Supply headaches sink German business morale to six-month low

Global developments

There has been some progress on the USD 3tn social and infrastructure spending plan within the Democratic party. The party is trying hard to convince the moderates within the party. A billionaire tax has been proposed to fund the plan which would alleviate some concerns around how the plan would be funded. Natural gas prices rose over 10% yesterday and are back above USD 6 per mmbtu. Given that Europe is the most reliant on natural gas for its energy needs, the Euro underperformed. Weaker than expected IFO business expectations data yesterday also contributed to Euro weakness. 1.1660 is acting as a strong resistance. Gold prices are above USD 1800 on low US real rates. Brent is hovering around USD 86 per barrel mark. Overall risk sentiment is positive.

Domestic developments

Equities

Domestic equities recovered from day lows to end in the green as bank stocks outperformed. The Nifty managed to end flat at 18125. The S&P 500 ended at yet another record high, gaining 0.5% on strong corporate earnings and hopes around the passage of the spending bill. Asian equities are trading with a positive bias. 

Bonds and rates

Rates sold off yesterday with 1y and 3y OIS rising about 6bps. 1y OIS at 4.27% is pricing in 2 rate hikes of 25bps each in a year. The yield on the benchmark 10y bond ended 1.5bps higher at 6.35%.

USD/INR

The Rupee ended at close to the weakest point of the session at 75.09 against the Dollar. USD/INR however got resisted at 75.10 multiple times throughout the session. Higher crude prices are putting pressure on the Rupee. Month-end exporter selling may however limit upside in USD/INR. 1y forward yield ended at 4.61% and 3m ATMF vols were steady around 4.95%.

Strategy: Exporters are advised to cover on upticks towards 75 levels. Importers are advised to cover on dips towards 74.50 The 3M range for USDINR is 73.80 – 76.00 and the 6M range is 73.50 – 76.50.

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