Market Outlook
Rama Krishna Vadlamudi, HYDERABAD 12 August 2011
Stock markets are inherently volatile. But, they have been subjected to some extreme volatility since the beginning of August 2011. Various factors have contributed to these wild fluctuations. First, it was the controversy between the US president and the Congress about solving the debt deal. Afterwards, the global markets have fallen heavily following concerns about sovereign debt crisis spreading to other eurozone countries, like Italy and Spain. Even commodities have fallen sharply while gold prices are surging relentlessly. The final blow came when the Standard and Poor’s has downgraded the US long term debt rating by one notch from AAA to AA+ after the markets in the US closed on August 5th. Here is an analysis of the global markets with an emphasis on Indian markets between August 1st and August 12th.
To know all about the S&P’s US Debt Downgrade and Its Impact, just click:
http://ramakrishnavadlamudi.blogspot.com/2011/08/us-debt-downgrade-and-its-impact-vrk100.html
or,
http://www.scribd.com/doc/62314269
The news flow was too much for the financial markets to absorb. Investors are at a loss to understand what’s going on. They are reacting very wildly due to panic. There are some concerns in the currency markets also. Stock prices across the world, right from Dow Jones to Dax, Cac, Hang Seng and Nikkei, are all over the place. Countries, other than the US and in eurozone, are worried about the appreciation of their domestic currencies against the US dollar. Investors are selling their dollar assets and moving to other currencies, like, the Japanese Yen and the Swiss Franc on concerns about the bloating US government debt. Japan intervened in the foreign exchange markets on August 4th to prevent the appreciation of Yen against the US dollar. The Swiss National Bank, the country’s central bank, cut interest rates with a view to preventing the Swiss Franc from appreciating against the US dollar. The Bank lowered its target for the three-month Libor to as close to zero as possible from 0.25 per cent. Against the US dollar, the Swiss Franc rose up to 0.76 on August 2nd. Investors are having real concerns about the global slowdown in GDP.
Investors have been losing confidence in the stock markets in the last four years since the global financial crisis broke out in 2007. So far, Greece, Portugal and Ireland received bailouts for their debt woes. The only silver lining in Europe is Germany, whose economy remains strong till date. Commodities too have been sold off, except gold and silver. Gold prices are rising amidst the gloom. The price of gold has crossed the important level of $1,800 per ounce. On August 9, Nymex crude oil fell to $76 a barrel while Brent crude sunk to $100 a barrel in reacting to the US credit rating downgrade by S&P. However, by weekend oil prices recovered. US unemployment rate is down to 9.1 per cent in July 2011 from 9.2 per cent in June.
Various measures have been taken in the last few weeks to cool down the highly volatile markets. The US Fed has issued a statement stating that it would keep the interest rates near zero for the next two years. The European Central Bank (ECB) has promised to take more action to douse the fears about sovereign debt crisis spreading to other countries. France, Spain, Belgium and Italy have temporarily banned short selling in stock markets for 15 days. But these measures may not be sufficient to bring some sense to the financial markets. The extreme volatility will continue for some more time. The global markets have entered a new phase of uncertainty and investors have to brace themselves for such extreme situations.
In India, the benchmark Sensex had fallen 700 points intra-day and closed down 2.2 per cent or 387 points at 17,306 on August 5th. The selling continued next week with the Sensex hitting an intra-day low of 16,432 on August 9th after the markets absorbed the news of S&P downgrade of US credit rating. The Sensex closed at 16,840 on August 12th. The government authorities have tried to calm the markets during the last two weeks. Global factors like the sovereign debt crisis in the US and eurozone are compounding the domestic problems for Indian stock markets. India at present is plagued with high and stubborn inflation, slow policy reforms, milder corporate profits and problems associated with project implementation.
Important Data:
Indices Closing Commodities Closing
12-Aug-11 12-Aug-11
Dow Jones 11 269 Nymex Crude ($/barrel) 85
Nasdaq 2 508 Brent Crude ($/barrel) 108
S&P 500 1 179 Gold ($/ounce) 1 746
FTSE 100 5 320 Silver ($/ounce) 39
Dax 5 997
Nikkie 225 8 963 Currencies
Hang Seng 19 620 GBP-USD 1.63
Shanghai composite 2 594 EUR-USD 1.43
Sensex 30 16 840 USD-JPY 76.86
Nifty 50 5 073 USD-RMB 6.39
US dollar index 74.6 USD-INR 45.19
The US Debt Deal
The US lawmakers have reached an agreement to reduce the budget deficit and avert a debt default. According to the much-awaited deal between the US president and Congress, the ceiling for US borrowing will be raised by up to $2.4 trillion. Immediately the debt ceiling is raised by $400 billion and next by another $500 billion. The debt ceiling is the legal limit on the total amount of debt the US government can run up in order to pay its bills. (Before this deal the ceiling was $14.3 trillion.) In the meantime, the deal puts in place measures to cut the US deficit by at least $2.1 trillion over 10 years. From October 210, $917 billion worth of spending cuts kicks in.
Guidelines for investment by foreigners in Indian mutual funds
The Government of India has issued guidelines for investment by foreigners in Indian mutual funds. This was as part of the Union Budget announcement in February 2011. The salient features are:
--- Qualified Foreign Investors (QFIs) can now directly invest in Indian mutual funds, either debt or equity
--- QFIs are foreign pension funds, trusts and individuals – not registered with SEBI as foreign institutional investors (FIIs) or sub-accounts thereof
--- These guidelines for QFIs are separate from guidelines that are already in place for Foreign Institutional Investors (FIIs)
--- QFIs can invest up to $10 billion in equity schemes, while for debt mutual funds there will be an additional limit of $3 billion
--- There will be no limit for one investor or one scheme
--- QFIs will have to fulfil the know-your-customer norms
SEBI’s concept paper on Alternative Investment Funds (AIFs)
The Securities and Exchange Board of India has released a concept paper on proposed alternative investment fund regulation for public comments. The proposals are:
--- Registration is a must for AIFs
--- The entity must be a trust, a limited liability partnership or a company
--- The sponsor and fund manager shall have relevant experience
--- The AIFs are not to accept any funds from the public or retail through issue of prospectus or offer document
--- AIFs are private equity funds, private investment in public equity funds (PIPE), real estate investment trusts (REIT), venture capital funds and others
--- AIFs are privately pooled funds of institutional investors and high net worth individuals
News Notes
Royal Bank of Scotland reported loss of GBP 897 million in the second quarter (April-June 2011) due to Greek debt write-down. RBS made a provision of GBP 733 million for Greek government bonds.
The Economist says that Indian Rupee is undervalued by 53 per cent against the US dollar, as per the Big Mac Index-July 2011. Chinese currency Yuan is undervalued by 44 per cent, while Mexican and Russian currencies are undervalued by 33 and 34 per cent respectively. Brazil and Argentina are overvalued by 52 and 19 per cent respectively. The Big Mac index is developed by The Economist 25 years back and uses the price of McDonald’s burger in different countries to build the index.
The Prime Minister’s Economic Advisory Council (PMEAC) has asked the Indian Government to take active measures to improve investment climate and go ahead with unfinished economic reform agenda.
HSBC Holdings is cutting 30,000 jobs globally by 2013
HSBC Purchasing Managers Index (PMI) for India fell to 53.6 in July from 55.3 in June
Indian Government sought parliament’s approval for an additional Rs 34,724 crore expenditure for 2011-12, but the net outgo will be only Rs 9,000 crore
Cognizant has overtaken Wipro in June 2011 quarter, in terms of revenues, and become number three software exporter from India after TCS and Infosys
The stock price of BL Kashyap had fallen by 20 per cent on August 4th, after allegations surfaced that it resorted to evasion of provident fund dues to Employee Provident Fund Organsiation (EPFO). However, the company denied the allegation.
Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivative products to companies
BEST bus service in Mumbai has completely replaced the old bus ticket boxes with electronic devices
The Government of India has announced a package of Rs 1,200 crore for the ailing Air India. However, Moody’s has cautioned that defaults by Air India may dent ratings of banks which have lent money to Air India. SBI, PNB, BOB, BOI, IDBI Bank, CBI and OBC are its large lenders.
State Bank of India raised its base rate by 50 bp to 10 per cent and its BPLR by 50 bp to 14.75 per cent while ICICI Bank raised its base rate and BPLR by 50 bp to 10 per cent and 18.75 per cent respectively
Mahindra Satyam Limited has announced the ‘winding down’ of its ADS (American Depository Shares) as it faces cancellation of its registration from SEC. The company’s shares were delisted from NYSE after a fraud by the promoter.
India’s indirect tax collections (customs duty, excise duty and service tax) have surged by 27 per cent to Rs 125,900 crore in Arpil-July 2011 against the same period last year
India’s direct tax collections fell by 8.1 per cent during April-July 2011 due to sharp jump in income tax refunds
The Government has given D Subbarao two-year extension till 2012 as the Governor of RBI
India’s exports grew by 82 per cent year-on-year to $29.3 billion in July 2011 driven by engineering, readymade garments, gems and jewellery and electronics
Index of Industrial Production (IIP) has grown up by 8.8 per cent in June 2011 year-on-year
National Stock Exchange (NSE) has decided to impose transaction charges on trades it is currency derivatives (futures and options) segment
BPLR-Benchmark Prime Lending Rate, NYSE-New York Stock Exchange, RBI-Reserve Bank of India, and SEBI-Securities and Exchange Board of India.
Disclaimer: The author’s views are personal. Investors need to consult their certified financial adviser before making any investment decisions.
