'Are we seeing shift in global money flow away from hard assets'

Mumbai | Updated: Sep 4 2014, 20:38pm hrs
MoneyRisk appetite remains robust, as momentum remains a strong attraction for global money managers.
Over the last one week, thanks to steady dose of foreign currency inflows Indian rupee touched a five week high of 60.33/34 levels on spot.

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Hope of easing in the geopolitical tensions in central Asia played a role. However, FIIs continue to chase the equity and debt assets of EM markets like Brazil, India and Indonesia. A sharp rally in the Russian currency and markets also supported the Rupee. Risk appetite remains robust, as momentum remains a strong attraction for global money managers.

Volatility continues to remain low as demand for US Dollar from reserve manager and supply of the same from foreign speculators dampens possibility of a trend. RBI is quite happy to absorb the inflows sub 60.50 levels on spot. At the same time, option traders are eager to sell volatility and gamma due to low realised vol and lack of near term triggers. However, historically September has seen high volatility.

The recent trend of economic data from the globe has been a mixed bag, but with more misses than hits. In China, trend of manufacturing and services PMI remained weak. In Japan, capital spending by Japanese companies fell 1.8% in Q2. Manufacturing PMIs from Euro zone were weak, with Italian PMI sub-50, indicating contraction. Services PMI improved in Spain but was weak in Italy. German factory orders, a volatile time series, rose by 4.6% in July over June.

In Eurozone, retails sales contracted in August. UK economic data was mixed too, with manufacturing PMI being weak but services PMI putting up a strong show. In US, economic data continued to surprise on the upside, with ISM manufacturing and factory both suggesting strong trends in industrial sectors. We expect the August jobs data from US to beat consensus estimates of 209K.

Many participants have been bewildered by the disconnect between USD/INR and the US Dollar index. However, though it is unusual but it does not surprise us. We had mentioned in the past and will mention once again, on why we are seeing the disconnect and what can reverse it. US Dollar continues to strengthen against developed world currencies with divergent path if monetary policies. At the same time, US Dollar has found traction against EM currencies with either political or economic vulnerabilities.

However, US Dollar has largely remained flattish against Asian and EM currencies where foreign investors are engaged in an asset chase, like, Rupee. Therefore the outperformance in the Rupee can continue as long as no major risk aversion hits global financial markets. In case it does, then can see the gap between US Dollar Index and USD/INR narrow.

Tonight, ECB meeting will be a keenly watched event. We expect ECB to sound uber-dovish but stop short of announcing QE styled programs. Incase, ECB does not announce any fresh easing measure, there is risk of a short squeeze in the EUR/INR and EUR/USD. Technically, USD/INR remains in a downtrend, as long as 60.70/75 holds out on spot. Support levels are around 60.00/10 levels on spot and then around 59.70/80 levels. Incase, of a reversal above 60.75, the pair can aim for 61.30/50 levels on spot.

Globally, money flow continues to favour financial assets over hard assets, evident from the underperformance in realty, Industrial commodity and bullion prices vis a vis equity and debt market. Interestingly, history suggests that when a boom has ended in one place (assets or geographies), money flow has rotated away towards the next theme or fad.

As a result, be it coincidence or true pattern, a death of one boom had laid the seed for the birth of another. For example, during the mid to late 90s, the end of real estate boom across Asia and EM (including India) coincided with the most dramatic phase of the technology bubble in financial assets. Therefore, the question that comes to mind is are we seeing a similar shift in global money flow away from hard assets into financial markets.

If so, would India continue to receive a sizable chunk of that, due to the presence of strong domestic theme, that remains the central question.

- By Anindya Banerjee, Analyst, Kotak Securities