Global bond yields are at historical lows which mean global bond prices have rallied across developed markets while S&P 500 is close to its historical high. This by itself is a dichotomy as bond prices and equity prices are not expected to rally together at the same point. Either of the two has to be true. •Bond prices and yields are inversely related therefore, bond prices rally when yields and interest rates are expected to be low. Interest rates are expected to be low because growth prospects are low. This would entail the central banks to cut rates and because the demand for credits will be low due to the low growth prospects, the yields are expected to be low which explains the rally in bond prices. Considering this, the rally in the equity markets is not possible as there is no expectation for growth. This is the dichotomy that the global world is at particularly in the developed markets. In the light of the current scenario, either of the two has to give in i.e. either bond prices correct leading to normalcy in yields or equity markets give in.

1. THE WORLD THIS WEEK
July 4– July 8, 2016

2. EQUITY VIEW

3. EQUITY VIEW
• Global bond yields are at historical lows which mean global bond prices have rallied across developed markets
while S&P 500 is close to its historical high. This by itself is a dichotomy as bond prices and equity prices are not
expected to rally together at the same point. Either of the two has to be true.
• Bond prices and yields are inversely related therefore, bond prices rally when yields and interest rates are
expected to be low. Interest rates are expected to be low because growth prospects are low. This would entail the
central banks to cut rates and because the demand for credits will be low due to the low growth prospects, the
yields are expected to be low which explains the rally in bond prices. Considering this, the rally in the equity
markets is not possible as there is no expectation for growth. This is the dichotomy that the global world is at
particularly in the developed markets. In the light of the current scenario, either of the two has to give in i.e. either
bond prices correct leading to normalcy in yields or equity markets give in.

4. EQUITY VIEW
• In the current scenario, the approximately 12 trillion dollars of global bonds that are fetching negative rates have to
be considered. While a large part of this is related to the efforts made by the central banks globally to stimulate
credit, anxiety of Brexit has also contributed to it.
• Money is flowing into US treasuries and other global developed market bonds in search for safe haven. This is
something that is likely to be a tentative phenomenon so while in the very near time this anomaly might persist but
this is something that will not sustain in the medium term or long term. Bond yields are most likely to go up initially
which means as risk aversion decreases, money will be pulled out from bonds and invested in equities therefore
bond yields will start rising and prices will come down. However, this does not indicate a very positive outlook on
how interest rate cycles will fair in a country like India.

5. EQUITY VIEW
• US Treasury has been on hold for some time now but this will reverse since bond yields are expected to
go up and US Treasury starts increasing rates again. In the near term what is likely to happen is as bond
yields start rising up, interest rates in emerging markets like India would have bottomed out. This means
expectations regarding interest rate fluctuations have to be moderate as there cannot be a situation
where real rates keep rising across global markets while it falls in emerging markets such as India since
that will lead to immense pressure on currency. Even without this happening, as dollar strengthens, there
will be lot of pressure on emerging market currencies like the rupee.
• Hence the strategy going forward has to be that the equity market is expected to rally aggressively in the
next five to ten trading sessions to hit an all time high. There is need to get rid of high beta and junk
stocks from the portfolio. The focus should be on non interest rate sensitive assets for the very
immediate term.

6. EQUITY VIEW
• Sectors such as IT, Pharma, FMCG, Durables and Domestic consumption should be focused on while moving
away from extreme interest rates.

7. NEWS

8. DOMESTIC MACRO
• The government's tax kitty was up 28 per cent (year-on-year) in the first quarter (April-June), against the
target of 12 per cent growth in gross tax collection for 2016-17. In absolute terms, these swelled to Rs
3.24 lakh crore in the quarter, against Rs 2.52 lakh crore in the year-ago period. As much as 42 per cent
of it, excluding cess and surcharges, would go to states. This was factored in the Budget when the fiscal
deficit target for FY17 was set.
• India may alter the list of steel items that attract a minimum import price if the country decides to continue
with the protectionist measure beyond August, according to steel secretary Aruna Sundararajan . India
imposed the minimum import price (MIP) on 173 steel products in February, helping cut inbound
shipments last month to their lowest level in at least 14 months. The MIP expires in August. The country
is the world's third-largest steel producer, with a total installed capacity of 110 million tonnes.

9. GLOBAL MACRO
• Some of Britain's biggest financial institutions said they were ready to lend more after a
decision by the Bank of England to cut their capital requirements, according to a joint
statement with finance minister George Osborne. The Bank of England, which is trying to
ease the hit to the economy from last month's vote to leave the European Union, it would
lower the amount of capital banks are required to hold in reserve, potentially freeing up an
extra 150 billion pounds ($196 billion) for lending.
• Money placed in real estate vehicles managed by big asset management firms such as
Standard Life and Henderson may have yielded strong returns during the boom years, but
with the pound in freefall and Britain headed towards economic recession, the flip side of
such investments is fast becoming evident.
EURO

10. GLOBAL MACRO
• U.S. job growth surged in June as manufacturers and other employers
boosted hiring, confirming the economy has regained speed after a first-
quarter lull, but tepid wages suggested the Federal Reserve will probably not
raise interest rates soon. Nonfarm payrolls increased by 287,000 jobs last
month, the largest gain since last October, according to the Labor
Department.
• New orders for U.S. factory goods fell in May on weak demand for
transportation and defense capital goods, but growing order backlogs and
lean inventories suggested the worst of the manufacturing downturn was
probably over. According to the Commerce Department new orders for
manufactured goods declined 1.0 percent after two straight months of
increases.
UNITED STATES

11. GLOBAL MACRO
• Chinese government data showed consumer prices in June rose at the
slowest pace in six months, suggesting the world’s second-largest economy
is still experiencing weak consumer demand amid a broad downturn.
According to the National Bureau of Statistics China’s consumer price index
(CPI) rose 1.9 per cent in June from a year earlier.
• China's factory-gate Deflation eased for the sixth straight month, adding to
evidence that falling prices have turned a corner after more than four years
of declines. The producer-price index fell 2.6 per cent, compared with a 2.8
per cent drop a month earlier, the National Bureau of statistics said on
Sunday. The decline was the smallest since late 2014.
CHINA

12. INDICES
Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck
4/7/2016 27,279 11,927 19,904 20,742 12,070 15,378 8,496 15,759 11,232 8,715 10,145 2,018 1,576 6,107
5/7/2016 27,167 11,917 19,686 20,647 12,031 15,431 8,485 15,791 11,175 8,749 10,095 2,004 1,566 6,071
7/7/2016 27,201 11,867 19,585 20,696 12,004 15,309 8,563 15,971 10,994 8,692 10,055 2,010 1,570 5,975
8/7/2016 27,127 11,880 19,709 20,634 11,974 15,158 8,544 16,040 11,000 8,649 9,957 2,010 1,566 5,963
-0.56% -0.39% -0.98% -0.52% -0.80% -1.43% 0.57% 1.78% -2.06% -0.75% -1.86% -0.40% -0.66% -2.36%

13. COMMODITIES AND CURRENCY
Date USD GBP EURO YEN Crude (Rs. per BBL) Gold (Rs. Per 10gms)
4/7/2016 67.18 89.30 74.83 65.47 3,304 31,046
5/7/2016 67.40 89.15 75.03 66.06 3,141 31,095
7/7/2016 67.50 87.61 74.83 67.00 3,197 31,204
8/7/2016 67.46 87.32 74.72 67.15 3,047 31,529
-0.41% 2.22% 0.15% -2.57% 7.78% -1.56%

14. DEBT
Tenor Gilt Yield in % (Friday) Change in bps (Week)
1-Year 6.90 -6
2-Year 6.98 -4
5-Year 7.23 -12
10-Year 7.39 -3

15. KIASL TEAM
Jharna Agarwal
Head- Advisory
Jharna.agrawal@Karvy.com
Nupur Gupta
Lead Advisor
Nupur.gupta@Karvy.com

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