In India, ‘Another Fed-Induced Tightening Tantrum’

Following last week’s dollar weakness and concurrent reinvigoration of the reflation trade (perhaps temporary), Nomura’s Charlie McElligott is out with his latest daily missive which, as usual, offers a quick “lay of the land”, so to speak.

Earlier on Monday, Mario Draghi, speaking in Brussels, struck a relatively hawkish tone, adding to the policy convergence impetus which played into last week’s dollar pullback.

“[The] stable profile of inflation forecasts conceals a slowing contribution from the non-core components of the general index, and a relatively vigorous pickup in underlying inflation,” Draghi said, adding that “overall, recent developments vindicate the Governing Council’s earlier assessments of the medium-term inflation outlook.”

That bit about a “relatively vigorous” pickup in inflation is amusing because, well, because “vigorous” isn’t an adjective that usually comes with a qualifier.

DRAGHI SEES RELATIVELY VIGOROUS PICK-UP IN UNDERLYING INFLATION

If this is what "relatively vigorous" means, then I guess "outright vigorous" would easily get us to 1.25 pic.twitter.com/jrYMuojQve
— Walter White (@heisenbergrpt) September 24, 2018

Draghi’s upbeat comments lifted 10Y yields in the US and Germany and as the above-mentioned McElligott writes, “this too keeps pressure on German Bunds and global fixed-income—UST 10Y yields again bleeding higher in sympathy to highs of session.”

Oh, and in case you’re wondering what to make of the sudden plunge in Indian equities, Charlie reminds you that this is yet another example of a “Fed-induced Tightening Tantrum”.

India has been forced to hike this year in an effort to stay out ahead of the Fed and as with other EM central banks that have adopted a similarly cautious approach, it’s a trade off: You can hike to protect the currency, but that plays into the very same tightening of financial conditions that’s causing the problems in the first place, with ramifications for the local economy and domestic equities. Volatility in Indian stocks soared to its highest levels since February on Friday, as a rollercoaster session rocked confidence.

Vol

(Bloomberg)

“Since the last week of August, India’s NIFTY 50 equities index is -6.7% and MSCI India Small Caps -8.7% MTD, as the worst corporate credit liquidity crunch in years is battering Indian money markets with escalating borrowing costs and thus refinancing risks”, McElligott writes, adding that this is “thanks to diminished global liquidity off the back of the Fed’s normalization push as the RBI has too been forced to hike rates against the weakening Rupee.”

CM3