Market Review WEEK ENDED JULY 06, 2012InternationalGlobal financial markets closed an eventful week on a mixed note as concerns about the health of the globaleconomy overshadowed policy actions by key central banks.The MSCI AC World Index closed marginally lowerled by decline in equity markets in the West. Latest PMI and employment data from major economies added toglobal growth concerns. IMF officials also indicated that its current estimate of global growth in 2012 willundergo downward revision. Major treasury bond yields eased in response to latest round of monetary stimulusand weak macro-economic data. Crude oil prices moved up this week as tensions with Iran resumed and US oilinventories declined.This alongside strength in select other commodities helped the Reuters Jefferies CRB Indexadd close to 1%. In currency markets, the euro witnessed sharp declines against the US dollar after ECB cutbenchmark rates. Some of the key M&A deals announced this week were – Porsche/VW, Dell/Quest Softwareand Linde/Lincare.The investigation into LIBOR rigging led to the resignation of Barclays CEO and concernsabout the role played by the other large banks.• Asia-Pacific: Regional equity markets fared better than counterparts led by strong gains in Singapore, Indonesia and Hong Kong. Mainland Chinese equities however registered a marginal fall – stocks declined on concerns growth was weakening. China’s official manufacturing PMI index edged lower to 50.2 from 50.4 earlier while the HSBC PMI survey pointed to mild contraction. People’s Bank of China lowered its one-year lending rates by 31 bps to 6% and deposit rates by 25 bps to 3%. Bank of Japan’s latest Tankan Survey indicated the sentiment amongst large Japanese manufacturers has improved.• Europe/MENA: European stock indices closed mixed amidst renewed concerns about growth and rise in Spain/Italy bond yields. Equity indices in Germany and France finished marginally lower while the FTSE 100 gained. ECB cut its main refinancing rate by 25 bps to 0.75% and reduced the deposit rate to zero. BoE expanded its asset purchase programme by £50 bln. Euro-area manufacturing PMI was unchanged from last month’s level. While the services PMI moved up slightly, the dip in German services PMI below 50 raised concerns growth is stagnating in the core countries. A similar measure of UK services sector output also slid. Euro-area unemployment hit new high of 11.1% in June. Italy announced spending cuts of €26bn up to 2014 so that it could delay increase in sales tax. Saudi Arabia’s cabinet approved regulations that pave way for establishing mortgage companies in the country. Nigeria signed a $4.5 bln deal with Vulcan to establish six new refineries in the country.• Americas: A weak US jobs report led frontline indices to close in the negative territory. The tech- dominated Nasdaq index fared relatively well and closed flat. Non-farm payrolls rose by 80,000 in June and the unemployment rate remained unchanged at 8.2%. US ISM manufacturing index recorded a large drop to 49.7 from 53.5 last month.The ISM non-manufacturing index dipped to 52.1 from 53.7. In Mexico, presidential elections delivered a verdict in favour of Enrique Peña Nieto of the Institutional Revolutionary Party. Latest data from Brazil pointed towards a slowdown with industrial production growth for May continuing the negative growth trend and consumer price inflation fell sharply. GSK agreed to pay $3 bln for improper promotion of drugs and failure to disclose safety information.
Weekly Weekly change (%) change (%) MSCI AC World Index -0.33 Xetra DAX -0.10 FTSE Eurotop 100 1.48 CAC 40 -0.87 MSCI AC Asia Pacific 1.18 FTSE 100 1.64 Dow Jones -0.84 Hang Seng 1.85 Nasdaq 0.08 Nikkei 0.16 S&P 500 -0.55 KOSPI 0.23India - EquityFrontline equity indices were range-bound, but closed in the positive territory for the week. Gains in mid andsmall cap stocks outpaced large caps. Real estate stocks got a boost from the government’s decision to extend the1% interest subvention scheme for housing loans up to Rs. 15 lakhs (with a property value not exceeding Rs. 25lakhs) by one year. Banking and consumer durable stocks also outperformed broad markets, while FMCG and ITstocks registered declines. FII flows into equity aggregated $240.3 mln in the first four trading days of the week.Earnings will be a key driver of sentiment over the near term and the ongoing monetary easing by various centralbanks across the globe could bolster global risk appetite and aid capital inflows into emerging markets. However,this could push up commodity prices as well, leading to additional inflationary pressures in India.• Foreign Direct Investment: As per UN’s latest World Investment Report, India continues to be the third most favoured FDI destination after China and the US. As per the report, FDI flows into India increased by over 30% in 2011 to $32 bln, notwithstanding the various policy issues. Flows are expected to remain strong in 2012 as well, though the momentum could be slower than 2011. RBI data indicates that India received cumulative FDI inflows of $14.2 bln in 2012YTD, compared to $6.5 bln in the corresponding period last year. The UN report classifies India amongst countries where FDI potential is amongst the highest but actual flows have been below potential. Policy reforms are a must to attract FDI flows, which can help reduce dependence on volatile FII flows, for funding the current account deficit.• Exports: One of the benefits of the sharp fall in the rupee has been increased competitiveness on the exports front. While India is largely a domestic-demand driven economy, the contribution of exports to overall economic growth has been increasing.While net exports contribution to GDP has remained small or negative, gross exports’ share of GDP more than doubled to 25% in FY12 from 12% at end of 2000. Apart from growth in volumes, there has been a marked shift in the overall composition of exports and the target markets. Over the recent years, India’s export destinations have been mainly EM countries and this makes them resilient to any sharp slowdown in developed markets.
Trends in destination of India’s exports % p 70% Emerging Markets 60% 50% Developed markets 40% 30% 01 03 05 07 09 11 Source: JP Morgan In terms of composition, manufacturing exports now have a higher share of the basket (almost two-thirds) vis-à-vis software. Also notably the manufacturing product basket has seen a shift away from traditional goods to mechanized and differentiated ones such as automobiles, auto parts, chemicals and capital good. Weekly change (%) BSE Sensex 0.52 S&P CNX Nifty 0.72 S&P CNX 500 1.28 CNX Midcap 2.19 BSE Smallcap 4.26India - DebtImprovement in the liquidity situation helped short-dated bond yields to ease, while those on longer-datedsecurities held steady.The over $10 bln FII debt auction for g-secs and corporate debt held this week witnessed lukewarm response anda third of the auction limits were unsold.The g-secs sold at the auction had a residual maturity of three years ormore, while the long-term corporate bond infrastructure limits auctioned had a one year lock-in period andresidual maturity of 15 months• Yield Movements: Yield on the 10-year Indian benchmark treasury bond was unchanged from last week’s level. Better liquidity conditions helped 1/5 year gilt yields and CP/CD rates for various maturities ease. Consequently the yield curve steepened and spreads between short (1-year) and long dated (30-year) gilt yields increased to 68 bps from 64 bps.• Liquidity/ Borrowings: Demand for liquidity reduced - repos averaged around Rs. 43,000 crore as against Rs. 89494 crore last week. Overnight call money rates however stayed elevated. Scheduled bond auctions for four GOI securities received good response