Global stock, bonds and commodities rallied on a dovish interpretation of the latest comments from the
US Federal Reserve, leading to hopes of continued liquidity support. Earnings optimism also helped equity
markets in many developed economies clawback to record highs, and the MSCI AC World Index closed up
3.36%. The IMF lowered global growth projections by 25 bps each to 3.1% for 2013 and 3.8% for 2014
respectively, citing increased downward risks to Emerging economies growth and prolonged weakness in
euro area. Global benchmark treasury bond yields eased as latest comments from Fed officials and FOMC
meeting minutes assuaged investor concerns about policy direction. The NYSE Euronext took charge of
LIBOR rate setting supervision. Commodities including gold witnessed a relief rally this week and the
Reuters Jefferies CRB Index closed up 2.12%.The US dollar index edged lower amidst the dovish remarks,
but closed week off lows.The euro gained strength, while the yen weakened.
• Asia-Pacific: Regional equities and currencies gained ground this week on global central bank newsflow,
even as China economic data came in below expectations. China’s trade surplus expanded but less than
expectations as both exports and imports fell. In another step to liberalize currency controls, Chinese
authorities nearly doubled Qualified Foreign Institutional Investor quota limits to $150 bln this week.
Singapore’s economic growth accelerated sharply on the back of growth in manufacturing. Central banks
in Korea, Malaysia and Japan maintained status quo on policy. Bank Indonesia raised benchmark policy
rate by 50 bps to 6.50%.While IMF upgraded 2013 growth forecasts for Japan to 2% from 1.5%, it reduced
growth estimates for the Emerging Asian economies by 0.3% to 6.9%.
• Europe/MENA: Leading European indices notched up gains even as economic and policy news
flow remained weak. Fitch downgraded France’s credit rating one level to AA+ from AAA and S&P cut
Italy’s credit rating to BBB from BBB+. While Greece secured the next round of funding this week,
Portugal borrowing costs spiked up amidst political uncertainty and the reform programme. On the
economic front, latest data showed Eurozone industrial output contracted in May and German exports
also fell. In its latest world economic outlook update, IMF cut Euro area growth estimates by 0.2% to -
0.6% while revising UK growth forecasts upwards. On the corporate front, Schneider Electric is in talks
to acquire Invensys for $5 bln and UK government approved privatization of Royal Mail. Russia central
bank kept rates on hold and introduced a new lending facility.The situation in Egypt stabilized and a
new interim Prime Minister was appointed and neighbouring nations extended financial help.
• Americas: Fed statements reassured investors the central bank will take time to shift its policy stance
and this alongside hopes of good corporate earnings helped US and other key regional markets end
higher. US consumer confidence, as measured by the Thomson Reuters/University of Michigan,
decreased and weekly jobless claims increased. Large dividend payouts by Freddie Mac and Fannie
Mae helped the US post a record budget surplus in June. Mexico’s central bank left key rates
unchanged. In its efforts to curb inflationary pressures, Brazil’s central bank raised the Selic rate by
50 bps to 8.5%. Economic activity in Brazil however remains lackluster. On the M&A front, AT&T
is buying Leap Wireless for $1.2 bln and grocery chain Kroger said it is buying Harris Teeter
Supermarkets for $2.5 bln. As per IMF’s latest report, Canada GDP will expand at a faster pace than
previously estimated, while the US growth rate is expected to slow to 1.7% (1.9% estimated earlier).
WEEK ENDED JULY 12, 2013
change (%) change (%)
MSCI AC World Index 3.36 Xetra DAX 5.21
FTSE Eurotop 100 2.70 CAC 40 2.70
MSCI AC Asia Pacific 2.70 FTSE 100 2.66
Dow Jones 2.17 Hang Seng 2.03
Nasdaq 3.47 Nikkei 1.37
S&P 500 2.96 KOSPI 2.00
India - Equity
Indian equity markets remained on an upward trajectory as comments from US Federal Reserve officials
comforted investors. Gains were led by tech stocks, which witnessed a sharp rally following Infosys
positive earnings report. Auto and oil & gas stocks however posted declines. FII outflows amounted to
$219 mln in the first four trading days of the week.
• Macro: Growth in India’s industrial production faltered in May – the index slid 1.6%yoy on the back of
decline in manufacturing (-2%) and mining (-5.7%) output. Electricity production growth accelerated
to 6.2%yoy (up from 4.2% in April) and offset some of the negative impact on headline numbers.
The latest set of numbers emphasizes the need for continued policy action to address issues impacting
Source: CEIC, Ministry of Commerce, Morgan Stanley Research
Helped by sharp decline in gold and oil imports, India’s trade deficit narrowed to about $12 bln in June
(from over $20 bln in May). However, exports growth remained weak – exports fell by 4.6%yoy. Going
forward, the trade deficit levels could normalize if demand for precious metals remains subdued. Oil price
movements, external demand and gold imports will shape trade deficit trends in coming months.
• Corporate Earnings: The earnings season started off well this week with Infosys results surpassing
market expectations. In the ongoing weak macro environment, we expect companies dependent on the
investment cycle to report subdued earnings growth. Ongoing weakness in consumer spending is likely
to weigh on consumer durables companies as well.
Trade Deficit (3-months Trailing, as % of GDP annualized)
Trade Deficit (Monthly, as % of GDP annualized)
Weekly change (%)
S&P BSE Sensex 2.37
CNX Nifty 2.40
CNX 500 2.10
CNX Midcap 1.09
S&P BSE Smallcap 0.79
India - Debt
Indian bond yields were volatile this week, tracking the rupee and economic data. Overall yields closed
mixed - bond yields closed almost flat at the shorter end of the curve, but moved up at the longer end of
• Yield Movements: Yields on the 1- and 5-year papers decreased by 1 bp each, while those on the
10-year paper firmed up 3 bps to 7.62%.Yield on the 30 year gilts increased 7 bps.
• Liquidity/borrowings: Systemic liquidity tightened compared to last week levels and as a result, repos
averaged higher this week and overnight call money rates rose to 7% levels from 6.60% last week.
Scheduled bond auctions of GOI securities worth Rs. 15,000 crores received bids of over Rs. 37000 crores
and there was no devolvement on primary dealers.
• Forex: The Indian rupee witnessed heightened volatility this week – Fed statements, RBI intervention
and policy measures to curb speculative trading helped the currency rebound from record lows of
Rs.61.21/$ to close at Rs.59.56/$. For the week as a whole, the currency posted gains of 1.1%. As of Jul
5, 2013, India’s forex reserves stood at $280 bln, $4.5 bln lower than last week levels.
Change in Foreign Reserves
Source: CEIC, Bloomberg, CLSA Asia-Pacific Markets
Reports indicate most Asian countries have recorded a fall in foreign reserves over the last quarter due to
foreign outflows and central bank intervention to prop up local currencies. In case of RBI, the fall in price
of gold, which accounts for a relatively large proportion of the bank’s reserves contributed to the decline.
TA KO SI PH CH MA TH IN ID
(USD bn) 2Q13 Since end-2012 Jun/2013