Multi-Asset Weekly Newsletter

BUDGET TICKS THE RIGHT BOXES: FOCUSES ON REVIVING PERSONAL CONSUMPTION WHILE MAINTAINING FISCAL PRUDENCE. 

Fed kept the rates unchanged in its policy this week, as expected. Chair Powell said that the FOMC was in no hurry to cut Rates. ECB cut Rates as expected by 25bps. President Lagarde said that the direction of travel was clear but refrained from giving solid forward guidance. US Q4 GDP missed estimates (2.3% against the expected 2.6% yoy). Eurozone Q4 GDP too came in weaker than expected. German Jan CPI print came in way lower than expected at -0.2% against the expected 0.1% MoM. 

President Trump said that he would impose 25% tariffs on Canada and Mexico and that China would also have to face tariffs. News about Chinese LLM Deepseek being computationally more efficient sent shivers down the spine of US chip companies that have capitalized on demand from LLMs such as ChatGPT. The Deepseek saga suggests that China could also have tricks up its sleeve to keep Trump's aggressive tariff policies in check. 

NIFTY V/S GLOBAL MARKETS

S&P500 ended the week 1% lower. Tech-heavy Nasdaq was down 1.6% on demand concerns given growing Deepseek popularity. European indices were mixed with FTSE gaining 1.3%, CAC ending 1% lower and DAX ending 0.3% higher. 

FIXED INCOME: 

Yields on US treasuries were flat on the week. 2y ended at 4.20% while 10y ended at 4.54% 10y Yields across Eurozone and UK were down 5-8bps Yield on the India 10y benchmark had dipped to 6.62% in reaction to liquidity infusion measures announced by RBI but eventually ended the week 2bps higher at 6.70% RBI announced a slew of measures to infuse durable liquidity in the banking system I.e. conducting OMOs, Buy-Sell USD/INR swaps, and 56-day VRR. Liquidity in the banking system was running persistently in deficit as a result of RBI's delivery of short forward contracts and Dollar sales. The budget seems fiscally prudent. The thrust is on stimulating private consumption. The government would like to see the capacity utilization increase and thereafter an onset of a private Capex cycle. There has been too much reliance on government spending to maintain growth. The government would gradually want to change that. 

FX and Commodities 

FOREIGN EXCHANGE: 

All G10 currencies weakened against the Dollar except Yen (+0.5%) Commodity currencies were the worst performers. Euro and Pound ended 1.3% and 0.7% lower respectively Key data to look forward to next week would be the US January jobs report. BoE monetary policy is also due next week. BoE is likely to cut rates by 25bps to 4.5%. All Asian currencies weakened against the Dollar this week. MYR(-1.9%) was the worst performer. The rupee weakened 0.5% to end at 86.62, close to record lows. FX Reserves rose USD 5.5bn to USD 629.5bn in the week ended 24th January. 1y forward yield climbed 8bps to 2.28%. 3m ATMF implied volatility climbed 11bps to 3.40%. 

COMMODITIES: 

Gold and Silver were up 1% and 2.4% respectively this week. Brent came off 5% to USD 75.7 per barrel. US Natural gas prices fell 24% this week on fears of a reduction in energy demand from data centers on Deepseek news and the weather Outlook turning warmer. LME Copper and Aluminum prices fell 2.5% and 3.4% respectively this week. 

WHAT WE LIKE: 

FX: 

We expect the Dollar to trade sideways over the coming week. Over the medium term, we expect the Dollar to trade with a slight bullish bias. Importers are advised to hedge on every dip. Exporters are advised to hedge through participating option structures. 

Fixed Income:

We expect the US treasuries to rally from current levels. Upside in yields from current levels seems limited. On the domestic front, one can look to exit long-duration positions on any dips in 10y towards 6.60% and wait for better entry levels. We may see a positive reaction to the budget on Monday given that the fiscal deficit was budgeted at 4.4% against the expected 4.5%. Gross borrowing and net borrowing at Rs 14.8 lakh crs and Rs 11.5 lakh crs respectively were in line with market expectations. We see any dip to 6.60% on the 5y OIS as a good paying level