Commodity & Equity Markets Weekly Wrap.
The Commodity & Equity Markets movements remained subdued globally for the week. Gold Futures Prices along with Silver, Copper & Crude Oil had rallied on the high expectations of more actions by the ECB but slumped after only an Interest rate cut was announced. Metals though remained largely range bound. The Euro dipped to a 2 year low of 1.2266 against theUS$. The Nifty traded in a narrow range this week with a positive bias as it ended the week 0.72% higher. It was the second consecutive week of gains. Though the Nifty has been trading in a narrow range for the last few sessions, the underlying tone remains positive. Global Commodity & Equity Markets await Important Chinese economic data due over the next few days. During a five-day period from 9 to 13 July 2012, China will unveil data on second quarter gross domestic product, data for June 2012 on fixed-asset investment, inflation, industrial production and bank lending. European stock markets edged lower on Friday, as investors continued to fret over global growth prospects after a series of rate cuts in Europe and China the prior day. Key Equity Markets benchmark indices in UK, France and Germany were down by 0.16% to 0.53%.
Global Equity Markets & Economic Update:
China’s central bank, The People’s Bank of China, cut benchmark interest rates for the second time in a month on Thursday and allowed banks to offer bigger discounts on their lending costs, stepping up efforts to reverse a slowdown in the world’s second biggest economy after the US. The one-year lending rate will fall by 31 basis points and the one-year deposit rate will drop by 25 basis points effective from Friday, 6 July 2012. Banks can offer loans of as much as 30 percent less than benchmark rates, the central bank said. China’s National Bureau of Statistics data showed signs of marginal improvement in national manufacturing. The June manufacturing PMI (Purchasing Managers Index) came in better than expected at 50.2 for June, while market consensus estimates had it at 49.9 versus the May survey results of 50.4.
Japans large manufacturers became less pessimistic as declines in commodity prices aided profitability, boosting the outlook for the worlds third- biggest economy even as a stronger yen crimps exports. The quarterly Tankan index of sentiment was minus 1 in June from minus 4 in March, the Bank of Japan said.
Australian retail sales advanced more than economists forecast in May on stronger spending at restaurants and department stores, sending the local dollar to a two-month high as traders pared bets on an interest-rate cut. Sales climbed 0.5 percent to A$21.3 billion ($22 billion) from a month earlier, when they rose a revised 0.1 percent, the fifth straight monthly gain.
Manufacturing in the U.S. unexpectedly contracted in June for the first time in almost three years, indicating a mainstay of the U.S. expansion may be faltering. The Institute for Supply Managements manufacturing index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May.
The Institute for Supply Management said its June Purchasing Manufacturers Index fell to 49.7, down from 53.5 in May. It was the first time the index fell below 50, which signals expansion in the sector, since July 2009.
Automakers reported June sales figures on Tuesday. Ford posted a 7% gain from last June, with 208,000 vehicles sold. Ford had warned last week that second-quarter losses from overseas operations, particularly in Europe, would be bigger than expected.
U.S. chain-.store sales rose 1.4% year on year for the week that ended on June 30, according to the International Council of Shopping Centers (ICSC) and Goldman Sachs. The week-to-week change in comparable-store sales was flat. Weather took a bite out of sales with some 2.5 million people without power late in the sales week as severe storms affected the consumer’s ability to shop.
Consumers, spooked by months of sluggish hiring and a global slowdown, pulled back on spending in June, which took a toll on top U.S. retailers’ sales. Even with steep promotions, June sales at stores open at least a year — a key industry performance metric that excludes the impact of new and closed stores — came in less robust as both consumer confidence and sentiment ebbed in June in the face of a steady stream of weak economic reports, stubbornly high unemployment rate and a volatile stock market. U.S. comparable chain store sales rose 0.2 percent in June from a year earlier.
European retail sales unexpectedly increased in May as gains from France to Ireland and Portugal helped offset decreasing demand in Germany. Sales advanced 0.6 from April, when they slipped 1.4 percent.
Europe’s economy probably failed to grow in the second quarter as budget cuts eroded consumer spending just as companies stepped up job cuts and global demand faltered.
Unsurprisingly Euro-Zone Manufacturing PMI also remained firmly in contraction territory, while the latest official unemployment data showed a new Euro-era high of 11.1 percent in May from a previous 11 percent. Across the Atlantic, the closely watched ISM manufacturing index undershot estimates with the gauge retreating to 49.7 from a previous 53.5. Economists expected a moderate decline to 52.
Unemployment in the 17-country Euro-zone bloc hit another record in May as the crippling financial crisis pushed the continent toward the brink of recession. Unemployment rose to 11.1% in May from 11% the previous month. May’s rate was the highest since the Euro was launched in 1999 and adds further urgency to the Euro-zone countries’ plan to create economic growth and cut excessive government debt.
German manufacturing orders recovered 0.6% in May and the drop in April was revised up half a point to -1.4%. Taking account of the upward revision for April, orders in May were 5.4% lower on the year. Domestic orders fell 1.3% on the month. Foreign orders increased 2.3%, with demand from the Euro-zone ex-Germany up 7.7% and orders from non-Euro-zone countries down 0.8%. The latest round of PMI data from Markit Economics showed German manufacturing contracted at the fastest pace in 3-years. German PMI fell to an index level of 45 in June from a previous 45.2, slightly higher than the previously estimated 44.7.
The Bank of England has announced that it will inject 50bn pound into the UK economy over the next four month as a continuation of its Quantitative Easing (QE) program. The Bank also announced that it will leave UK interest rates unchanged at 0.5 per cent. This week this decision was mirrored in the Euro-zone, where the European Central Bank lowered interest rates from 1 per cent to 0.75 per cent.
Britain’s manufacturing sector contracted for the second straight month in June as new orders continued to fall, a survey showed on Monday, adding to expectations the Bank of England will pump more cash into the struggling economy. The Markit/CIPS closely watched Purchasing Managers Index (PMI) rose to 48.6 last month from Mays three-year low of 45.9, beating expectations for a more modest climb to 46.5.
Indian Equity Markets:
The Reserve Bank of India said on Wednesday, the year-on-year reserve money growth in the week to June. 29 was 5.5% compared with 18.6% a year ago. Currency in circulation grew 13.8% year-on-year during the week as against 15% a year ago.
India’s manufacturing sector inched up in June as the country saw improvement in business conditions as well as hiring. The HSBC India Manufacturing Purchasing Managers Index (PMI) – a measure of factory production - improved slightly to 55 in June from 54.8 in May. Activity in the manufacturing sector kept up the pace in June with output, and employment expanding at a faster pace.
India’s service sector moderated slightly in June, but new orders picked up and companies hired more workers, a private survey released on Wednesday showed. HSBC’s services purchasing managers’ index dropped to 54.3 in June from 54.7 in May, indicating eight straight month of expansion. The index, based on a survey of nearly 400 firms, showed new orders rose at fasters pace in four months and companies stepped up hiring to meet this demand.
India is aiming to attract one percent of the total world tourist arrivals by the end of the 12th Five Year Plan (2012-17). Foreign tourist arrivals in India in 2011 were 6.29 million and the country earned $16.56 billion in foreign exchange. Of these, nearly 16 percent of the tourists came from the US, adding the need to promote tourism between India and the US as the latter was the top source for inbound tourism to this country.
Global financial services provider Barclays has said that India’s current account deficit (CAD) is likely to remain elevated at 3.6% of the GDP in the current fiscal, though lower than the record high of 4.2% in 2011-12. However, it said that the current weaker international oil prices and likely lower gold imports during 2012-13 could be silver linings.
Attributing economic slowdown in India to monetary and fiscal policy, global financial service provider Nomura has lowered the country’s GDP growth projection for 2012 to 5.5% from 6.1%. It has also lowered the projection for India’s economic growth for 2013 to 6.6% from 7.1%.
Key Sectoral Movement
Most of the sectoral indices in the Equity markets ended in the green this week. The top gainers were Realty, Consumer Durables, Bankex and Metals, which ended higher by 4.6%, 3.9%, 3% and 2% respectively. The sectoral losers include IT, FMCG and Oil & Gas, which lost 1.9%, 1.6% and 0.2% respectively.
India Economic Update:
Draft guidelines issued by Indian government last week for implementing the controversial anti-avoidance tax proposal viz. the General Anti-Avoidance Rules (GAAR) state that GAAR provisions should be invoked on a foreign institutional investor (FII), if it chooses to take a treaty benefit, but would not in any case be invoked in the case of the non-resident investors of the FII. The draft guidelines suggested that the onus of proving wrongdoing should be on the authorities.
Prime Minister Dr Manmohan Singh has said in a newspaper interview that he has identified controlling the fiscal deficit, achieving clarity on tax matters, reviving the mutual funds and insurance industries, clearing a backlog of foreign investment proposals and boosting infrastructure as his focus areas in the short term. Singh said there will be no arbitrariness in tax matters. The statement assumes significance in the context of a raging controversy over the Income Tax amendment to re-open tax demands with retrospective effect from companies like Vodafone over acquisition of companies having operations in India but registered abroad to avoid taxes.
Singh last month said he is chalking out plan for the country’s economic revival. Singh last month took additional charge at the finance ministry after Pranab Mukherjee resigned as finance minister on 26 June 2012 to contest the presidential polls scheduled on 19 July 2012. Mr. Mukherjee is the leading contender in the July 19 presidential election, having been nominated by the Congress party-led United Progressive Alliance government for the largely ceremonial post.
Agriculture Minister Sharad Pawar today, 6 July 2012, said that production of lentils and oilseeds could fall this year as a delayed start to the monsoon season. Rainfall in June 2012 was not satisfactory for agriculture and water reservoirs, Pawar said on the sidelines of a conference. Monsoon rainfall has been deficient in 82% ofIndia’s crop area so far, coming in 29% below long-term average in June alone. Any sharp fall in the production of oilseeds and pulses would mean thatIndia, the world’s biggest importer of cooking oils and lentils, will be importing a lot more of these commodities this year.
Mr. Pawar said the delayed monsoon won’t impact the summer-sown rice crop so much. Plantings of rice paddy starts in June but the main sowing period for the water-intensive crop is July when the country receives the maximum monsoon rainfall.
According to the India Meteorological Department, the monsoon will likely advance to the northwestern region–a major grain-growing area–by early next week, though more than a week later than usual. The situation, however, could turn grim if this doesn’t happen as water levels in reservoirs in the north are already low. The monsoon rains, which make up around 70% of India’s annual rainfall, are crucial to the nation’s agriculture sector and broader economy. More than 60% of the country’s farmland is rain-fed. The timing, distribution and quantity of rainfall are all important for crops. Commodity & Equity Markets movements in India would take important cues from the rainfall in the coming days.
The next major trigger for the Commodity & Equity Markets is Q1 June 2012 corporate earnings, which will start trickling from the second week of July 2012. Investors and analysts will closely watch the management commentary that would accompany the result which could cause revision in their future earnings forecast of the company for the current year or the next year. A deceleration in top line growth of India Inc amid economic slowdown and slowdown in investment cycle will weigh on bottom line growth in Q1 June 2012 as the core operating profit margin could be negatively impacted by deceleration in top line growth.
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