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Charts & Analysis

FedEx Takes the Rupee 6-0, Nifty Below 200DMA

The Federal Reserve has decided to Exit the Stimulus it has been giving the US economy by purchasing bonds worth $85 billion each month. The Fed Exit (“FedEx”?) will be tapered down later this year and further purchases will be completely stopped by mid-2014.

Bloomberg:

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said, referring to the FOMC’s outlook for “moderate” economic growth, further labor-market gains and inflation accelerating toward the Fed’s 2 percent goal.

If such gains are maintained, “we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” he said. A “strong majority” on the FOMC now expects it won’t sell mortgage-backed securities as part of their exit strategy.

The result: The rupee goes to Rs. 60 to a dollar. Indian markets are down 3%. Nearly every world market is down 2%. Indian banks are down nearly 4%.

This, on the back of the Fed saying it *might* cut purchases.

We are now in the enviable position of having had a crisis, and the world’s largest bond purchase program to help get out of that crisis, and then just the THOUGHT of no longer buying any more is triggering a panic?

Note that it’s not a crisis situation. 2-3% moves are nothing great, though the fear is that now, we’ve fallen 8-9% from the highs, and are just 10% off the all time high. Our P/E (standalone, I agree) is still 17.

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(Click for larger picture)

On the downside, we have broken down below the 200 DMA again and are now 3% below it. Stocks that were supported largely by banks are now breaking down because the Bank Nifty is in really bad shape, having fallen 20% off the peaks of 13,200.

Does the Fed move hurt that much? How do bond purchases by the Fed even impact us? Here’s the theory: The fed buys bonds in large quantities, printing money. That takes bonds off the books of banks, who now have money to lend. They lend some, they invest some. The money finds its way into investors’ hands, who them pump money all around the globe. India gets some of it. And when they stop, we don’t get it, and there’s no replacement for this “FII” money.

Another way: when bond purchases stop, the bond yields go up. Indeed the 10 year bond yield in the US is now over 2%, having been at 1.5% recently. The drop in bond prices (which go inversely with yields) drives people out of bonds. And to take those losses, investors exit bond positions everywhere else. In India, they have supposedly gotten out of about $5bn worth of bonds.

Eventually, when foreigners exit, the rupee drops. And the rupee hit the 60 mark in intraday trading today:

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The good part: Calculated Risk tells us that it’s not like the US will stop buying bonds tomorrow. It is only likely to, if the broad economic data tells it that a recovery is in place. And for that the US GDP needs to grow at nearly 3% for the next six months, unemployment would have to drop another 0.4% and inflation should be closer to the 2% the Fed expects. This is so that the Fed tapers in September, so it’s likely we will miss that and go to December instead (for the taper, which is more or less a definite thing, so it’s when, not if).

Samir Arora says we’re bullshitting ourselves that this will make any difference. We all knew the taper was going to happen, he says, so what’s new? The answer: We all knew QE3 was coming, more or less, and when it happened it still changed market dynamics. This market is about emotions.

Ben and Janet say it like they’re surprised that we’re surprised: Really?

My take: It doesn’t matter. I was long when it went up. I exited most positions at a stop loss, five profitable exits and 2 unprofitable ones. I’m now short. All this about sentiment, it shows in the price: the Nifty was down 6% from it’s recent high before it fell 3% today. The Dollar fell just 2% today but 8% from the 55 levels about two months ago. The price was talking before Bernanke was talking.

  • Vamsy says:

    “When bond purchases stop, the bond prices go up. Indeed the 10 year bond yield in the US is now over 2%, having been at 1.5% recently”
    I think you meant “When bond purchases stop, the bonds GO DOWN…”.
    Anyway, what is different this time is Fed put a timeframe which was not done in the earlier times. My best guess is Fed had to make this statement as asset classes are in their highest valuations and wanted to slowdown the bubble buildup. I think markets did not overreact, the only real surprise was from the technical standpoint the market was in a bull run but this sudden event has make a wideselloff that caught everyone by surprise (please correct me if I’m wrong).

  • ARP says:

    One of the points that is not well discussed is the USD/INR carry trade unwinding. The FIIs borrowing in the US at 2-3% and buying bonds (lending) in India at 7-8% to earn a spread of 5-6%.
    This seemed to be lucrative trade when the rupee was stable. But now that the rupee has depreciated more than the safety margin of 5%, the FIIs started liquidating in the bond markets.
    I pray that the erudites at FinMin / RBI do not enforce capital controls (or restrict the amount of dollars being taken out of the country) else we are going to see a massive correction in the rupee.
    Secondly, day by day it seems the BRIC is nothing more than a catch phrase of the past. Brazil already facing huge problems and even riots starting to break out. China facing a huge economic downturn and liquidity crisis in its banking system.
    Yesterday, the one-day repo rate closed at an all-time high of 12.85% (rising 5.87%). Intra-day it hit 25%. Yes …. 25%.
    We are living in interesting times ….

  • Prabhakar says:

    I think this bit about “it being in the price” is interesting and i have seen a lot of people bring it up when it works. But there are as many instances (if not more) where prices turn back violently post the event. And prices could very well have turned on Thursday had Bernanke said something else or had RBI unleashed some “secret weapon” or ….. The point is “who knows”. But it would be interesting to test this theory of “in the price” across many instances before and after the actual event happens.
    I think what really works is post the event – whether its an earnings announcement or a macro event the markets aren’t able to discount the entire information in the price instantly and hence we get trends – moves post the event which can either be a continuation or a reversal which might last for more than day which can definitely be traded.
    Just because the price was down and the event turned out to corroborate that doesn’t really mean it was in the price.If it were then one would have doubled the short positions before the event. The way i look at it is – the trend was down and it made sense to be short, now post the event it makes even more sense to add to the shorts since the trend sustained. However if the trend changed post event it would make sense to cover the shorts and go long?
    Would love your views since you’ve probably been a trader for much longer than my entire experience in the markets.

    • There are contrarian times and trend times. Many contrarian things take the market by surprise, and sometimes even THAT is built in to the price (even in teh 1987 crash in the US, prices were falling a week ahead. )
      However the point is that when you’re trading you don’t care about being right or wrong. You have to take many bets, and some will be wrong. The point is that when the price so deeply bearish, it’s already telling us a lot. And then another tiny fall isn’t the real trade (even if it was 3% in a single day). THe real trade was the 8% that came before it 🙂
      But then trading is also about knowing when to ignore the rules. I know that doesn’t leave you with much, but it really is case by case. In this particular case I took off my long positions (on a trailing stop) but didn’t go too badly short, even though the price said so. (Was chicken!)
      Markets are about sentiment in the short term, and there is no “discounting of information” – it’s just a collective sentiment of the market. When that sentiment edges on the extreme bullish, you find that the market shrugs off bad news and reacts positively to good news. In a bearish zone it’s the opposite. It’s a trader’s job to recognize the deal…