Macro Update

The past month had a negative surprise of sudden eruption of war in the Middle East which impacted markets to a great extent, but subsided gradually as it has so far not escalated into a larger conflict.  In an act of terrorism for which Israel was totally unprepared, on October 7th 2023, thousands of armed military wing members of Hamas tore down large parts of the Gaza security fence using tractors, RPGs and explosives and invaded southern Israel. Simultaneously, Hamas military wing in Gaza fired thousands of rockets toward Israel.  Over 1,300 civilians were murdered, and over 200 were abducted. The Hamas military wing briefly took control of about 10 Israeli towns, terrorizing and brutalizing their residents. Israeli Defence Forces (IDF) forces operated to neutralize this military wing and thwart their infiltration; however, they were also ambushing IDF bases, killing soldiers and hurling grenades and explosives. The State of Israel has never encountered such a large-scale, calculated attack on the Gaza front. Hamas stated that their initial attack was due to the occupation of West Bank by the


Israel which was in a state of shock due to unanticipated attack, responded very strongly, mobilized 300000 reserves and attacked with a barrage of airstrikes that have decimated the Gaza Strip, leaving more than 350,000 residents displaced and their defense minister ordering a “complete siege” of Gaza Strip cutting electricity to the region and blocking fuel and food from entering the territory from Israel.  PM Netanyahu vowed to demolish Hamas.  The casualties on Palestinian side is reportedly around 8000. The whole world was in a state of shock looking at the number of civilian casualties and human sufferings and called for cessation of the attacks and for ceasefire, but Israel has continued with their ground attack which has so far been limited.  Almost no one wanted an escalation of the war, particularly involvement of larger Arab countries like Iran which can then take the conflict to a global level.  It is believed that Iran helped Hamas’ attack on Israel for several weeks before October 7th.

Global Market’s Reaction:

There was a big impact on the global markets with stocks falling, Dollar rising, bonds being bought as safe haven and gold making a big stride.  However, even attacks reduced somewhat markets have settled down (believing that global efforts to de-escalate will succeed) and started re-focusing on the economy and monetary policies.  However, we are not certain that things will settle down completely easily and there will be simmering violence that will keep geopolitical situation on the radar of markets for a long time. 


Even as HIGHER FOR LONGER in interest rates remained the policy of most Central Banks, economies started/continued to show slowdown as tight financial conditions and unaffordability affected consumption and activities.  However, on a relative basis, U.S. economy was still quite strong where consumption continued to support although cracks seem to be appearing there as well.  Euro Zone showed negative growth on QOQ basis but on YOY basis grew just 0.1%.  UK showed 0.2% growth on QOQ basis, but the Central Bank forecasts showed growth headed for a sharp slowdown.  Inflation was seen easing across the major economies supporting the PAUSE in rate hikes by the respective Central Banks.  US grew 4.9% beating forecasts which were at 4.3%.  China seemed to be starting stabilize responding to various measures initiated by the Government, but it is too early to conclude they have turned the corner.  India confirmed its fastest growth and lowered inflation, but activity surveys indicated slowdown. 

Particularscurrent vs. prev.current vs. prev.current vs. prev.current vs. prev.current vs. prev.current vs. prev.
GDP – QoQ (%)4.9 vs. 2.1(0.1) vs. 0.20.2 vs. 0.31.2 vs. 1.54.9 vs. 6.37.8 vs. 6.1
Ind. Prod. – YoY (%)0.1 vs. 0.1(5.1) vs. (2.2)1.3 vs. 1.0(4.6) vs. (4.4)4.5 vs. 4.510.3 vs. 5.7
PMI Mfg.50.0 vs. 49.843.1 vs. 43.444.8 vs. 45.248.7 vs. 48.549.5 vs. 50.655.5 vs. 55.7
PMI Service50.6 vs. 50.147.8 vs. 48.749.5 vs. 49.351.1 vs. 53.850.4 vs. 50.258.4 vs. 61.0
Jobless rate (%)3.9 vs. 3.86.5 vs. 6.44.2 vs. 4.12.6 vs. 2.75.0 vs. 5.210.5 vs. 7.09
Inflation – Headline (%) 3.7 vs. 3.72.9 vs. 4.36.7 vs. 6.73.0 vs. 3.20.0 vs. 0.15.02 vs. 6.83
Inflation – Core (%)4.1 vs. 4.34.2 vs. 4.56.1 vs. 6.22.8 vs. 3.10.8 vs. 0.84.6 vs. 4.8


We have had monetary policy decisions from the four major Central Banks of Europe, Japan, US and UK in the past one week with all of them maintaining status quo on policy rates.  Earlier we also had the Canadian and Australian Central Banks maintaining unchanged policy despite recent rise in inflation.  Thus they kept door open for more action, if needed.  

EUROPE: Economic concerns have dominated while inflation has dropped substantially, which is conveyed through ECB’s message and we may well have seen the peak in their rate.   The ECB President said that impact of huge rate rises were still working through the economy. 

JAPANESE CENTRAL BANK has been sending out conflicting signals.  While loosening their stance on Yield Curve cap at 1% for 10 year JGBs, they have been seen indulging in fresh bond purchases still.  They do not think time is ripe for any policy change despite economy showing good improvement and inflation remaining high. 

Meanwhile, they continue to verbally intervene on the exchange rate.  

U.S. FEDERAL RESERVE left the policy rate unchanged when they met on Wednesday, but their statements indicate that they are focused on getting inflation back to 2% target as it hovers under 4%.  They expect to see continued impact on the economy through tightened financial conditions but are now sure how long it will impact. Market discounting shows that the policy rates will remain on hold till January (next two meetings), though FED keeps the door open for further policy action depending on the upcoming data.  

U.K. CENTRAL BANK went for a second consecutive pause in policy rate at 5.25% but published forecasts show the economy skirting close to a recession.  The central bank said it expected no growth in Britain’s economy in July-September, edging up to just

0.1% in the fourth quarter, with zero growth forecast for 2024 and an expansion of just 0.25% in 2025.  Their inflation projections show that they will maintain HIGHER FOR LONGER policy just like the FED.  


Markets have been volatile during the month, particularly in stocks and bonds.  Bond yields have actually been guiding moves in other markets, viz. stocks, currencies and commodities.  

BONDS were weaker in earlier part of the month (yields higher) as increased supply from the US Treasury was not getting enough buyers.  Initial dip in the yields came when the Middle East war started.  But as situation seemingly eased they rose again.  Subsequently, when the US Treasury announced plans to borrow less of long term treasuries they started easing again and the real fall came when the US non-farm payrolls report came weaker than expected, unemployment rate increased and the wage inflation month-on-month eased.

COUNTRY (all figs. In %)2 YEAR10 year
Currentcycle highCurrentcycle high

Long term yields have now fallen more than 0.5% from their cycle highs and the yield curve has steepened again (difference between 2 year and 10 year yields further increasing), a sign of future recession that analysts have been hinting at.  Bond yields in other major nations followed that of the U.S.  In Japan 10 year yields have risen close to 1% and Japanese authorities are likely to be more relaxed on its rise.

EQUITIES: Stock markets were volatile and were in a falling trend for most of the month, impacted by higher yields and the war factor.  However, they got some support initially through earnings report for Q3 coming better than forecast and the yields coming off substantially.  

MARKET01-Oct04-NovChange (Abs)Change (%)
DOW JONES33,43134,061-6301.88
GERMAN DAX15,43915,189250-1.62
UK FTSE7,6087,417191-2.51
CHINA COMPOSITE3,1003,03070-2.26
INDIA NSE19,07919,230-1510.79

NASDAQ and S&P500 both fell more than 10% from their recent highs and briefly entered correction territory.  But they have since bounced strongly to gain 7.5% and 6.2% respectively.  Composite index of global equities also gained 5.5% from their recent low after war getting less intense and yields falling.  

CURRENCIES: The U.S. Dollar maintained strength for most part of the month, supported by safe haven flows due to the Middle East conflict and also higher yields.  

Currency01-Oct04-NovChange (Abs)Change (%)
Dollar Index106.17105.02-1.15-1.08

However, Dollar started to lose ground gradually mainly to the EURO and the UK Pound as war situation eased somewhat, de-escalation efforts intensified and the yields started to come off.  It was really significant that EURO maintained good demand despite the Euro Zone economy continuing to underperform the U.S. and ECB itself sounding quite dovish on the growth prospects.  

USDJPY almost hit the previous high at 151.94 (from where we had seen a big drop to below 128 last year) and has since retreated along with general Dollar weakness. We have so far seen only verbal intervention from Japanese authorities and no actual selling of Dollars has been seen.  However, the same is not ruled out should we see further weakness.  Chinese Yuan stopped falling this month and the USD held below 7.34 with investors watching to see if the economy stabilizes as some green shoots were observed.   Among commodity currencies, AUD was stronger on higher inflation number and better economic performance while Canadian Dollar underperformed as oil failed to maintain its uptrend after initial rally in the wake of the war.


The slowdown of the U.S. economy and the result effect of pushing down the yields is good for the risk assets and for non-Dollar currencies.  However, though U.S. Government tweaked the tenor of borrowings, they are still going to borrow much more this year from the market than last.  Their fiscal deficit more this year by 23% and reportedly over a trillion Dollar worth of bonds are maturing this year which they need to roll over at a higher rate and that will further push up the deficit.   The major headwinds for the market will be-

  1. Escalation of the war into a wider conflict and its implications for inflation. 
  2. U.S. Housing market sharp slowdown; mortgage rate highest since 2000 at 8% and affordability at multi-decade lows.  
  3. Possibilities of another shutdown of the U.S. government after November 14 and spending bills being stalled.
  4. Higher Real Yields pressure stock market sell-off.
  5. HIGHER FOR LONGER rate policy by Central Banks will slow the economies sharply resulting sell-off in risk assets and affect carry trades.
  6. Change in Japanese monetary policy also affecting carry trades.
  7. Without major structural reforms, China slows down further sharply.
  8. Widening of Germany-Italy bond spreads can lead to another debt crisis in Europe.
  9. Delinquency rates on credit card at above 2008 levels in the U.S. 

Any sharp slowdown in the global economy would be negative for risk assets and for EM currencies which depend on overseas capital.  However, we see the Dollar Index has technically seen a possible medium-term top at 107.35 and more falls are likely.  


There has been mix of good and bad news for the Indian economy.  On the good side, growth has been far higher among the major economies and inflation has sharply moderated.  However, capital flows which are crucial for the country to fund its current account has been eluding in the last few months.  After an average of USD 4 bio p.m. from FIIs seen from March to August, we have seen negative flows from September onwards to a cumulative amount of nearly USD 4 bio.  The FDIs have also been far less this year from April to August compared to last year (USD 3 bio in 2023 vs. USD 18 bio in 2022).  In addition, we have been seeing consistent outflows on account of ECBs.  Due to higher interest rates abroad, corporate are not rolling over their borrowings and prefer to repay the same by borrowing in domestic market.  

All the above factors would have normally pressured the USDINR higher and more so because the Real Effective Exchange Rate of the Rupee is 5% overvalued as per RBI data.  However, the Central Bank has been intervening consistently to prevent the Rupee from falling to new lows beyond 83.29.  Due to consistent demand and RBI selling the rate has been held in a very tight range between 83 and 83.29 for the last two months.  This situation will only change if RBI gives up its intervention policy and allow rupee to find its level or if we see a gush of inflows which is not absorbed by the Rupee.

Two things to note is that even a bear trend in global Dollar Index is unlikely to see the rupee strengthen immediately due to its overvaluation on REER basis and the flows which are likely to slow down due to elections to the State and later to the Lok Sabha.  The expected flows due to the inclusion of Indian Bonds in the JP Morgan’s EM Bond Index will only happen in the next financial year.  Also due to the valuation concerns, FII flows to Indian equities will take some time to resume.  

We feel that if the domestic inflation falls further, we may see the RBI letting the Rupee to fall.  

Our expectation for the Rupee for the next month is to move between 82.80 and




Gold observed a brilliant rally last month after escalation of the Geo-political tensions. The yellow metal found support in the 1800s zone to rally back above USD 2000 levels during the month. 

Although the metal moved with momentum in the previous month it is yet to break above the triple top it formed around USD 2070 levels which currently acts as a formidable resistance. Break of this resistance would bring in a new rally for the metal leading to USD 2300/2400 for Gold. Immediate resistance is at USD 2015 levels. 

Small mean reversion move can be expected for the pair towards support zone before beginning of any new trending move. Supports around USD 1960 and USD 1935 can hold short term dips while much stronger supports are held at USD 1860.

GOLD: MCX Gold: CMP: INR 60880

MCX Gold wasn’t alienated in the Gold rally previous month and it moved along with COMEX gold towards it multiple tops formed around INR 61,850. Break above this should kick start another trending move on the upside but needs correction in the shorter time frame before it begins it march higher. Immediate short-term resistance can be observed at INR 61,400. Supports expected to hold this mean reversion action for MCX Gold can be around INR 59,400 and more significant supports lie at INR 57,800. Sideways action for the metal in the range for this month can be expected unless further escalation in Geo-politics is observed.

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