Intermarket Analysis for Indian Traders

Published on: December 17, 2024

Intermarket analysis is a comprehensive approach to understanding the interplay between various asset classes, such as equities, bonds, commodities, and currencies. It helps traders and investors gauge the broader market sentiment, identify trends, and make informed decisions.

For Indian traders and investors, this analysis becomes even more crucial due to the interconnectedness of global and domestic markets. With an evolving economy and increasing foreign participation, understanding intermarket relationships can give market participants an edge.

The Foundation of Intermarket Analysis

John Murphy, the pioneer of Intermarket analysis, outlined four key relationships:

1. Commodities vs. Bonds: Rising commodity prices often signal inflationary pressures, leading to higher bond yields.
2. Bonds vs. Equities: Bond yields impact equity valuations due to the cost of capital and interest rate expectations.
3. Equities vs. Currencies: Strong domestic equity performance often correlates with a robust currency.
4. Currencies vs. Commodities: Commodities are inversely related to the currency of their primary producer/exporter.

I would recommend the readers to read his book. You can buy from Amazon

Intermarket Analysis in the Indian Markets

1. Nifty50 and USD/INR Relationship

• A falling rupee (INR depreciation) often triggers foreign fund outflows, negatively impacting Indian equities. Conversely, a strong rupee (INR appreciation) attracts foreign investments.
• Practically, the rupee has been depreciating if we look at the long-term perspective, while Nifty or Sensex, the benchmark indices, too, are trending bullish for the same period.
• Example:
  During the pandemic-induced crash in March 2020, the USD/INR soared to ₹77, while the Nifty50 plunged below 8,000. The reversal of this trend in subsequent months, with INR stabilising, coincided with a strong equity recovery. This generally happens during the event volatility.

• How to track it?

Monitor the USD/INR chart alongside Nifty50 for divergence. Another way to analyse this is to use the ratio chart of Nifty/USDINR for trend identification.

2. Bonds and Equities: Yield vs. Cost of Capital

• Indian Context: The Indian 10-year Government Bond Yield serves as a benchmark for interest rates and the cost of borrowing.
• Relationship: Rising bond yields generally signal higher interest rates, dampening equity valuations, especially for interest-sensitive sectors like real estate and banking.
• Example:
  In 2022, as Indian bond yields crossed 7.5%, rate-sensitive sectors like Nifty Realty underperformed, reflecting tightening monetary conditions. Though this may be short-term biased, the market trend may define the performance of the sectoral indices on the bond yield.
• Practical Insight: Track the bond yield chart and its correlation with Nifty Realty and Bank Nifty. Rising yields often signal bearish sentiment in these sectors.

3. Commodities vs. Indian Equities

• Crude Oil: India is a major importer of crude oil. Rising crude prices inflate the current account deficit and weaken the rupee, negatively impacting equities. In 2018, crude oil prices surged above $85 per barrel, leading to a sharp depreciation in INR and a correction in Nifty50.
• Gold: Gold is a safe-haven asset and often inversely correlates with equities. During periods of economic uncertainty, gold prices rally as equities correct.
• Example:
  During the COVID-19 crash in 2020, gold prices soared, reaching a record high above ₹56,000, while equities witnessed a steep decline.
• Practical Insight:
  Use crude oil and gold charts as a sentiment gauge. Rising crude and gold prices can signal potential equity weakness.

4. Sectoral Intermarket Relationships

• IT Sector (Nifty IT) vs. USD/INR: A depreciating rupee benefits IT companies as they earn in dollars.
• Example:
  During the rupee’s fall in 2022, Nifty IT outperformed other sectors, with stocks like TCS and Infosys rallying.
• Metal Sector (Nifty Metal) vs. Global Commodity Prices:
  Global metal prices, such as copper and aluminium, directly impact the performance of the Nifty Metal index.
  • Example:
    The rally in global metal prices in 2022-2023 fueled a strong uptrend in stocks like Hindalco and Hind Copper.

Tools for Intermarket Analysis

• Definedge Platforms: Use TradePoint or RZone for multi-asset charting.
• Ratio Charts:
  • Nifty50/Gold: Measure the relative strength of equities against gold.

Practical Strategy: Using Intermarket Analysis for Trading

Step 1: Analyse Macroeconomic Indicators

• Monitor inflation, GDP growth, and RBI policies. Rising inflation often impacts bonds and equities negatively.

Step 2: Identify Key Intermarket Relationships

• Cross-reference Nifty50 with USD/INR, Indian bond yields, and global commodity prices.

Step 3: Use Definedge Charts for Confirmation

• Apply DeMAP to identify emerging trends in commodities and equities.

Step 4: Develop a Trading Plan

• Example:
  If USD/INR is appreciating and crude oil prices are rising, focus on IT and export-driven sectors while avoiding sectors like aviation and FMCG that rely on imports.

Call to Action:

The intermarket analysis provided early warning signs of equity weakness and highlighted opportunities in gold and IT stocks. However, these intermarket setups play on a medium to long-term perspective and are not suitable for day trading.

Start leveraging platforms like TradePoint and Zone to explore Intermarket relationships and uncover actionable insights. Enhance your trading with the power of multi-asset analysis today!