Data released
• Headline inflation came in at 7.25% YoY in June (as compared to our expectation
of 7.60% YoY), lower than previous month’s print of 7.55% YoY.
Global update
• China’s Premier Wen Jiabao said that growth momentum is weak but
Government measures to support growth are “bearing fruit” and current pace
of growth is within the target range.
• The IMF lowered its global economic forecasts as prolonged Eurozone debt
crisis weighed on global growth. The 2013 global growth forecast was
revised down to 3.9% from 4.1% estimated in April. India’s 2013 growth
projection was cut by 0.7 percentage points to 6.5%.
• US Federal Reserve Chairman Bernanke, on his second day of testimony to
US Congress said that the economy has “decelerated” in the first half of the
year and that the Fed is “prepared to take further action as appropriate”. He
also sought to assure lawmakers that the Fed can control inflation while
providing additional stimulus.
• German lawmakers voted in favor of Spanish banking sector bailout after Finance Minister Schaeuble assured that Spain
would remain liable for the aid and the German Parliament would be consulted on each step of the rescue
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MARKET UPDATE
Global Markets Overview
• Weak US retail sales data coupled with IMF’s downward
revision of global economic forecasts weighed on the US
stocks. However, US stocks advanced in the week as Fed
Chairman Bernanke kept open the option of further monetary
easing and a four-year high reading of US housing starts aided
optimism over economic recovery. Better than expected Q2
earnings posted by JP Morgan Chase & Co., IBM, Google and
Ebay cheered US stocks with Dow Jones trading 2.86% higher
for the week (15:00 IST). Morgan Stanley stocks slid as
earnings missed estimates owing to a decline in trading
revenue.
• Asian stocks opened the week mixed as
gains on the Wall Street were countered by
persistent growth concerns. Series of weak
US economic data released and weak
picture of US economy painted by Fed
Chairman in his testimony further
underscored Asian markets during the
week. However, strong corporate earning
results from US coupled with resilient US
housing starts supported market sentiment
Domestic Equity Market Overview
Indian stocks opened in the green tracking gains in other Asian peers. Markets received some support from June WPI release but
concerns surrounding the weak monsoons pared the gains. On Thursday, sentiment remained supported owing to upbeat data
releases from the US and amidst optimism that the government is likely to implement policy reforms post the Presidential
elections.. Benchmark indices were pulled further up by gains in index heavyweight Reliance Industries as a leading investment
bank upgraded the rating for the company to ‘buy’ from ‘neutral’. Maruti Suzuki slumped nearly 9.0% owing to stoppage of work at
the company’s Manesar plant. Indian equities traded weak at the end of the week with Sensex closing in the negative territory.
Fixed Income
Gilts surged as lower than expected June headline WPI reading
aided optimism over further monetary stimulus by the RBI going
ahead. However, paring of expectations of further policy easing
by the RBI post Governor Subbarao’s comments that inflation
levels continue to remain way above their comfort level pared
the gains. Improvement in risk sentiment globally coupled with
rise in crude oil prices also weighed on the gilts. Indian Government bonds commenced the day on a firm note as a downbeat risk
sentiment pushed investors to seek the relative safety of Government bonds. Fresh supply of Government debt worth INR 150 bn
lined up this week also weighed on the sentiment. Markets would look forward to India’s Presidential election due for further cues.
Case for rate cut or no rate cut?
• June mid-quarter review – Case for No rate cut because of challenging inflation scenario
• Coming July policy meet – Some room for rate cut as domestic growth concerns have increased since last policy meeting
with May IIP print at 2.4% YoY and June inflation print has declined to 7.25% YoY from previous reading of 7.55% YoY
• However, the weakness in monsoons and impending fuel price hike pose a sharp upside risk to inflation in coming
months, which could lead the Central Bank to defer policy easing.
Oil
Brent oil prices are trading 4% higher this week supported by supply concerns owing to sanctions on Iran and Tehran’s threat to
close the Strait of Hormuz. However, gains remained capped owing to broad based Dollar strength. Crude oil prices rose for the
seventh consecutive day tracking weakness in the Dollar amidst improvement in market sentiment. Prices also remained supported
as the US Energy Department reported that crude stockpiles declined 0.8 mn barrels last week. Brent surged to touch a recent high
of USD 108.18/bbl and is currently trading lower at USD 106.89/bbl (15:00 IST). Tensions in the Middle East eased after Israel
hinted that it would not rush into open conflict with Iran. The recent rise in crude has come under question with the global economy
showing no signs of recovery, even as seasonal demand seems to be weakening.
Oil price view: To rise gradually in Q3
Prices are expected to rise gradually on the back of monetary stimulus expectations. However, the supply and demand factors
suggest that the upside in oil prices should be capped in the near term. Therefore, we continue to expect Brent to trade higher
around USD 105-110/bbl in Q3 2012. Meanwhile, continued geopolitical tensions around Iran pose substantial upside risks to
prices.
USD-INR
The Rupee traded weak at the week's start on account of losses in
domestic stocks coupled with Dollar demand by importers.
Meanwhile, the RBI allowed qualified foreign investors to invest in
debt securities on a "repatriation basis", in yet another step to
liberalize India’s capital account and support the Rupee. The Indian
Rupee traded in a range tracking range bound movement in the
Euro and domestic equities, currently trading at 55.24 (15:00 IST).
However, the losses are likely to be capped on news that the
Government would take up big-ticket reforms before 15th August to improve the investment environment in the economy, while
reining in the fiscal deficit.
Gold
Gold prices fell at the start of the week on the back of a stronger Dollar. Subdued market sentiment on Chinese Premier’s comments
coupled with losses in the broad commodity space further aided the losses. However, v alue buying after prices fell in the last three
sessions aided demand for the bullion which is trading flat for the week. The yellow metal is getting support from revived
expectations of policy stimulus by the Fed after weaker than expected US economic data weighed on the economy’s growth
prospects. However, a stronger Dollar is likely to limit the gains
View - The safe haven allure of the bullion remained largely muted in the recent past. Demand for gold is likely to remain supported
amidst historic low levels of interest rates in major economies. Though growth concerns might prevent the metal’s rally to very high
levels, increase in liquidity on the back of expansion of the asset purchase program by major Central Banks would provide support.
Besides, with the possibility of the US Fed embarking on another round of quantitative easing to support growth later this year, the
bullion prices are likely to remain firm.
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