Multi-Asset Weekly Newsletter

RENEWED US-CHINA TRADE TENSIONS, CONTINUING US GOVERNMENT SHUTDOWN, SPOIL RISK SENTIMENT. 

On Friday, President Trump said that he would impose another 100% tariff on China and also export controls on any and all critical software from 1st November onwards. He said he would withdraw these if China lifts restrictions on rare earth exports.  On Friday itself, the Trump administration started laying off Federal workers. Trump said that the number of Federal workers who will be laid off will be a lot. These employees will not be returning to the office after the shutdown ends. The US government has been shut down for 10 days now, and the shutdown continues into the weekend with no possibility of common ground seen between Republicans and Democrats as of now. These Friday developments triggered risk off and flight to safety, causing US equities to sell off and US treasury yields to drop. The Dollar that had strengthened earlier in the week also gave up gains.  

Foreign Exchange 

• Both EUR (-1.1%) and GBP (-0.9%) weakened against the USD, with the Euro underperforming slightly. 
• This indicates mild downward pressure on EUR/GBP, favoring the Pound marginally. 
• The euro was under pressure due to political troubles in France. President Macron's own allies seemed to have turned against him. In a surprising move on Friday, though, Macron reappointed Lecornu as PM, after having accepted his resignation 7 days ago. The opposition is calling for a snap election. 
• In Japan, the appointment of Sanae Takaichi as Japan's PM caused the Yen to weaken as she is seen as being pro-stimulus. Expectations around rate hikes by the BoJ were therefore pushed back. 
• The Indian Rupee emerged as the best-performing Asian currency this week, appreciating 0.1% against the dollar. 
• Most peers weakened, with the Korean Won and Thai Baht leading losses, down 1.3% and 1% respectively. 
• Except on Friday, the Rupee traded in extremely narrow ranges during the week. It traded a 88.51-88.80 range during the week and ended at 88.69 compared to the previous week's close of 88.78 
• RBI most likely continued intervening to defend 88.80, especially in offshore. 
• FX Reserves ended almost unchanged in the week ending 3rd Oct at USD 700bn 
• Implied forward yields show a gradual upward slope from 1.94% (1M) to 3.07% (5Y), reflecting mild long-term rate expectations. 
• Meanwhile, ATMF implied volatility edges higher from 3.06% (1M) to 3.24% (3M), indicating modestly rising uncertainty over the near term. 

Fixed Income 

Yield on the US 2y dropped 9bp to 3.50% while yield on the 10y dropped 12bp to 4.03%. 10y. Yields across the UK and the Eurozone were down between 6-8bps. Yield on the domestic 10y benchmark ended 3bps higher at 6.54%. It ended at the highest point of the week. The low was 6.49%. 1y OIS ended the week almost unchanged at 5.44% and 5y OIS also ended flat at 5.66%. FPIs have invested net USD 500mn in domestic equities in October so far. 3m, 6m, 12m T-bills are at 5.43%, 5.51% and 5.54% respectively. 3m, 6m, and 12m CD rates are at 5.93%, 6.07% and 6.33%. 10y Gsec annualized is at 6.64%, 10y AAA PSU at 7.12% and 10y AAA NBFC at 7.34%. 

Commodities 

This week, energy prices saw declines with Brent crude down 2.8% and US natural gas falling 6.6%, while metals had mixed movements—aluminum rose 1.4% and copper
slipped 1.8%. Precious metals outperformed, with gold gaining 3.4% and silver up 4.5%.
Gold and Silver rallied this week, both taking out key psychological levels of USD 4000 and USD 50, respectively
Silver borrowing cost surged to unprecedented levels, sending the curve into backwardation. It indicates massive spot demand for delivery  

Option Structures for Exporter Importer

Importer Option Strategy (Seagull) 

Spot ref 88.70
Tenor 3m
Buy call Atmf (89.15)
Sell put 88.50
Sell call 90.16
Net Zero cost  

   

Exporter Option Strategy (KIKO) 

Spot ref 88.70
Tenor 6m
Atmf 89.66
Buy put at 89.55
Sell call at 89.55 with eki at 90.50
Net Zero cost 

Our Views: What we like? 

FX: We continue to believe, despite this week's Dollar strength, that we are still in a phase of overall Dollar weakness, especially in the case of G10. We expect Dollar weakness to be less pronounced against Emerging market currencies, especially the Rupee. Importers are advised to buy into any dips. Exporters are advised to hedge in a calibrated manner, as we believe Rupee depreciation will likely happen in a controlled, step-wise manner. IFA Global Hedging barometer at 120 is indicating a mildly bearish view on the Rupee over the medium term (Implied range is 88.40-89.30 over the next 6 weeks). Barometer range is 36-180, with 36 indicating peak USDINR bearishness.  

Fixed Income: We expect the 10y to trade a 6.45-6.65% range over the next few weeks. We believe any uptick on 10y towards 6.65% is a good opportunity to add duration to the portfolio. Current levels on 5y OIS are attractive to convert floating-rate liabilities to fixed. 

Commodities:  We continue to remain bullish on precious metals amid uncertainties around trade and the US government shutdown. Overall, Dollar weakness imparts a tailwind as well. We are more upbeat on Silver than on Gold. We are neutral on Brent and Base Metals at this point.