Concerns from China have caused investors to trim risky bets. China's biggest property developer Evergrande's Debt woes are extremely concerning and are threatening to snowball into a contagion. Evergrande has total debt of around USD 300bn. Evergrande's bonds are trading at a 70% discount to their face value. Property market accounts for a huge share of China's GDP and a protracted period of deleveraging there can have major global spillovers. There would be a huge setback as far as demand for commodities is concerned. China's August Retail Sales data in particular was extremely disappointing pointing towards signs of a slowdown. How the Chinese authorities respond to the crisis and whether they succeed in containing the contagion will be interesting to see.
After a softer than expected CPI print, US retail sales data beat expectations. US Michigan sentiment data too indicated that long term inflation expectations remain too elevated, way above the Fed's comfort zone. These data points led to a sell off in US treasuries in the last couple of sessions. US real yields rose about 8-9bps across the curve as expectations of taper announcement have been brought forward. The Dollar strengthened against all G10 currencies this week (except JPY which ended flat). South African Rand, Turkish Lira and Thai Baht were among the worst performing EM currencies this week. Gold fell to USD 1754 per ounce while Brent ended just above USD 75 Per barrel mark.
The most important event in the coming week would be the US Fed policy (Wednesday 22nd Sept, 11:30 IST). It would be interesting to see whether the Fed goes ahead with the taper announcement in this policy itself or waits to buy some more time. Concerns from China, continuing threat from the Delta variant may just result in a more cautious approach from the Fed.
Domestic assets continued to outperform this week. Consumer prices grew less than expected in August which could give RBI greater leeway in maintaining accommodative stance.
The RBI released the much awaited Comprehensive Guidelines on Derivatives (CGD) which come into effect from 3rd January 2022 onwards. It opens doors for banks to offer structured FX, Interest rate and Credit Derivatives to clients with appropriate risk management in place.
RBI FX Reserves fell USD 1.3bn to USD 641.1bn as on week ended 10th Sep.
The Nifty gained 1.25% in the week to end at 17585. The Bank Nifty outperformed, gaining 3%. US equity indices fell 1.3% while Shanghai and HangSeng fell 2% and 3% respectively
Domestic bonds and Rates almost ended the week flat. Yield on the benchmark 10y ended at 6.17%. 3y and 5y OIS ended at 4.66% and 5.18% respectively. Price action in bonds is likely to be driven by the Fed policy decision on Wednesday. A global risk off would be bullish for bonds. We expect the 10y bond yield to continue trading in the 6.13-6.25% range. 3m T-bill rates continue to hover around 3.30% mark.
The Rupee traded a 73.35-73.74 range and ended the week flat at 73.48. Rupee was the best performing Asian currency this week.
In the coming week we expect the risk appetite to be a bit subdued. In line with a slight risk off tone, we expect USD/INR to trade a 73.30-74.30 range with an upside bias.
1y forward yield ended the week slightly higher at 4.40% while 3m ATMF volatility remains close to lowest levels since 2008 at 4.55%.
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