the rupee appreciation limited. Upside looks well protected around 83.20 initially and then 83.40/45 levels. 

Commodity Outlook (Gold) 

GOLD: COMEX: XAUUSD: CMP: USD 2021 

Attempts at breaking above the USD 2070/2080 range have been numerous but the sustenance of the prices above has been questionable by far. Although the metal is bullish in it’s underlying trend over the 3-6 month horizon the prices action has been of consolidation in the past couple of weeks. The precious metal is expected to move upwards as conviction of rate cuts during the year by FED increases and real yields decreases. Targets in the longer term stay at USD 2200/2300 levels initially. Supports around USD 2005 initially and later at USD 1970 for the month can be observed break of which the metal can again set into a consolidating move for some more month. 

The yellow metal against INR on MCX also moved sideways in the previous month with bias for bullish action while USDINR component keeping volatility limited. The charts suggest a channel break is required for significant action on the upside thereby putting initial resistances around INR 63250 and INR 64150. Break above these levels shall bring in bullish action targeting INR 67500 above. 

Supports around INR 62000 and INR 60300 should hold any downside push during this bullish rally expectations. 

Prepared by: 

Mr. Jayaram Krishnamurthy, 

Co-Founder and COO – Almus Risk Consulting LLP 

Mr. Shikhar Garg, 

VP – Treasury Markets – Almus Risk Consulting LLP

The month of November can be described as the month of great deceleration globally which was a relief to all stake-holders – policymakers, investors and general public.  Inflation, which had been falling in the past few months, got some momentum on the downside and came lower than expected in most major economies.  This meant that the policy rate hikes that Central Banks had done over the past 18 months had their desired effect though with a lag.  However, while the markets took the development with both hands and rallied across all segments, Central Bank speakers continue to adopt a cautious line and were pushing back against market expectation of timing & extent of rate hikes in the year ahead as they were not yet ready to declare victory over inflation.  

Disinflationary Trend (Annual Cpi %)

Country	Nov-23	Oct-23	Peak in cycle
U.S.A.	3.2	3.7	9.2
EUROPE	2.4	2.9	10.6
U.K.	4	6.7	11.1

However, a note of caution on assuming continued deflationary trend is warranted.  Base effect was favouring lower indices in some countries and it was also helped by the sharp fall in energy prices which remain volatile and one cannot rule out a spike up with deliberate supply reductions through output cuts by oil producing countries.  Another factor to be borne mind, which some FED members have been hinting at is that the easing of financial conditions and risk asset rallies (which create wealth effect can once again push up demand led inflation through higher consumption).   

Global Economies

We saw refreshing news of some stability in economic updates from both China and Europe during the month, while U.S. economy continued to throw up mixed data.  But on the overall growth rate, U.S. won the contest hands down as the second estimate of GDP for July-September quarter came at 5.2%, beating forecasts of 5% and previous quarter growth rate of 2.1%.  Total output of goods and services grew at its fastest rate in nearly two years.  Consumption, which accounts for 70% of the US economy rose 3.6% annual rate and Government spending rose 5.5% on annual basis, both of them accounting for the big rise in the GDP.  In contrast, Europe continued to struggle with a growth rate of 0.1% vs. previous estimate of -0.1%, while UK recorded a flat growth for the quarter.  In Europe both Germany and France recorded negative growth rate of -0.1%.  

EU actually cut Eurozone 2023 GDP forecast to 0.6%, down from a Sep forecast of 0.8%.  UK saw the flash reading of composite index jumping to expansion territory at 50.1 from 48.7 in October. 

The reading indicated a stabilization of UK private sector output after marginal reductions in the previous three months. 

Country	U.S.A	EUROPE	U.K.	JAPAN	CHINA	INDIA
Particulars	current vs. prev	current vs. previous	current vs. prev.	current vs. prev.	current vs. prev.	current vs. prev.
GDP QOQ	5.2 vs. 2.1%	-0.1 vs. 0.2%	0 vs. 0.2%	-0.5 vs. 1.1%	4.9 vs. 6.3%	7.6 vs. 7.8%
Ind. Prod YOY	-1.7 vs. -0.9	(5.1) vs. (2.2)	0 vs. -0.5%	-4.4 vs. -4.4	4.6 vs. 4.5%	5.8 vs. 10.3%
PMI Mfg.	49.4 vs. 50	43.8 vs. 43.1	46.7 vs. 44.8	48.1 vs. 48.7	49.4 vs. 49.5	56 vs. 55.5
PMI Services	50.8 vs. 50.6	48.2 vs. 47.8	50.5 vs. 49.8	51.7 vs. 51.6	50.2 vs. 50.6	58.4 vs. 61
Jobless rate	3.9 vs. 3.8	6.5 vs. 6.5	4.2 vs. 4.2	2.6 vs. 2.7	5 vs. 5.2	10.5 vs. 709
Headline Inflation	3.2 vs. 3.7	2.4 vs. 2.9	4.6 vs. 6.7	3.3 vs. 3	0 vs. 0.1	4.87 vs. 5.02%
Core Inflation	4.1 vs. 4.3	3.6 vs. 4.2	5.7 vs. 6.1	2.9 vs. 2.8	0.8 vs. 0.8	4.2 vs. 4.6%
Consumer Confidence	102 vs. 99.1	-16.9 vs. -17.9	-24 vs. 0-30	36.1vs. 35.7		92.2 vs. 88.1

Japanese Economy 

Shrank at its fastest annualized quarterly pace in two years in the July-September period, as rising domestic inflation weighed on consumer demand, adding to export woes as demand waned.   In China, Data on Industrial Production and Retail Sales showed improvement for the second successive month adding to optimism of the second largest economy recovering. However, even so, the real estate downturn continued to drag down investment in fixed assets. Jobless rate was stable at 5% but there was no update on the youth unemployment rate, which hit a record high of 21.3% in June.

A general improvement in the manufacturing is observed although some economies still have a contraction.  In Germany, for instance, industrial production dropped once again in September for the fifth consecutive month and Industrial production is now more than 7% below its prepandemic level, more than three years since the start of Covid-19.   Employment component of the PMIs is weakening too, which is good news for the doves.  

Housing Sector Remains Depressed 

U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market.  Barring a rebound in November and December, home re-sales this year are on track for their worst performance since 1992.

Bond Market

Bond Markets had their best month since 1980s sparking Cross-Asset rally.   In a year in which little has gone right in the US bond market, November turned out to be a month for the record books.  Yields plunged across economies with initial reaction coming to the weak unemployment report from USA and got downward movement after inflation rates were seen much lower than previous months.  Even the leading indicators across economies showed a downward trend sparking expectation of early rate cut by the FED and ECB.   

Tenor	2 Year		10 Year
COUNTRY	Current	Prev. month	Current	Prev. month
U.S.A.	4.55%	4.73%	4.33%	4.92%
GERMANY	2.81%	3.07%	2.45%	2.81%
U.K.	4.59%	4.79%	4.18%	4.52%
JAPAN	0.04%	0.16%	0.68%	0.95%
INDIA	7.26%	7.32%	7.28%	7.35%

As can be seen most countries saw lower yields as markets expect Central Banks to start easing rates much earlier.   According to Fedwatchtool fed will cut rates by at least 0.25% as early as May 2024 (some even predicting March 2024), while in Europe rate cut is expected in April.  Both Central Banks are expected to cut rates by up to 1% next year.  The expectation of rate cut in UK is much further down the line as their inflation is still far higher than the target rate of 2%, though it has fallen substantially in recent months too.  China is still on easing path to support the economy as their inflation is still low while investors are speculating on when the Japanese Central Bank will start raising rates (current expectation is for April 2024). 

Equities

Yield plunge spurred advance in stocks, credit and emerging markets. Investors see scope for more gains with Fed cuts on horizon. Investors frantically bid up the price of shares igniting a powerful pan markets rally.   

MARKET	1st Nov 2023	1st Dec 2023	Change	% Change
DOW JONES	33,081	36,425	3,344	10.11
S&P500	4,205	4,593	388	9.23
NASDAQ	12,887	14,305	1,418	11.00
GERMAN DAX	14,851	16,397	1,546	10.41
UK FTSE	7,321	7,529	208	2.84
CHINA COMPOSITE	3,038	3,031	-7.0	-0.23
JAPAN	31,311	33,431	2,120	6.77
INDIA NSE	19,064	20,267	1,203	6.31

It is observed that equity volatility has fallen to multi-year lows (indication of complacency) with investors chasing stocks aided by abundant liquidity without regard to valuations.  

Currencies

It was a weak month for the Dollar with DXY recording a sizeable fall of more than 3% with EURO and GBP making handsome gains, followed by Chinese Yuan, Yen and AUD.  

CURRENCY	1st Nov 2023	1st Dec 2023	Change	% Change
Dollar Index	106.67	103.27	-3.40	-3.19
EURUSD	1.0577	1.0881	0.03	2.87
GBPUSD	1.2150	1.2700	0.06	4.53
USDJPY	151.31	146.81	-4.50	-2.97
USDCNY	7.32	7.14	-0.18	-2.42
USDINR	83.27	83.26	-0.01	-0.01

Fall in the Dollar was the direct result of US Yields falling and rising expectation of early rate cut by the FED.  U.S. economy softening adds to these expectations, notwithstanding the GDP of 5.2% in Q2 which was ignored by investors, being a backward-looking data. Falling yield helped Yen to recover too which was a surprise, given the super-easy policy pursued by the Japanese authorities and promising to do more if economy required. At the same time, they kept voicing concerns on Yen weakness hinting at action. However, USDJPY fell without an actual intervention. The other surprise came when USDCNY fell nearly 3% which had twin reasons – economy showing tentative signs of stabilizing in some sectors and fall in US Yields narrowing the differential with China. The meeting between the Chinese Premier and President Biden on the sidelines of APEC meeting in U.S. was another trigger as markets perceived their meeting as a positive development.

Indian Economy and Markets 

Indian economy continued to show its superior placement in the global picture.  July-September GDP came at a forecast beating 7.6% (expected 6.8%) aided by higher consumption, manufacturing expansion and higher Government spending.  The buoyant growth was underpinned by cyclical factors like robust corporate profits, a strong fiscal impulse, with government spending being front-loaded in a pre-election year, and a boisterous financial sector.  This reading presents some upside to FY24 GDP, but growth is likely to moderate in the coming quarters as consumption growth is likely to slow post the festive season, and some slowdown in credit growth also expected.  

Inflation moderated further, helped by drop in vegetable prices and some favorable base effect.  It is likely to remain volatile due to big influence from food prices.  Due to Government subsidy fuel inflation trended lower.  While the inflation has been within the overall band of 2-6% mandated to the MPC, RBI Governor has recently reiterated that 4% is what the Central Bank is focused on.  Meanwhile, the WPI index continued to show deflationary trend.  

With growth remaining strong, we expect MPC to remain on vigilant mode and keep policy unchanged and maintain the stance of withdrawal of accommodation.  

India’s merchandise trade deficit hit a new all-time high of USD 31.46 bio, vs. forecast figure of USD 20.50 bio.

Particulars		Oct-23	Sep-23	Oct-22
Merchandise	Exports	33.57	34.47	31.60
	Imports	65.03	53.84	57.91
Services	Exports	28.70	29.37	25.30
	Imports	14.32	14.91	31.51
Overall Trade (Merch. + Serv.)	Exports	62.26	63.84	56.90
	Imports	79.35	68.75	71.42
Net Trade Balance		-17.09	-4.92	-14.52

                                                                                                                  All figs. In USD Bn

As can be seen from the above tables, deficit has been higher both on a YoY basis and MoM basis and even the net deficit (Merchandise + Services) shows a jump of over USD 12 bio compared to September.  Major contributing factor for the big rise in deficit is gold imports which rose by 95% during October (with festival season demand impacting) and the rise in crude prices since September which is reflected in October deficit.  While exports have actually dropped slightly, imports have surged by USD 11.18 bio.  On YoY basis, however, exports have shown an increase both on merchandise and services.  

Indian stocks gained over 6% during the month, helped by higher GDP growth and a strong rally following the state election results.  

Despite various positives going for the economy, the INR remained on the weaker side as strong demand unmatched by supplies from flows, kept the upward pressure on the Dollar.  The recent improvement in global factors like fall in US Yields, USD index falling, improvement in China Yuan and lower oil prices have not helped Rupee to move away from its weakest levels.

Surprisingly, the good GDP number last week and the state election results which indicate a possible stable government formation in next general election has also been ignored by the Rupee.  At the same time, upside of the USD has also been limited due to the persistent intervention from RBI.  

Outlook

Global markets have seen good two-way volatility during the year in all segments (yields up and down, stocks down and up while the Dollar has seen alternating bouts of bullish and bearish plays.   As we step into the last month of the calendar year, the volatility is expected to decline with a lot of suspense regarding the Central Banks’ monetary policy approach in response to the fall in inflation and weakening economies.  In the past, we have seen that rate cuts happen when there is a systemic crisis or when the economy slumps big.  Hence we expect Central Banks to maintain their neutral and data dependent tone for some more time.

Going forward, the fiscal situation of the U.S. is likely to become a big headwind for the global markets as their deficit has risen by 23% this year. US debt interest bill has also rocketed past $1tn a year. It’s 4% of annual US GDP having doubled in 19 months. It is equivalent to 16.3% of the entire Federal budget for fiscal year 2022.   While the heavy borrowing due to the same keeps the yields supported, in medium term this may result in a big depreciation in the value of the Dollar.  

Taking note of the severe fiscal situation of the US government, Moody’s Investors Service signalled it was inclined to downgrade the nation because of wider budget deficits and political polarization. The rating assessor lowered the outlook from stable while affirming the nation’s rating at AAA, the highest investment-grade notch. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said.  This did not have an immediate impact on the markets as FITCH another rating agency had already done it back in May this year.  However, it does have a negative medium term implication and add to a depreciation tendency for the Dollar.   

Indian Rupee Outlook

State election results – encouraging for investments 

The final results of the elections announced for four of the five state assemblies that went to the polls declared on 3rd December did spring a surprise which can turn to be a positive for the Indian financial markets including the Rupee.  The BJP which was expected to win only one State out of the five, run a close contest in another and lose the remaining, ended winning three of the four with clear majority.  This has not only beaten all forecasts (just like many of the US economic numbers have been) but has significance for the political development in the next few months when Parliamentary elections will be held.  Going by the current popular support, the ruling party at the centre could do well and ensure a stable government for third time running, which will be a huge positive for the investors.  

Global investors who had been holding in check much of their investments in last few months in view of the possible uncertain political situation would heave a sigh of relief at these election results.  A positive view taken by them can result in fresh inflow of funds into the Indian market, and more importantly to the FDIs that will relieve a lot of pressure on the Rupee which may actually start to strengthen.   

In the short term, however, rupee is likely to remain under pressure due to lack of flows and higher deficits.  

Technical Outlook

USDINR

The range for the currency pair continues to narrow, although with a new high due to technical glitch once. The pair as long as continues to trade in the range 83.00 and 83.40 should be looked as the range extremes and suitable actions around these levels should be taken for risk management purposes.

Commodity Outlook (Gold)

GOLD: COMEX: XAUUSD: CMP: USD 2025

Gold broke above its all time high, resisted thrice earlier in the past 3 years (USD 2070), in a thin early Asian market with less liquidity. The prices then corrected in its follow through during the day with profit taking actions in sight. The metal gave up gains during the day to close back below the USD 2070. 

The metal is expected to remain bullish in as the US Real Yields start to decline again, making way for the metal to rally. Buy on dips can be the suggested action for gold with a rise in the uncharted territory to be seen again during the month.

Supports around USD 2000 and USD 1960 to hold any downside action for the month. The metal is expected to move upside with eventual targets around USD 2260 and USD 2300 in the next 36 months’ timeline.

Even against INR, the precious metal made a new all-time high breaking above 61850 levels in the last week sustaining well above these levels. Support for the commodity against INR is expected around INR 61,250 and then around INR 59,600 (less likely to see prices beyond these levels). 

The expectations primarily continue to be bullish for new highs to be seen in the coming few months. Initial resistances are expected to be at INR 64200 although this is further expected to be broken for a next move towards INR 68,300 levels in the next 3 months.

The break of ATH and decrease of Real Yields have most likely kickstarted a new bull run for the precious metal in the longer time frame.