Market Review WEEK ENDED APRIL 13, 2012InternationalGlobal equity markets were weighed down by renewed concerns about Europe and also due to weak data outof China. The MSCI AC World Index fell by 1.52% as investors fretted over increase in Spain and Italianborrowing costs along with worries about the impact of the austerity measures on European growth. Globaltreasury yields eased as latest round of economic data led to expectations monetary policy will remain supportivefor a prolonged period of time.Amongst commodities, crude oil prices trended lower as IEA report indicated thebalance of oil supply and demand is improving. This alongside weakness in industrial metals and othercommodities led the Reuters Jefferies CRB Index 1.18% lower. In currency markets, the euro weakened sharplyon Friday on indications the central bank will not expand its asset purchase programme.The PBoC widened theChinese yuan’s trading band to 1% from 0.5%.• Asia-Pacific: The rally in Chinese stocks continued this week as weak GDP numbers led to expectations government may announce pro-growth policies. China reported economic growth of 8.1% for Q1-2012, slower than 8.9% recorded in the sequentially previous quarter. Consumption spending accounted for 76% of economic growth, much higher than about 52% last year, highlighting a policy-led shift in favour of the former. March new loan growth was however stronger than expected. Chinese inflation rate climbed to 3.6% from 3.2%, primarily due to rise in food prices. Bank of Japan left its policy rate unchanged at 0-0.1% and maintained its asset purchase programme size of ¥65 bln. Japan’s core machinery orders rose 4.8% in February well ahead of market expectations. South Korea’s ruling party emerged victorious in the Parliamentary elections.• Europe: Led by sharp declines in banking stocks, regional equity markets extended declines this week. Indications the ECB will not further expand its stimulus programme pushed up Spain and Italy’s borrowing costs. Spain’s government sought to address market concerns by announcing additional spending cuts of €10bn. On the economic front, German exports continued to expand in February and Euro-area industrial production also increased led by gains in France and Netherlands. UK retail sales increased as warmer weather boosted demand for clothing and outdoor gear. Swiss National Bank officials defended their intervention in currency markets last week and said will continue to cap the Sfr at 1.20 against the euro.• Americas: US equity indices closed the week lower – the tech-sector dominanted Nasdaq witnessed steeper declines. On the economic front, the Fed’s latest Beige Book broadly acknowledged the modest acceleration in growth but expressed concerns over the rise in energy prices. US budget deficit hit record highs for March and Michigan consumer sentiment index decreased. US trade deficit narrowed significantly in February as imports fell by about 2.7% and exports were virtually flat. In contrast, Canada witnessed its trade surplus narrow from as exports declined. Peru central bank left rates unchanged. On the M&A front, Facebook bought photo-sharing app owner Instagram for $1 bln.
Weekly Weekly change (%) change (%) MSCI AC World Index -1.52 Xetra DAX -2.82 FTSE Eurotop 100 -2.56 CAC 40 -3.94 MSCI AC Asia Pacific 0.10 FTSE 100 -1.26 Dow Jones -1.61 Hang Seng 0.52 Nasdaq -2.25 Nikkei -0.52 S&P 500 -1.99 KOSPI -0.99India - EquityRenewed global risk aversion and weak earnings announcement by IT services major Infosys dragged Indianequity markets lower this week. Infosys reported a near 2% fall in revenues and profits, as against expectationsof growth. Multiple events converged resulting in slower business accretion for the firm. Following theannouncement IT stocks lost ground and closed with double-digit losses. In contrast, FMCG, healthcare andauto stocks closed in the positive territory. FIIs pulled out about $288.5 mln in the first four trading days ofthe week. On the M&A front, India Hospitality Corp acquired 100 per cent stake in Adelie Foods, a UK basedconvenience foods firm for $350 mln (about Rs. 1800 crores). Trends in Industrial Production Source: CSO, Morgan Stanley Research• Industrial Production: As per latest data, the industrial production index rose 4.1% in February helped by 8% growth in electricity production and 4.1% growth in manufacturing. Mining output continued to decline. January industrial production numbers underwent sharp revision – growth was revised downwards from 6.8% to 1.1% following a nearly 2.5 times correction in sugar production reporting. On a cumulative basis, industry growth during Apr-Feb12 was 3.5%, as against 8.1% recorded in the same period last year. Continued weakness in industry along with other economic data might prompt the central bank to consider rate cuts at its policy meet next week, but inflation and fiscal concerns could have a negative influence and delay the process and limit quantum.
Weekly change (%) BSE Sensex -2.24 S&P CNX Nifty -2.17 S&P CNX 500 -2.17 CNX Midcap -2.95 BSE Smallcap -0.67India - DebtIndian bond yields fell this week, but closed off lows on profit taking. Hopes the recent weak economic newsflow willlead the central bank to cut rates had pushed yields lower.• Yield Movements: Yields on the 10-year benchmark bond declined 13 bps while those on the 5-year gilt eased 19 bps.Yields on AAA rated corporate bond of similar tenor decreased 21 bps and consequently spreads over gilts were nearly unchanged at 90 bps.Yields on the 1 year paper moved down 20 bps while those on the 30-year g-sec paper decreased 6 bps.As a result, spreads between the long (30-year) & short (1-year) end of the curve expanded to 50 bps from 45 bps.• Liquidity/ Borrowings: Liquidity conditions improved this week – overnight call money rates hovered around 8.50% levels and demand for liquidity under the LAF window averaged much lower. Scheduled bond auctions for four GOI securities – 8.24% GOI 2018, 8.79% GOI 2021, 8.28% GOI 2027 and 8.33% GOI 2036 – worth Rs. 15,000 crores were subscribed 2.06 times.• Forex: Weak domestic economic data and FII outflows led the Indian rupee to extend declines from last week. The currency closed 0.4% weaker against the dollar.As of Apr 06, forex reserves aggregated to $292.9 bln, down $1.47 bln over last week levels.• Policy Outlook: Developments over the past month or so have indicated that central banks across most Emerging Markets, especially Asia, are in a wait-and-watch mode after the sharp easing in second half of last year and start of 2012, as they keenly watch cues from global oil prices as well as economic growth momentum. In India, the central bank has refrained from any easing due to stubborn inflationary pressures and fiscal situation. The rise in global oil prices and recent policy developments have led to uncertainty about the quantum of monetary easing in the year ahead. The RBI’s annual policy review next week is keenly awaited for insight into the bank’s reading of the current macro-economic environment and fiscal measures announced in the Budget.The central bank has to weigh supporting economic growth with tackling inflation, which has eased in recent times due to seasonal factors and high base effect. Structural factors driving inflation however remain and the weakening rupee is adding to the high cost of oil imports.