Macro & Markets - Feeble macros dent sentiments :: Edelweiss

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Global macro conditions are deteriorating; while the incoming US economic data have improved of late, the broader economy remains weak. In fact, the slowdown is spreading to EMs fast with PMIs declining across the board. Most EM central banks have halted the tightening cycle and a few of them have even started reversing the process. In Europe, France is coming under the scanner of bond markets and the threat of further sovereign downgrades loom large. Therefore, the outcome of the forthcoming EU summit will be quite crucial. Indian markets seem to have resigned to a very moderate earnings growth in FY12 while the focus is shifting to FY13 which has already seen rapid downgrades.

Looming EU summit may pave way for enhanced ECB role

Amidst the escalating EU debt crisis (French bond spreads have started to widen), financial markets are looking forward to the all important EU Summit, scheduled for 8-9, Dec 2011 where leaders will explore the possibility of tightening fiscal rules by introducing changes to the EU treaty. If leaders do manage to strengthen the ‘fiscal compact’ within the monetary union, it may open doors for ECB to significantly enhance its role by scaling up bond purchases. Such a step would help contain the crisis and restore confidence in the integrity of EU.

EM growth concerns rising, few kick off monetary easing

The PMI (manufacturing) data has slipped below 50 in China, South Korea and Brazil and is hovering close to 50 for India, Russia etc. Evidently, growth concerns are building up, reflecting in domestic policy tightening and contagion from Western economies. Accordingly, most of the EM central banks have halted the tightening cycle and some of them have even embarked on monetary easing (China, Brazil, Indonesia, etc)

India’s growth slips below 7%, INR weakness continues

GDP growth slipped below 7% in Q2FY12 with the industry facing headwinds of ongoing policy hurdles, high cost of capital and lingering global uncertainties. Services, however, have shown resilience amidst adverse business conditions as was observed in during FY09 down turn. Going ahead, policy hurdles would persist even as global financial conditions might deteriorate further. Indeed, our lead indicator, EELII suggests that non-agri economic activity in Q3 would be no better than Q2. Therefore, we are downgrading our FY12 GDP forecast to ~7% from ~7.6% earlier.

Markets nervous, earnings trajectory caves in

Reacting to macro cues, global markets were weak, closing 3% down MoM although it could have been much worse had it not been for the co-ordinated attempts from global central banks to set up dollar swap lines. India was once again a relative underperformer with the earnings trajectory taking a hammering. The focus has now shifted to FY13 which has already seen rapid downgrades, to the tune of 3% during the just concluded quarterly reporting season and 10% for the year so far.