Market Review WEEK ENDED FEBRUARY 22, 2013InternationalGlobal financial markets continued to be in the grip of uncertainty as fresh data cast a shadow overmanufacturing growth prospects for 2013 and on concerns over the US Federal Reserve’s resolve forextended quantitative easing. Gains on Friday helped the MSCI AC World Index pare its weekly loss to0.4% and EM equities underperformed Developed markets. Benchmark treasury bond yields eased on thegrowth concerns and reduced risk appetite. The overall weak sentiment weighed on other risky assets andthe decline in commodity prices led to a 1.65% decline in the Reuters CRB index. In currency markets,UK’s sterling fell sharply after the rating downgrade by Moody’s and the Euro lost ground (on concernsabout growth and Italian election results).• Asia-Pacific: Regional markets exhibited divergent trends – Chinese and Hong Kong markets fell on concerns about government measures to tighten liquidity and cool down the property markets. Markets in Japan, Korea and Indonesia however moved up. Japan’s trade deficit touched record highs as rise in exports failed to offset impact of higher energy imports and yen weakness. A strong rebound in manufacturing and agriculture sectors helped Malaysia log 6.4%yoy growth in the fourth quarter. Singapore GDP expanded by 1.3% on the back of pick-up in financial/business services sector.Thailand’s central bank left policy rates unchanged, but the policy statement was quite hawkish as the country reported strong Q4 GDP growth of 18.9%yoy.• Europe: European markets fared relatively better amidst mixed economic data. Flash manufacturing PMIs for February slid to 47.8 from 47.9 and the services PMI fell to 47.3 from 48.6. German IFO business confidence and ZEW economic sentiment surveys were positive. EU Commission cut 2013 growth forecasts to -0.3% from -0.1% predicted earlier. ECB data indicated banks’ LTRO repayments for February will be about €61.1 bln, much less than the previous round (~€ 137 bln) and market expectations. Moody’s downgraded UK’s rating to AA1 from AAA citing sluggish economic growth and state of government finances. Fitch revised outlook on Poland’s rating upwards.Turkey central bank cut overnight borrowing/lending rates by 25 bps to 4.5%-8.5% and increased lenders’ foreign exchange reserve requirement from 11.1% to 11.5%, with a view to stem currency appreciation.• Americas: US equity markets closed marginally lower in the holiday shortened week. Gains at the end of week helped pare losses after minutes of Fed’s recent meeting indicated divided views about the ongoing bond-buying programme. On the economic front, US consumer inflation rose 1.6%yoy in February. Housing sector continued to show improvement – sales of previously owned homes rose 0.4% in January (9.1%yoy) and the median price rose 12.3%yoy. Elsewhere in the region, Colombia cut policy rates by 25 bps to 3.75% and Mexico’s consumer inflation rose at a pace faster than expected. On the corporate front, Office Depot agreed to acquire rival OfficeMax for about $1.2 bln.
Weekly Weekly change (%) change (%) MSCI AC World Index -0.46 Xetra DAX 0.90 FTSE Eurotop 100 0.40 CAC 40 1.25 MSCI AC Asia Pacific 0.55 FTSE 100 0.12 Dow Jones 0.13 Hang Seng -2.82 Nasdaq -0.95 Nikkei 1.90 S&P 500 -0.28 KOSPI 1.90India - EquityWeak global sentiment and uncertainty ahead of the Union Budget led Indian equity markets lower thisweek. Mid and small cap stocks performed better than large caps. Amongst sectoral indices, real estate andtechnology indices posted gains while metals and FMCG indices were the top losers. FII inflows wererelatively low this week at $295 mln. The RBI issued guidelines for licensing new private banks – thenorms allow all private and public sector entities with Rs. 500 crore for capital investment in the business.It also mandated new banks to open at least 25% branches in unbanked rural areas.• Union Budget: The upcoming Union Budget has given rise to lot of speculation and expectations from policy makers have increased (due to the recent spate of reforms). Like in the past, we don’t expect too many policy measures to be announced in Union Budget, but the insight into government borrowings and spending plans will be important for investors. It is likely to be an interesting balancing act for the government, ahead of the national elections in 2014, between populist measures and the need to control deficit. Key areas to watch will be efforts to contain the twin deficits and plans for boosting investment activity.The roadmap to fiscal consolidation laid down last year requires the fiscal deficit to be reduced to 4.8% of GDP – the target is tougher to achieve in a slow growth environment. In addition to the recent announcements (direct cash transfers and diesel price de-regulation), changes to taxation and higher disinvestment (through new instruments) may be considered to boost revenues, along with further belt tightening on expenditure. The arithmetic may become complicated due to the focus on the Food Security Bill. The Budget may see some tax benefits as part of efforts to boost financial savings and investments, along tax measures to boost revenues.The push on enhancing infrastructure is likely to continue – the Twelfth Plan envisages $1 trillion spending during 2012-17. The relative importance of the Union Budget has declined over the last decade or so with regular policy changes being announced outside this event – however, the upcoming event will be keenly watched primarily because of the current economic environment and the limitations to push through major policy changes post this session. Weekly change (%) BSE Sensex -0.78 S&P CNX Nifty -0.63 S&P CNX 500 -0.55 CNX Midcap -0.05 BSE Smallcap 0.36
India - DebtThe government’s move to cancel scheduled GOI bond auctions this week lifted investor sentiment andhelped gilt yields edge lower. Short-end rates – 1yr bond yield and CP/CD rates – however continued torise due to the liquidity crunch. FIIs bought debt securities to the tune of $259 mln in the first four daysof the week.• Yield movements: Yields on the benchmark 10-year paper eased by 2 bps, while those on the 1-year paper moved up by 4 bps. 5-year and 30-year gilt yields edged lower by 1 bp each. CP/CD rates continued to rise amidst the tight liquidity conditions. Source: Morgan Stanley Research• Liquidity/borrowings: Demand for liquidity under the RBI’s LAF window remained high and overnight call money rates continued to hover around the 7.7-7.8% mark.• Forex: The Indian rupee closed slightly higher this week ahead of key events – GDP release and Union Budget – next week, even as risk appetite weakened. As of Feb 15, Indian forex reserves stood at $293.3 bln, $732 mln less than previous week levels. Trends in credit/deposit growth Source: Morgan Stanley Research