Global financial markets started October on an uncertain note, as heightened political wrangling in the US
led to partial government shutdown and raised concerns about a potential debt default. Notwithstanding
the rally towards the close of week, the MSCI AC World Index closed down 0.34% mainly due to declines
in Japan and the US. Emerging markets outperformed developed counterparts amidst relatively positive
economic data and hopes that US budget impasse could delay the Fed tapering plans.While US short-term
t-bill yields rose, the long-dated Treasury bond yields were only slightly higher over the week. Other major
treasury bond markets, UK and Germany, also witnessed a slight rise in yields.The Reuters Jefferies CRB
Index ended the week almost flat following mixed price trends amongst major commodities.The US dollar
lost ground due to the uncertainty and yen gained amidst demand for safe havens as well as due to hike in
sales tax and stimulus measures.
• Asia-Pacific: Regional markets exhibited divergent trends - Japanese equities were weighed down by a
stronger yen, but India and Taiwan markets posted strong gains. Shanghai equity markets were shut for the
Golden Holidays.The official and HSBC PMI measures of China’s manufacturing sector climbed higher and
the services PMI hit multi-month highs raising hopes about economic recovery. Bank of Japan kept policy
on hold and the quarterly Tankan survey showed an improvement in business sentiment amongst large
manufacturers helped by recovery in exports. Japan’s unemployment rate however increased 0.3% to 4.1% in
August. Japan raised sales tax by 3% to 8%, a move that aimed at fiscal consolidation and also unveiled a $51
bln stimulus package. Elsewhere in the region, Bank of Australia left key policy rate unchanged and rise in
exports helped the trade deficit narrow to ~$0.8 bln from $1.3 bln.
• Europe: Concerns about the impact of a protracted US budget standoff weighed on European markets,
even as regional newsflow was largely positive.While the ECB left the benchmark policy rate unchanged
at 0.5%, the policy tone seemed dovish and the central bank said it will monitor liquidity conditions and
intervene to ensure the recovery continues.Italian sovereign bonds rallied after the incumbent government
won a confidence vote. Eurozone flash composite PMI numbers rose as gains in services offset a fall in
manufacturing sector. In UK, both the manufacturing and construction PMIs dipped marginally. In a bid
to strengthen democracy and allay citizens’ concerns, Turkey’s government unveiled reforms that will
enhance the rights of minority groups and ease religious norms for women. In Austria, election results
showed a dip in ruling coalition partners’ vote share, but they continue to hold a majority in Parliament.
• Americas: US equity markets were range-bound as US debt related concerns dominated investor sentiment
and overshadowed positive economic data.Technology stocks however outperformed and closed in the positive
territory. Brazil stocks fell as Moody’s downgraded outlook on Brazil’s credit rating to stable from positive.
Canadian equities also slid on concerns about the US budget impasse. US ISM manufacturing index surprised
on the upside, rising 0.5 points to 56.2. In contrast, the US ISM non-manufacturing index dipped, coming off
multi-year peaks. RBC Canada manufacturing PMI jumped up to multi-month highs showing sharp
WEEK ENDING OCTOBER 04, 2013
improvement in business activity. On the corporate front,Twitter said it plans to raise $1 bln through a public
change (%) change (%)
MSCI AC World Index -0.34 Xetra DAX -0.44
FTSE Eurotop 100 -0.92 CAC 40 -0.54
MSCI AC Asia Pacific -1.21 FTSE 100 -0.90
Dow Jones -1.22 Hang Seng -0.30
Nasdaq 0.69 Nikkei -4.98
S&P 500 -0.07 KOSPI -0.74
India - Equity
Despite muted FII flows ($90 mln), Indian equity markets managed to post strong gains this week amidst
relatively better domestic economic data. Real estate and banking stocks were the top gainers, while
FMCG and power stocks posted declines.
• Macro: After a sharp fall last month, India’s HSBC manufacturing PMI index turned a corner and was
up at 49.6. Rising input prices and fall in export orders constrained recovery to above 50 levels.Another
positive data on the industrial front was the 3.7% increase reported in the eight-core industries index
Current account balance
Source: CLSA, CEIC.
A sharp increase in the current account deficit (CAD) caused India’s Balance of Payments to post a deficit
in the June quarter (-$0.3 bln compared to +$0.5 bln in March quarter). The trade deficit jumped as
exports growth lagged expansion in imports last quarter. This along with slowdown in income from
services exports translated into a CAD of $21.8 bln (4.9% of GDP), higher than the $18.1 bln (3.6% of
GDP) last quarter. Rise in FDI and bank credit flows helped offset impact of FII outflows from domestic
bond markets and contributed to an increase in capital account surplus. Going by the July and August trade
data, we could see a sharp decline in the current account deficit from June levels.
Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13
• Outlook: Indian markets have had a positive September helped by the US Federal Reserve decision not
to reduce quantitative easing. Whilst this has helped EM equities and India in the last few weeks,
domestic policy makers need to utilize this breathing space to make adequate changes to prepare for the
eventuality of lower global liquidity. Moreover, the euphoria over the Fed’s decision has already given
way to concerns about the ongoing political impasse in US and resultant partial shutdown of the
government. At this stage, markets expect the situation to be resolved very soon, but a protracted
shutdown and any technical debt default due to disagreement over US debt ceiling, are likely to weigh
heavily on the global economy and markets. While India has limited direct economic linkages, market
sentiment is likely to be influenced by global developments as well as the upcoming earnings season.
Weekly change (%)
S&P BSE Sensex 0.96
CNX Nifty 1.27
CNX 500 1.35
CNX Midcap 1.53
S&P BSE Smallcap 1.25
India - Debt
Indian bond prices rose tracking gains in the rupee and market players cheered RBI’s move to conduct
OMO buyback operations next week.
• Yield movements: Treasury bond yields eased across maturity buckets - yields on the 10-Yr
benchmark gilts fell 22 bps, while the 5-year Gilt yield decreased by 21 bps.Yields on the 5–year AAA
corporate bonds dropped 30 bps over the week and the consequently the spread narrowed to 90 bps
from 98 bps. 1 yr gilt yields decreased by 9 bps, while yield on 30 year Gilts dipped by 10 bps.
• Liquidity/borrowings: Systemic liquidity conditions remained stretched, but the RBI’s
announcement of an OMO purchase operation next week relieved markets. Overnight call money rates
slid to 9% levels from close to 9.5% last week. Scheduled GOI bond auctions for four securities
proceeded well and were fully subscribed.
• Forex: Buoyed by hopes the ongoing budget impasse will lead Federal Reserve to delay QE tapering,
the Indian rupee rallied 1.7% against the US dollar. India’s forex reserves stood at $276.4 bln as of
• Macro: As per latest data, the fiscal deficit increased to 75% of budgeted estimates in August vis-à-vis 62.8%
last month, and much above the long term averages.This was despite higher tax collections and tighter control
on expenditure. It remains to be seen how the government will seek to achieve the 4.8% fiscal target, given
limited visibility on divestments and weak tax revenues. Any cuts in plan expenditure will negatively impact
economic growth momentum.