Weekly Market Commentary - Jun 24 - Jun 28, 2013

There is a thing with democracies. They squabble over issues/decisions, slows down progress, are mostly unable to reap the benefits of good times and sometimes take action to soothe one interest group which works as detrimental to rest of the country, before realizing it is too late. More often than not, reforms happened with the gun pointing at their head. It was balance of payment crisis in 1991, this time rising deficits and sliding rupee did the trick. Govt finally got its act together and bite the bullet over gas pricing. The war is not yet over as markets are looking at rising external debt. 44% of total external debt is maturing in the next one year which, if not restructured, will eat into 59% of total foreign exchange reserve country has. Chart below, from Livemint, illustrates the situation better.

Sensex ended this week up 3.3%, while Nifty gained 3.1% and CNX Midcap was up by meagre 0.3%.

Monday - Sensex down by 1.2%, Nifty down by 1.4%, Midcap down by 2.6%
Market extended their losses from previous week as the global stocks continue to slid post Fed announcement of curtailing its bond buying program. Market seems to be ignoring the ifs and buts in the announcement and is running havoc with no plan in sight. Markets were also nervous when Chinese central bank made comments to the effect that liquidity in the system is reasonable, when China is facing liquidity squeeze. Central bank suggested fine tuning the system, which market assumed as reducing liquidity. Shanghai went down more than 5%.

Indian markets mirroring their global peers, are also under pressure due to rising CAD worries and fall in currency value. Brokers are of the view that FIIs have sold over $5 billion of debt and equities in June so far.

Tuesday - Sensex up by 0.5%, Nifty up by 0.3%, Midcap down by 0.6%
The Indian stocks went up in early trade as China tries to soothe investors’ nerves, short covering as F&O expiry nears. Markets also bought oil and gas stocks ahead of pending decision on gas price revision. Gas price were supposed to be revised previous week itself but the decision was deferred as Oil Minister was out for an official tour.

Wednesday - Sensex down by 0.4%, Nifty down by 0.4%, Midcap down by 0.0%
The Chinese central bank move to provide liquidity to some parts of its financial system to stabilize money market rates cheered the global market. Indian markets had a rangebound session as good news from China, short covering due to nearing F&O expiry was completely offset by rupee playing a spoilsport sliding below 60/$ level.

Thursday - Sensex up by 1.7%, Nifty up by 1.7%, Midcap up by 0.7%
Sensex and Nifty rallied as investors cheered the downward revision on US GDP data from 2.4% to 1.8%, which eased the concerns of reduced Fed spending. RBI also took advantage of this news and advanced its release of CAD data by one day. India's March quarter CAD came at $18.1 billion, 3.6% of GDP vs. consensus estimate of $21.7 billion or 4.4% of GDP. Corresponding figure for December quarter was 6.7%. The FY13 CAD stood at $88.2 billion and the Q4 Balance of Payments (BoP) stood at a surplus of $300 billion versus a $600 billion deficit year-on-year. Short coverings on the last expiry day of June series also buoyed the market.

Friday - Sensex up by 2.8%, Nifty up by 2.8%, Midcap up by 2.9%
Indian markets rallied as govt got its act together and approved doubling of gas prices from current $4.2/mmbtu to $8.4/mmbtu. The gas price decision was in limbo for several months now as various govt ministries, such as fertilizer, power and oil quarrel over the impact on their respective sectors. This decision was in tandem with the recent approval to power producers to pass on the imported coal cost to the consumers. The new gas pricing will get into force from April 1, 2014 and will work to attract investments in the sector as it makes several projects, big or small, across the country even more economical.

Rupee also rebounded to 59 levels after govt announced reforms to attract investments in the country and reduce country's dependence on imported gas (fuel). Govt has also initiated towards setting up of a coal regulator to settle disputed over quality and quantity of coal sold in the Indian markets. The poor quality of coal has led to squabbling between the country's premier energy producer NTPC and largest coal producer Coal India.

Ben Bernanke - Calling early victory?

Market reaction to Fed announcement of reducing easy liquidity it has splashed the markets with, has not come as a surprise to lot of investors. It is the timing, which caught few investors off-guard. US markets are not yet out of the rut, unemployment is still not back to pre-crisis range, business confidence has not improved significantly meaning none of the objectives of the QE has been achieved so far. Investors should keep in mind that Ben's term is getting over in January, and maybe the biggest reason of tapering down of QE is that he does not want to go down in history as the person who threw the world economy into deflation. He does not want to end up like his predecessor Alan Greenspan. Maybe that explains the call for early victory.

Weekly Market Commentary - Jun 17 - Jun 21, 2013

This week begin with the RBI's decision to maintain status-quo on key policy rates and ended with the new gameplan from Ben Bernanke to taper down its bond purchase program.

I think chances of rate cut announcement in next RBI meeting in July have increased as inflation, trade deficit are trending downward and will move into RBI's comfort zone. Once the rupee worry is out of the way, I expect RBI to cut interest rates by at least 50bps.

Market reaction to Fed announcement of reducing easy liquidity it has splashed the markets with, has not come as a surprise to lot of investors. It is the timing, which caught few investors off-guard. US markets are not yet out of the rut, unemployment is still not back to pre-crisis range, business confidence has not improved significantly meaning none of the objectives of the QE has been achieved so far, in my view.

Sensex extended its losses and ended this week down 2.1%, while Nifty and CNX Midcap lost 2.4% and 2.3% respectively.

Monday - Sensex up by 0.8%, Nifty up by 0.7%, Midcap up by 0.6%
Market gave a thumbs up to the RBI decision of keeping the interest rates unchanged. RBI kept the repo rate intact at 7.25% while CRR was also unchanged at 4%. Although some investors were expecting the rate cut but overall the decision was considered prudent in wake of recent slump in value of Indian currency. Not only the rate cut would have done little to stimulate the domestic economy, I think capital inflows would have incurred more damage making the Indian rupee even less attractive in comparison to US dollar.

Tuesday - Sensex down by 0.5%, Nifty down by 0.6%, Midcap up by 0.5%
Once the market has chewed and digested comments from RBI meeting and decisions taken, the focus has now turned to Fed meeting, which has started today. Market is moving cautiously as Fed comments on tapering off of quantitative easing will be the next catalyst to decide market direction in short term.

Govt released its May trade deficit number which rose to $20.1bn from $17.1bn in April. Deficit widened as gold imports rose by 90% to $8.4bn while exports contracted.

Wednesday - Sensex up by 0.1%, Nifty up by 0.1%, Midcap up by 0.5%
Investors stayed largely nervous and markets remained flat for the day as focus stayed on Fed meeting. Fed will decide on whether they are going ahead with their plans to taper off QE and what will be the timelines. Market is expecting it to stay on until end of this year at least. Many investors hold QE responsible for excessive froth in the market and expect markets to return to normal after excessive liquidity is withdrawn.

Thursday - Sensex down by 2.7%, Nifty down by 2.9%, Midcap down by 2.4%
Sensex registered its biggest drop in 2 years as Fed discussed its timeline to taper down its bond purchase program (aka QE) later this year. Indian rupee also slumped and touched its new low of 59.93 to a dollar. Though timeline is little more aggressive than expected, and is replete with lots of ifs and buts, I believe we will return to normal markets where fundamentals will be the biggest drivers in stock and index values.

Friday - Sensex up by 0.3%, Nifty up by 0.2%, Midcap down by 1.5%
Market indices bounced back a little from yesterday's low amid FM's assurance that govt will do all it can to curtail the rupee fall.

Govt cleared a proposal that will allow power companies to pass on the cost of imported coal to customers. The move is a big relied to power generation companies struggling with high losses.

Weekly Market Commentary - Jun 10 - Jun 14, 2013

Market movements this week were dominated by currency related headlines. Rupee has slumped lower versus dollar and has raised the fears of inflation making a comeback via expensive imports. The selling, which was till recently going on in large cap stocks has spread to midcap stocks as well. Sensex ended this week with a loss of 1.3%, while Nifty and CNX Midcap lost 1.2% and 4.0% respectively.

Monday - Sensex up by 0.1%, Nifty down by 0.1%, Midcap down by 1.3%
Market traded under the pressure of depreciating currency. Rupee touched a low of 58 versus dollar and stoked inflation fears among the investors. IT stocks went higher will most of the midcap stocks slumped as currency traded lower.

Tuesday - Sensex down by 1.5%, Nifty down by 1.5%, Midcap down by 1.9%
Markets sentiments continued to be weighed down by currency depreciation. Recent good news from RBI related to decline in inflation as shown by downward movement in WPI and CPI have been totally offset by fears of inflation strengthening again as rupee continues to slide against the dollar. FIIs continued to sell Indian bonds as yield difference with US bonds lessen.

Wednesday - Sensex down by 0.5%, Nifty down by 0.5%, Midcap down by 0.4%
Markets were volatile as the rupee found support in the Economic Affairs Ministry's comments that the fall is a temporary phase and news that RBI has intervened by selling dollars. There were also reports that govt may raise FDI limits to finance CAD.

India also released its IIP and CPI numbers. While IIP growth came lower at 2% in April vs 3.4% in March, May CPI came in at 9.31% vs 9.39% in April. Decline in IIP growth has raised concerns whether RBI will cut rates in an attempt to stimulate growth although RBI's hands will be tied as rupee continues its slump. 

Thursday - Sensex down by 1.1%, Nifty down by 1.1%, Midcap down by 1.9%
Market traded lower as selling continued among no rate cut hopes, rising CAD and higher inflationary expectations.

Friday - Sensex up by 1.9%, Nifty up by 1.9%, Midcap up by 1.4%
Markets took a reprieve from continuous selling it was witnessing from past few sessions as investors hinged their hopes on rate cut from RBI next week after May WPI came lower at 4.7%.

Weekly Market Commentary - Jun 3 - Jun 7, 2013

This week may seem to be a non-event for the markets on the onset but one major step taken by the Govt recently will go a long way in consolidating its fiscal position. Govt launched inflation indexed bonds. IIBs, as they are called, in an attempt to wean off local investors from gold. Gold, one of the crucial components of our trade deficit has been touching new highs as markets turned volatile, giving the establishment new headache every passing day. How far will IIB go in reducing the country's gold import bill, only time will tell. You can read about IIB here.

Monsoon is here. On June 1, it arrived in Kerala, two days ahead of its time. It is a well known fact that the monsoon rains are very crucial for India, one of the world's largest producers and consumers of food.

Sensex ended this week with a loss of 1.7%, while Nifty and CNX Midcap lost 1.8% and 0.2% respectively.

Monday - Sensex down by 0.8%, Nifty down by 0.8%, Midcap down by 0.1%
Markets continued its downward movement taking the cues from sub 5% GDP growth announced previous week, weakening in rupee and from the fact that FIIs were net sellers on Friday. The sentiment were further dampened by the results of private survey, PMI, conducted by HSBC which indicated slowdown in manufacturing activity. The survey, which measures the business activity in Indian factories excluding utilities, indicated that index eased to 50.1 in May 2013 from 51 in April 2013, due to fall in output and less new orders. The survey also suggested that employment rose at a slightly faster pace; input prices deflated and output prices declined for the first time since the global financial crisis.

In data released by govt after trading hours on Friday, fiscal deficit for FY13 came in lower at 4.9% of GDP against 5.2% budgeted (revised) in Feb 2013. Fiscal deficit for FY14 is budgeted at 4.8% of GDP.

Tuesday - Sensex down by 0.3%, Nifty down by 0.3%, Midcap up by 0.4%
Markets lost initial gains made earlier in the day as rupee strengthened a bit and ended slightly negative amidst the choppy trade marked by profit booking.

Wednesday - Sensex up by 0.1%, Nifty up by 0.1%, Midcap up by 0.3%
No strong movements occur during the day. Markets ended slightly up as investors turn to bottom fishing, bargain hunting as markets in other parts of Asia see heavy selling due to fear of reduction in stimulus spending from Fed.

Thursday - Sensex down by 0.2%, Nifty down by 0.0%, Midcap down by 0.1%
Absence of any big news flow kept the sensex rangebound. RIL's AGM previous day, was a dull affair with no big bang announcements. Mukesh Ambani made familiar noises about E&P and 4G business.

Friday - Sensex down by 0.5%, Nifty down by 0.7%, Midcap down by 0.8%
Markets are trading nervous as rupee seems to be heading southward. Global environment has turned cautious after Fed's indication of tapering of its stimulus spending in case US economy gains upward momentum.

Inflation Indexed Bonds - Real risk of good intentions turning into bad economics?

Indian FM, in its current pursuit to contain fiscal deficits, have taken certain strong measures. One of the important steps taken is introduction of inflation linked bonds. FM is desperately trying to wean off Indian investors from their insatiable demand for gold which is widely considered a hedge against inflation and one of the main culprits behind rising deficits.

Govt earlier tried to discourage the gold demand by raising the import duty from 2% to 6% in beginning of this year but met with little success. Gold recently sent a shocker down the Govt spine when Apr statistics indicated a 138% jump in gold imports to $7.5 billion, taking the current account deficit to $17.8 billion from $10.3 billion in March.

Govt now is re-attempting to provide an alternative investment route in the form of inflation linked bonds to protect the investors against rising prices. In its earlier attempt in 1997, Govt offered protection to only principal payment. But this time, it went one step ahead and offered interest income to be also indexed to protect against inflation.

RBI's bond sale on Tuesday was a success as the corporates lapped up the product. Issue will open for retail investors in October this year.The main selling point is an offer of 1.44% real yield over the final WPI, with almost four months lag period, which means current offer is linked to January 2013 WPI rate.

There are two major issues with the current bond sale. First, the debt is indexed to WPI, which we know calculates the price changes in the trades among the corporates NOT consumers or retail investors. This essentially means, bond does not provides consumers protection against the rising prices, what best it does is provide partial protection. There is almost 4.5% difference between current WPI and CPI numbers. Though, it is too early to speculate on its impact on gold demand, I am not sure replacing WPI with CPI as the inflation benchmark in the offer would have served the purpose of streamlining the Govt finances.

Second major issue is, which is really a downside, what happens if, we faltered on our path to regain the lost growth, FII flows dries up due to some reason and we are left with falling currency, which fires up the inflation and inflationary expectations in domestic economy and Govt is left with huge bonds liability in a slow growth environment which will raise Govt borrowing costs and inturn stoke further inflation. Nobody on the street is seem to be discussing this.

What all I know is, global economy is not out of mess, markets are been artificially inflated with central bankers printing huge quantity of money, commodity prices are down - not because of increasing competition or supply but decline in demand across the developed countries and every important economy is struggling to get growth back on its feet.