Global trade tensions likely to deepen
There are three important central bank policy statements scheduled this week and all will be read with great care
Global cues and macro-economic updates will give traders plenty of cause for thought this week. US President Donald Trump walking out of the G7 meeting makes an escalation of trade tensions highly probable. Trump’s summit meeting with North Korea’s Kim Jong Un could also have some sort of impact. There’s also the Brexit Bill due for voting this week and that will shape the United Kingdom’s economic future, and, by extension, affect the EU's growth prospects.
Apart from this, there are three important central bank policy statements this week. The Federal Reserve is expected to make a bullish statement and hike policy rates. The European Central Bank is expected to announce some sort of schedule for tapering down its bond-buying programme. The Bank of Japan is expected to continue with its massive quantitative easing. All three policy statements will be read with great care, regardless of actual policy action.
The Reserve Bank of India’s (RBI) policy review last week was greeted with a relief rally in equities. While the Monetary Policy Committee did hike policy rates, it gave a fairly upbeat set of projections. The central bank expects a small rise in the inflation rate and it expects GDP growth to accelerate. Hence, it’s maintaining a neutral stance — neither easing nor tightening money supply. The market was expecting a tighter stance.
The Consumer Price Index and Wholesale Price Index for May, and the Index of Industrial Production for April, will be released this week. Those numbers will give an indication of manufacturing health and also of the ability of corporates to pass on input costs. Crude prices seem capable of moving lower, if the Saudis and Russia increase production to adjust for Iranian crude being forced off the market by renewed sanctions. That would be a relief on the fuel inflation front and also ease pressure on the government to lower duties on retail products.
Yields have tightened further in the rupee debt market, however, as traders adjusted to higher rates. Commercial banks have hiked rates anyhow. One way or another, rates are likely to move up further. If the Fed hikes, and the ECB tightens, there is the likelihood of higher hard currency yields. This could result in a movement away from riskier Third World assets, but right at the moment, Foreign Portfolio Investors seem to be the net buyers. Stay braced for currency volatility since the rupee will respond to changes in hard-currency yields.
As of now, domestic institutions and mutual funds are shoring up the market. Mutual fund data for May makes interesting reading. So far in the fiscal (April-May 2018), liquid/money market funds have ~697 billion net inflows compared to ~347 billion in the corresponding period of last fiscal (Apr-May 2017). Equity inflows are ~211 billion compared to ~140 billion. Income funds have seen an outflow of ~152 billion compared ~397 billion inflow last year. While equity is still getting enthusiastic support (about 85 per cent of equity subscriptions is from retail and HNI) the focus in debt has clearly shifted to the short-end of the market. That’s to be expected, given an expectation of rising interest rates.
The government will have to find ways to shore up PSU banks, which have hit a wall with massive 2017-18 losses and a rising NPA count. Massive recapitalisation will be necessary while mergers and creation of a “bad bank” have been mooted as possible solutions. Merger rumours have been denied by the finance minister, which doesn’t necessarily mean that mergers won’t happen at some stage. Until the PSU bank segment is back on a somewhat sound footing, credit disbursal to industry will be hampered, quite apart from the fact that cost of capital is rising.
The ICICI Bank-Videocon affair is going international with the US Securities Exchange Commission apparently getting into the act, since ICICI is listed in the US. Again, there are rumours that the bank might look to use the consent petition route to settle with the Securities and Exchange Board of India. We could see the share price swinging, as and when, there are any further developments.
The ~70 billion bailout package for the sugar industry doesn’t seem to have been well-received. Uttar Pradesh farmers are said to be owed over ~130 billion in dues. The concept of fixing a minimum sale price for sugar at ~29 per kg has been ridiculed by industry insiders who point out that production costs are in the range of ~34-35 per kg. The offer to subsidise the setting up on ethanol units may be a positive for the long-term, however. Given a bumper crop last season and an expected bumper crop this season, there’s massive global oversupply. Enforcing a high procurement price in these circumstances is counter-productive. The share prices of sugar companies fell, after initial optimism, when the bailout was announced.
Technically, the relief rally after the RBI policy review continues. The cues this week could be confusing, given the plethora of different inputs from multiple sources. There are chances of high volatility through the week, as news flow comes in. A fall below 10,650 could trigger a drop to the 10,350 zone while a rise above 10,900, could trigger a surge towards a new high.