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Daily Report 22nd June 2017

The big story overnight revolved around Oil. The price action sends out very strong bearish signals as is the case with any asset which does not rally on positive news and breaks the previous lows .

The news flow was decisively constructive and technical support was supposed to be strong , yet crude hit the lowest since August.

First, OPEC tried a bit of jawboning. Iran's oil minister Zanganeh said consultations were ongoing about a further production cut. That comment barely had a positive effect on prices. Second, the US inventory report was mildly bullish as oil inventories fell 2451K compared to 1200K expected. Initially, WTI climbed more than 50-cents on the headlines but the spike was erased in an hour and then price stated to swoon.

Finally, WTI easily slid below the important November low .The low on the day was 42.05 compared to 52 on the day of the OPEC meeting.

The combination of those factors made it an even worse day for oil than it seemed. It could also result in bad times for central bank hawks. The declining oil is no doubt deflationary and will obviously undercut hopes for a return to 2% inflation any time soon. Of course , it could be temporary aberration in oil prices but the optics of hiking rates with 1% headline inflation do not sound logical.

So Fed goes on hold in SH 2017 and ECB and BOJ remain on hold . FED tightening cycle was not able to lift the dollar as the political noise drowned that advantage . Now that FED could be staring at softer Inflation print and the energy sector going into shell ( nearly 200k job losses ?) in a tough political environment ( which is battling day in and out) , the dollar’s long held advantage is getting lost for sure. So we would expect USD to come under renewed pressure, if the oil declines further . It is not too long ago , the dollar weakness was the driver for higher oil prices whereas the tables have been turned now with oil weakness expected to drive USD lower .

As the global growth apprehensions are not the cause of this oil sell off as was the case in Jan 2016 , the equities as well as Risk might not be impacted adversely . It may be too early to say – Yet equities and risk could even start rallying as oil comes off in an orderly way as the overhanging sword of Monetary tightening gets removed once for all.

Technically Brent has to recapture 45.70 – the break down zone – swiftly whereas a close below 44.41 today strengthens the bear case of losses close to 40.00 in a sharp move lower.

The risk of economic impacts of a sharp oil decline ( Time not yet for a strong bearish call but if the prices steady around 40.00 for a longer time , that itself could be construed as bearish signal )

· A prime potential victim is Canada and the timing could not have been worse for the BOC as they have just shifted to a hawkish stance and declared that energy worries are behind the economy. A reversal in this stance would obviously send USD/CAD sharply higher.

· The US is not immune either. Another round of layoffs in the shale industry would come at a delicate time and worries about corporate debt could re-emerge. To be sure, those factors are not yet in play but if oil falls below USD 40, they will come to the fore.

· Middle east : Obviously they would come under renewed pressure . Having almost adjusted themselves to a steeper decline than this only in the recent past , we would expect the pain to remain manageable.

Second most important story of the day is the Brussels Summit . May will address her EU counterparts on her plans for the issue of expats' rights after Brexit. About 3.2 million EU nationals live in the UK. The plan is widely expected to fall short of the EU’s expectations and could open up the division between the EU and the UK.

Domestic :

· The global macros decide the direction of Indian markets nowadays and local factors at best soften the corners. A break past 9673 In Nifty should bring 10035 objective .

· With summer normally supportive of carry environment , USDINR could never have been so benign as it is currently .