The cup of sorrows for Indian investors showed no sign of ebbing after the government, Indian currency and foreign institutional investors left them in the lurch. The Indian equity market extended losses to fifth consecutive week after the FIIs sold approximately Rs. 40bn in the last five sessions. For the week, the Sensex and Nifty lost nearly 1.5% each.
The Nifty fell as low as 5,254, declining a massive 250 points in just four trading sessions, after the Indian rupee on Thursdayslipped below the psychological level of 65 against the dollar amid global nervousness about the timing and scale of the Federal Reserve's likely scaling back of its bond-buying program. The 2% drop took the Indian currency's decline since early May to 20%, raising worries about the impact it will have on the country's substantial import bills and on an already large current account deficit. Scaling back of stimulus would also lead to further outflows of money from the capital markets putting further pressure on the currency.
Sentiment was also hit badly after various brokerages tried to outbeat each other in downgrading India.
Global rating agency Standard & Poor's maintained its negative BBB- outlook on India citing currency depreciation adversely impacting investor confidence. On the other hand, Moody’s reiterated its stable outlook on India’s Baa3 rating supported by low government foreign debt and domestic savings rate.
Fitch Rating too has currently maintained its stable outlook on India, keeping its earlier rating of BBB-. However, it said that the recent sell-off in emerging markets, sparked by worries of a scaling back of cheap US financial stimulus, has raised the pressure on the countries. It also warned that India could see its credit ratings lowered if the government failed to halt the current slump in investor confidence.
The RBI announced slew of measures to ease liquidity, including Rs. 80bn bond buyback, to ensure adequate credit flow to the productive sectors of the economy. The measures were aimed at easing liquidity conditions in the market which has worsened after RBI's money tightening steps, including raising short-term rates, to curb volatility in the exchange rate of rupee. It said the immediate object of raising the short-term interest rate has substantially been achieved as evidenced by the money market rates anchoring to the Marginal Standing Facility rate of 10.25%. It allowed banks to hold statutory liquidity ratio bonds in held-to-maturity category at 24.5% of total deposits or net demand and time liabilities.
The government also slapped a 10% customs duty and 12.5% countervailing duty on television sets, as part of its efforts to discourage import of non-essential items and reduce the current account deficit that has put enormous pressure on the rupee.
In other economic news, India's services exports in June stood at $12.35bn, down 3.5% from the preceding month, data from the RBI showed. The total exports of services in May 2013 stood at $12.8bn. Imports of services also moved down to $6.22bn in June from $6.98bn in the previous month.
Indirect tax collection grew at 2.9% in the April-July period, mainly due to a decline in excise duty mop-up, reflecting a slump in manufacturing activity. Total collection of indirect taxes — excise, customs and service tax— was Rs. 1,47,750 crore in April-July.
Foreign direct inflows into India increased by about 16% YoY to $1.44bn in June, the lowest during CY13. In June 2012, India had received FDI worth $1.24bn. This indicates how bearish foreign investors are about India.
Closer home, Activity in China's key manufacturing sector recovered strongly in August helped by a rebound in new orders. The HSBC flash manufacturing PMI hit a four-month high of 50.1 in August from a final reading of 47.7 in July, moving above the 50 threshold that demarcates expansion of activity from contraction. Economic indicators released in the recent weeks including better-than-expected July industrial production and trade data point to a stabilisation in the world's second largest economy.
China’s new home prices rose the most since January 2011 in the nation’s four major cities, led by a 17% jump in Guangzhou and Shenzhen, on speculation the government will refrain from imposing tighter curbs. Beijing and Shanghai prices both increased 14% in July as 69 of 70 cities tracked by the government climbed from a year earlier. For the third month in a row, the eastern city of Wenzhou was the only one to post a decline.
Japan’s exports jumped by the most since 2010 in July, aiding Prime Minister Shinzo Abe’s efforts to drive an economic recovery even as rising energy costs boosted the trade deficit. Exports increased 12.2% from a year earlier after a 7.4% rise in June. Imports climbed 19.6%, leaving a trade deficit of 1.02 trillion yen ($10.5bn). The seasonally-adjusted deficit widened from June to 944bn yen.
In Europe, things are beginning to improve with the balance sheet of the European Central Bank and the Eurozone's 17 national central banks shrinking by 10.8 bn euro ($14.42bn) to 2.369 trillion in the week ending August 16, as banks borrowed less money from the central bank. Gold holdings remained unchanged at 319.968bn euro.
Euro zone flash composite purchasing manager's index rose to 51.7 in August, from 50.5 last month, beating estimates. It was the best reading since June 2011.
This week’s major sentiment driver was the Federal Reserve. Minutes of the last Federal Reserve meeting show that the Fed on August 1 was getting set to reduce, or taper, its bond buying by the end of the year, but with no clear signal of when it might move. Fed committee members rejected the idea of lowering the 6.5% unemployment rate threshold it set for raising the Fed funds rate. “Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” as per the minutes.
Federal Reserve Bank of Dallas President Richard W Fisher said record Fed stimulus can’t revive US manufacturers from a two-year slump caused by ambiguity in regulation and fiscal policy. “They have been given abundant, super-cheap monetary fuel needed to stoke up their production engines and expand their businesses,” Fisher said. “What is holding us back” is “fiscal and regulatory policy.”
In economic cues, the index of US leading indicators climbed in July by the most in three months, signaling improvements in housing and labor markets will help foster faster economic growth through year-end. The Conference Board’s gauge of the outlook for the next three to six months increased 0.6% after no change in June. Another report showed the fewest Americans since November 2007 filed applications for unemployment benefits in the past month.
Sales of previously owned US homes jumped in July to the second-highest level in more than six years as buyers rushed to lock in mortgage rates before they increased any more. Purchases advanced 6.5% to a 5.39mn annual rate last month, beating the 5.15mn median forecast of economists.
Payrolls increased in 32 US states in July, and the unemployment rate climbed in 28. California led the nation with a 38,100 gain in payrolls, followed by Georgia with 30,900 more jobs.
The fewest workers in more than five years applied for US unemployment benefits over the past month, indicating the labour market continues to improve. The number of claims in the month ended August 17 declined to 330,500 a week on an average, the least since November 2007. Compared with a week earlier, claims rose by 13,000 to 336,000, in line with the median forecast.
Five years after one of the most costly financial crises in the US history, the 18 largest banks still fall short in at least one of five areas critical to risk management and capital planning, the Federal Reserve said. While highlighting strengths and weaknesses, it said all of the bank holding companies “faced challenges across one or more” of five areas, and called for better analysis tailored to each bank’s business and risk.
Outlook for equity market:
Speaking on the road ahead for markets, Hadrien Mendonca, Technical Analyst at IIFL, expects the current pullback in the Nifty to face immediate resistance around 5,510-5,520 levels. "Market participants will shift their attention towards key economic data to be released in the coming week. GDP growth estimate for April-June quarter, July fiscal deficit data and the eight infrastructure industries data are among the importance data points."
Baring Private Equity Asia buys 41.8% stake in Hexaware for $465mn
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Fine Friday: Sensex crosses 18500, Nifty above 5450
The healthy recovery enjoyed on Thursday spilled on to Friday’s session taking the Nifty well past the 5,450 levels while the Sensex ended above the 18,500 levels. The rupee snapped its losing streak on Friday against the dollar on selling of the US currency by banks and exporters. The Indian currency was quoting at 64.08 off its all time low of 65.56 which it hit on August 22, 2013...Read More
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