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THE WEEK GONE BY AND THE WEEK AHEAD .

28 June, 2013

The debate remains open on whether markets reacted rather too violently to the FOMC announcement relating to QE tapering. That the yields and risk spreads were far too low in the US two months ago cannot be disputed. But the sharp fall in US 10y Treasuries to 2.55%+ and a sharp fall in EM assets and currencies may clearly be an over-reaction by the markets considering they did not probably expect such a hawkish tone from the FED.

A weaker GDP Print in the US at 1.8% against 2.4% expected, rising mortgage rates that will slowdown growth further and various other indicators including inflation point to a serious difference between fundamentals and the market reaction to FOMC. We believe that regardless of QE tapering. Fed Funds will remain depressed at current levels at least until 2015, inflation will remain benign and economic conditions will remain weak for a lot longer than expected for now.

The key events of last week:

The housing sector continues on the mend with home prices continuing upward. The FHFA price index for April increased 0.7 percent after improving 1.5 percent in March. 28 Dec 2012 The latest number, however, fell short of the market forecast for a 1.2 percent gain. The April increase was led by the Mountain region, increasing 2.2 percent. Six of nine Census regions posted gains in the latest month.

Home prices, boosted by lack of supply and perhaps a sense of urgency if not panic among buyers, are shooting
straight up. Case-Shiller's adjusted month-to-month gain for its 20-city index is up 1.7 percent in April alone and follows a 1.9 percent jump in March. The year-on-year rate is exceptionally strong, at plus 12.0 percent. Gains are sweeping across all cities without exception with strength centered out West where monthly gains are nearing 3 percent with year-on-year gains reaching 20 percent.

108, Madhava, Bandra Family Court Lane, BKC, Bandra (E), Mumbai 51

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The Eurozone M3 Money Supply increased 2.9% in the three months to May, following a 2.9% rise in the three months to April, according to the ECB official data. On an annual basis M3 Money supply grew 2.9% in May, down from the 3.2% rise registered the previous month, as projected. Year-over-year Private loans fell 1.1%, after dropping 0.9%, below expectations of -1.1%. The Eurozone M3 Money Supply increased 2.9% in the three months to May, following a 2.9% rise in the three months to April, according to the ECB official data. The Economic Sentiment Indicator (ESI) has improved by 1.8 points in both the euro area (to 91.3) and the EU (to 92.6) in June. The increase was due to an improved sentiment among consumers and managers in all business sectors except for services. Moreover, the Business Climate Indicator (BCI) for the euro area increased by 0.07 points to -0.68. All the five largest euro area economies saw sentiment improving, namely Spain (+2.5), Italy (+1.7), France (+1.3), Germany (+1.1) and the Netherlands (+0.9). Consumer confidence increased (+3.1) and for the seventh consecutive month. Consumers were significantly less pessimistic concerning the future general economic situation. Also their unemployment and savings expectations and their assessment of the future financial situation of their households were less negative.

. Construction confidence improved as well (+1.4), resulting from a less negative assessment of both order books and employment expectations. Also financial services confidence (not included in the ESI) picked up (+0.7), driven by better assessments of the past business situation and demand. However, services confidence remained broadly stable (-0.3). Page 2

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And closer home.

The Reserve Bank of India published the balance of payments data for the fourth quarter of 2012-13 (and, consequently, for the full year) a day earlier than scheduled. What clearly motivated this uncharacteristic enthusiasm was unquestionably the hope that a rather positive reading on the current account deficit would have on a rapidly declining rupee. India's current account deficit hit a record high 4.8 percent of gross domestic product in the fiscal year that ended in March, fuelled by rising imports of oil and gold, but was lower than an expected gap of 5 percent, giving a boost to the battered rupee. India's financial account, which includes foreign direct investment, portfolio investment and overseas borrowing by Indian companies, showed a surplus of $17.6 billion in the March quarter, compared with $22.4 billion a year earlier. Dollar/rupee ended below RS 60/$1 level Friday on strong inflows from overseas investors and corporate, and after government hiked price of natural gas, boosting investors' sentiment, dealers said. India's foreign exchange reserves including gold and special Drawing Rights were down by $2.812 billion to $287.845 billion in week to june 21, Reserve bank of India weekly Statistical Supplement showed Friday. Forward premia for dollar across maturities ended flat amid uncertainty over rupee's movement, exporters covering and demand from oil importers, dealers said Forward premium for dollar maturing in one-year ended at 5.77% compared to previous close of 5.75%. Foreign Currency assets were also down by $2.656 billion to $258.432 billion in week to June 21, Reserve bank of India weekly Statistical Supplement showed Friday.

Important upcoming International events to be tracked:

Date Time Country European Monetary Union European Monetary Union European Monetary Union Event

07-01-2013

13:30 IST

PMI Manufacturing Index

07-01-2013

14:30IST

HICP Flash

07-01-2013

14:30 IST

Unemployment Rate ISM Mfg Index (ISM Mfg Index Level)

07-01-2013

19:30 IST

US

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Construction Spending (Construction Spending - M/M change)

07-01-2013

19:30 IST

US European Monetary Union

07-02-2013

14:30 IST

PPI (Month over Month) ICSC-Goldman Store Sales (Store Sales - W/W change) Redbook (Store Sales Y/Y change)

07-02-2013 07-02-2013

17:15 IST 18:25 IST

US US European Monetary Union

07-03-2013

14:30 IST

Retail Sales (Year over Year) MBA Purchase Applications (Purchase Index - W/W Change) Challenger Job-Cut Report (Announced Layoffs - Level) ADP Employment Report (ADP employment) International Trade (Trade Balance Level) EIA Petroleum Status Report (Crude oil inventories (weekly change))

07-03-2013

16:30 IST

US

07-03-2013

17:00 IST

US

07-03-2013

17:45 IST

US

07-03-2013

18:00 IST

US

07-03-2013

20:00 IST

US European Monetary Union European Monetary Union US

07-04-2013

14:30 IST

GDP

07-04-2013 07-05-2013

17:15 IST 18:00 IST

ECB Announcement (Change) Jobless Claims (New Claims - Level) Employment Situation (Nonfarm Payrolls - M/M change) Money Supply (M2 Weekly Change) Fed Balance Sheet (Reserve Bank credit - Weekly Change)

07-05-2013 07-06-2013

18:00 IST 02:00 IST

US US

07-06-2013

02:00 IST

US

Important upcoming Domestic Events:

Date 07-01-2013 07-01-2013 07-03-2013 07-03-2013 07-03-2013 07-05-2013 07-05-2013 07-05-2013 Time 10:30 IST 10:30 IST 10:30 IST 17:00 IST 17:00 IST 17:00 IST Country India India India India India India India India Event Power generation HSBC India manufacturing PMI Reserve Money (change on year) HSBC India Services PMI HSBC India composite PMI WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk)

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TECHNICAL VIEW
After opening up around 59.74, rupee weakened to an all-time low of 60.75 during the last week and corrected to 59. 38 at the end of week buoyed by a jump in risk assets across the globe after a weak US GDP number for the last quarter and increasing realization of an over-reaction by markets to FOMC statement There are mixed signals emanating from technical indicators. While medium term (Daily) indicators are strongly bearish, short term (hourly) indicators have turned bullish which clearly point to a strengthening rupee in the short term We expect INR to retrace slowly, amidst high volatility, to 58.50 level in the next few weeks but also suggest that the next 3-6 month payable be covered around an all-in cost of 59 -60 whenever available as the EM currencies and risk sentiment will likely remain under pressure for a while

Source : Reuter Eikon

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