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🔗 Inter-market Analysis

Master the hidden connections between currencies, commodities, bonds, and stocks to predict market movements before they happen

📅 Saturday, February 2025
📖 15 min read
🎯 Advanced Technical Analysis
👥 Professional Level

🎯 Master Inter-market Analysis

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💱 Currency Correlations

Master how USD/INR movements impact IT exports, pharma revenue, and oil import costs. Learn to predict sector rotation using currency signals.

🛢️ Commodity Dynamics

Understand how crude oil, iron ore, and gold prices drive steel, energy, and jewelry sector performance with 2-8 week lead times.

📈 Bond Market Signals

Learn to read 10-year G-Sec yields as the ultimate market timer. Master when rising rates benefit banks versus growth stocks.

🔄 Professional Framework

Implement systematic 5-step analysis process to integrate multiple asset classes into coherent investment strategies.

⚡ Market Timing Edge

Gain 2-4 week timing advantage by reading leading indicators across currencies, commodities, and bonds before stock price reactions.

🎯 Why Inter-market Analysis Changes Everything

While most traders focus solely on stock charts, professional money managers understand that markets don't operate in isolation. Currency movements drive export company profits, commodity prices impact input costs, and bond yields determine valuations. This comprehensive guide reveals how to read the interconnected signals across asset classes to predict stock movements before they become obvious on price charts alone.

💱 Currency Impact: The Export-Import Equation

Understand how rupee movements create winners and losers in the stock market

🌍 Currency-Stock Relationships Decoded

📈 Rupee Weakening (USD/INR Rising)

Winners:

• IT Services (TCS, Infosys, Wipro)
• Pharmaceuticals (Dr. Reddy's, Sun Pharma)
• Textiles & Export-oriented companies
• Chemicals with export exposure

Why: Higher USD receipts when converted to INR increase revenue and margins for export companies

📉 Rupee Strengthening (USD/INR Falling)

Winners:

• Oil & Gas (ONGC, IOC, BPCL)
• Airlines (IndiGo, SpiceJet)
• Import-heavy manufacturers
• Gold importing companies

Why: Lower import costs improve margins for companies with significant foreign input costs

🎯 Currency Trading Rules for Stock Investors

Rule 1: A 5% rupee move typically impacts IT company revenues by 3-4%
Rule 2: Oil marketing companies see inverse correlation with crude prices and currency
Rule 3: Track DXY (Dollar Index) for broader currency trend insights
Rule 4: RBI intervention levels (₹82-84 historically) create trading ranges

📊 Real Example: TCS and Currency Correlation

Scenario: USD/INR moves from ₹82 to ₹85 (3.6% rupee weakness)

Impact on TCS:

• Revenue boost: ~2.5-3% from same dollar earnings
• Margin expansion: Operating margins improve by 100-150 bps
• Stock reaction: Typically 5-8% positive move over 2-3 weeks
• Peer effect: Entire IT sector moves in tandem

Trading Strategy: Monitor USD/INR for early signals, buy IT stocks on currency weakness confirmation

🛢️ Commodity-Stock Relationships: Input Cost Dynamics

Master how commodity price movements predict sector performance and profit margins

📊 Key Commodity-Stock Correlations

Commodity Primary Impact Sectors Correlation Type Key Stocks to Watch Lead Time
Crude Oil Oil & Gas, Chemicals, Airlines Positive for upstream, Negative for downstream ONGC (+), IOC (-), IndiGo (-) 1-2 weeks
Iron Ore Steel, Mining Positive correlation Tata Steel, JSW Steel, NMDC 2-4 weeks
Copper Metals, Electrical Equipment Positive for mining, Mixed for users Hindalco, Sterlite Technologies 1-3 weeks
Gold Jewelry, Banking Positive for jewelry, Mixed for banks Titan, Kalyan Jewellers Immediate
Cotton Textiles Negative correlation (input cost) Raymond, Arvind Ltd 3-6 weeks
Sugar Sugar, FMCG Mixed impact Balrampur Chini, EID Parry 2-4 weeks

🏭 Steel Sector Analysis

High Correlation

Key Drivers:

• Iron ore prices (primary input)
• Coking coal costs
• Steel futures on LME/COMEX
• Chinese demand signals

Trading Logic: Iron ore up 10% → Steel stocks up 5-8% with 2-week lag

⛽ Oil & Gas Dynamics

Complex Correlation

Upstream (ONGC): Positive correlation with crude prices

Downstream (IOC, BPCL): Negative correlation due to input costs

Marketing (HPCL): Mixed impact based on refining margins

Key Metric: Gross Refining Margin (GRM) drives profitability

✈️ Aviation Sector

High Negative Correlation

Impact Formula:

• 10% fuel cost increase = 3-5% margin compression
• Jet fuel accounts for 35-40% of operating costs
• Currency double impact (fuel priced in USD)

Hedge Factor: Airlines with better fuel hedging outperform during oil spikes

⚠️ Commodity Correlation Traps

Lag Effects: Commodity impact on stocks can take 2-8 weeks to fully materialize
Inventory Cycles: Companies with large inventories may show delayed reactions
Hedging Impact: Well-hedged companies may not follow expected correlations
Demand Destruction: Extreme commodity moves can destroy demand, reversing correlations

📈 Bond Market Signals: The Ultimate Market Timer

Learn to read bond yields as the most reliable predictor of equity market direction

📊

10-Year Yield Rising

Market Signal: Economic growth acceleration, inflation concerns

Equity Impact:

• Banks benefit (higher NIM)
• Growth stocks under pressure
• Value stocks outperform
• Real estate REITs struggle

Threshold: >50 bps move in 3 months triggers sector rotation

📉

10-Year Yield Falling

Market Signal: Economic slowdown, flight to safety

Equity Impact:

• Growth stocks rally
• Banking sector pressure
• Defensive sectors outperform
• High-dividend stocks in demand

Extreme: <6% yields often signal recession risk

⚡

Yield Curve Inversion

Market Signal: Recession probability rising

Equity Impact:

• Financial sector major decline
• Defensive sectors outperform
• Small caps underperform
• Flight to quality stocks

Historical: 70% accuracy for recession prediction

💰

Credit Spreads Widening

Market Signal: Risk-off sentiment increasing

Equity Impact:

• High-quality stocks outperform
• Leveraged companies struggle
• Banking sector stress
• Volatility increases

Watch Level: >200 bps spread indicates stress

🎯 Bond-Equity Correlation Rules

Rising Rates Environment: Banks (+), Real Estate (-), Growth Tech (-)
Falling Rates Environment: Growth Stocks (+), Banks (-), REITs (+)
Yield Curve Steepening: Banks and financials benefit most
Yield Curve Flattening: Defensive sectors and utilities outperform

📊 Case Study: Bond Yields and Banking Stocks

Scenario: 10-year G-Sec yield rises from 6.5% to 7.2% over 2 months

Banking Sector Response:

• NIM expansion expectation drives 15-20% sector rally
• HDFC Bank, ICICI Bank lead the move
• PSU banks show higher beta to rate moves
• Private banks benefit more from quality premium

Timing Strategy: Enter banking stocks when 10Y yield breaks above 7% decisively

Risk Management: Exit if yield curve inverts or credit spreads widen >150 bps

🔄 Professional Inter-market Strategy Framework

Integrate currency, commodity, and bond signals into a systematic trading approach

🎯 5-Step Inter-market Analysis Process

1

Market Hierarchy Assessment

Identify which market is leading: Bonds → Currencies → Commodities → Stocks

2

Correlation Strength Analysis

Measure current correlation vs historical norms using 60-day rolling correlation

3

Trend Confirmation

Confirm trends across multiple timeframes: weekly, daily, intraday alignment

4

Sector Impact Mapping

Map inter-market moves to specific sector impacts and individual stock implications

5

Risk-Adjusted Positioning

Size positions based on correlation strength and implement appropriate hedge strategies

💱 Currency Dashboard

High Impact

Monitor:

• USD/INR trend and momentum
• DXY for global dollar strength
• RBI intervention levels
• Trade balance data

Signal Stocks: TCS, Dr. Reddy's (export), IOC, BPCL (import)

🛢️ Commodity Tracker

Sector Specific

Key Metrics:

• Brent crude for energy sector
• Iron ore for steel companies
• Gold for jewelry demand
• Agricultural prices for FMCG

Lead Indicators: Futures curves, inventory levels, China PMI

📈 Bond Market Compass

Market Direction

Critical Levels:

• 10Y G-Sec: 6.5-7.5% range
• Yield curve slope
• Credit spreads vs G-Sec
• Foreign flows into bonds

Sector Rotation: Banks vs Growth stocks based on yield direction

🔧 Practical Implementation Example

Market Setup: USD/INR breaks above ₹84, 10Y yield rising, Brent crude falling

Inter-market Analysis:

• Currency: Favorable for IT sector exports
• Bonds: Rising yields support banking stocks
• Commodities: Lower oil benefits OMCs and airlines

Trading Strategy:

1. Buy IT stocks (TCS, Infosys) on currency strength
2. Add banking positions (HDFC Bank) on yield move
3. Consider OMCs (IOC) for oil benefit
4. Reduce allocation to import-heavy sectors

Risk Management: Set stops if USD/INR reverses below ₹83 or yields fall below 6.8%

⚡ Advanced Inter-market Techniques

Professional strategies for complex market relationships and correlation breakdowns

📊 Correlation Regime Analysis

Dynamic Tracking

High Correlation Periods:

• Market stress events
• Major economic transitions
• Policy regime changes

Low Correlation Periods:

• Stable growth phases
• Company-specific events dominate
• Sector rotation environments

Trading Implication: Adjust position sizing based on correlation regime

🔄 Lead-Lag Relationships

Timing Edge

Typical Lead Times:

• Bonds lead stocks: 2-4 weeks
• Currencies lead exports: 1-3 weeks
• Commodities lead costs: 3-8 weeks
• Global markets lead India: 1-2 days

Strategy: Use leading markets for early positioning in lagging assets

⚠️ Correlation Breakdown Signals

Warning System

Breakdown Indicators:

• 30% deviation from historical correlation
• Fundamental story changes
• Policy intervention effects
• Extreme market conditions

Action: Reduce inter-market based positions, focus on individual fundamentals

⚠️ Common Inter-market Analysis Mistakes

Overfitting Historical Correlations: Past relationships may not predict future performance
Ignoring Fundamental Changes: Structural shifts can permanently alter correlations
Timing Assumptions: Lead-lag relationships vary with market conditions
Single Factor Focus: Consider multiple inter-market signals simultaneously
Correlation vs Causation: Distinguish between statistical correlation and causal relationships

🚀 Next Steps: Mastering Complete Market Analysis

Continue building your technical analysis expertise with advanced pattern recognition and systematic strategies

🎯 Master Complete Technical Analysis

Inter-market analysis provides the macro context, but combine it with these advanced technical skills for complete market mastery:

🔬 Advanced Patterns

Master complex chart formations and institutional-grade pattern recognition

⏱️ Multi-Timeframe

Learn systematic top-down analysis across multiple timeframes

🧪 Strategy Validation

Master backtesting and systematic strategy development

Continue Technical Analysis Journey
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