Global financial markets stabilised as investors digested further comments from the US Federal Reserve and took
a breather from the sell-off last week. The MSCI AC World Index closed up 1.26%, in a volatile week that saw
Emerging Markets and Japanese equities bounce back sharply. However, the index fell by over 1% this quarter due
to the declines in EM indices (especially in Europe and Latin America). Global benchmark treasury bonds also
pared recent losses and yields closed slightly lower this week. Renewed buying interest helped gold close off lows
of $1200/ounce touched this week, but continued to witness pressure and the Reuters Jefferies CRB Index fell
by 0.88%.The US dollar continued to strengthen against major currencies, while the yen depreciated and weaker
UK GDP data weighed on the pound.
• Asia-Pacific: Bargain hunting lifted regional stock indices – Indonesia, Japan and India were amongst the
major gainers. For the quarter, Japan, Malaysia and Taiwan bucked the overall weakness. Japanese economic
data was positive and reinforced views that the new monetary policy was helping - consumer prices and
unemployment rate remained flat, while industrial production and retail sales rose by 2% and 1.5%
respectively. Chinese equity markets clawed back some of the losses and inter-bank money market rates
eased after the central bank signalled liquidity support (but cautioned against rapid loan growth). InTaiwan,
the central bank left policy rates unchanged.Australian witnessed a change in leadership after former Prime
Minister Kevin Rudd became the leader of the ruling Australian Labor Party.
• Europe: European equities climbed up on the back of gains in automotive and retail stocks, and for
the quarter, Hungary stood out in terms of gains.At the EU summit this week, European leaders agreed
to tackle some of the key issues facing the region. Leaders agreed on bank bail-in rules that would
require creditors to partake in losses at troubled banks. Insured deposits of up to $130,000 would be
exempted. Policymakers also agreed to leverage European Investment Bank resources to lend to small-
and-medium businesses in the region, while deciding to spend close to €6 bln to support job creation
in the region. On the economic front, Germany reported rise in retail sales and unemployment
declined. Kabel Deutschland accepted Vodafone’s takeover offer of $10 bln.
• Americas: US equity indices gained this week and the technology dominated Nasdaq index
outperformed counterparts. Mexico stocks also posted sharp gains, while Brazil saw a relatively muted
rally. On the economic front, US Q1-2013 GDP growth rate was revised down to 1.8% (annualized)
from previous estimate of 2.4%. The Conference Board’s consumer confidence index rose and core
durable goods orders increased. US Senate cleared the immigration reform bill this week. Monthly GDP
data this week showed Canada’s economy continues to see improvement. On the corporate front, Pfizer
announced additional $10 bln buyback plans taking its total repurchase program to $40 bln. The
sustained protests in Brazil led to the government offering a national referendum on political reforms,
amongst other measures.
WEEK ENDED JUNE 28, 2013
change (%) change (%)
MSCI AC World Index 1.26 Xetra DAX 2.18
FTSE Eurotop 100 1.92 CAC 40 2.21
MSCI AC Asia Pacific 2.18 FTSE 100 1.62
Dow Jones 0.74 Hang Seng 2.66
Nasdaq 1.37 Nikkei 3.38
S&P 500 0.87 KOSPI 2.22
India - Equity
A strong surge towards the end of the week helped the markets bounce back from lows. Despite negative FII
flows (-$709 mln), signs of renewed government commitment towards reforms and positive news on the current
account deficit front, boosted investor sentiment. Mid and small cap indices however closed in the red.A hike
in gas prices and new pricing formula, had boosted Oil & gas stocks. In contrast, consumer durables and FMCG
indices closed in the red.
Trends in BoP and INR
Source: CLSA, RBI, CEIC
• Macro: Helped by strong capital flows and a moderate current account deficit (CAD), India’s Balance of
Payments recorded a surplus of $2.7 billion ($0.78 billion last quarter) in the quarter ended March 2013.
Rise in exports combined with lesser imports helped the trade deficit narrow to $45.6 billion from $58.4
billion in the sequentially previous quarter. Invisible receipts were higher compared to the December
quarter and helped the CAD narrow to 3.6% of GDP from 6.7% of GDP. Even as capital inflows
moderated in Q4FY13, they were more than sufficient to fund the CAD.As we have been stating, CAD
remains one of the key risks facing India and the government has been cognizant of the same and has
announced various measures to curb gold imports and encourage foreign investments are positive.
However, the recent change in global environment with investors moving away from EM assets due to
expectations of a reduction in global liquidity, will pose a challenge.
Overall BoP and INR
Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13
(USD bn) (INR/USD, reverse axis)
• Policy: Two key measures were cleared by the government – a) Hike in gas pricing, b) Setting up of coal
regulator. The Cabinet accepted the recommendations of the C Rangarajan committee that will link
domestic gas prices to imports and global prices. The change in gas pricing will come into effect
beginning April 2014 and is likely to result in domestic gas price doubling to $8.4/mmbtu. The
government has also indicated that subsidy may be provided to cushion impact on production costs of
fertilizers and gas-based power projects.The final details are expected over the next few months, but these
measure are positive and can incentivize further investments in oil & gas sector.This augurs well for the
country’s energy security and can help reduce dependence on imports. Similarly, the move to set up a
coal regulator is positive and could improve transparency on allocation of coal blocks and pricing.
Weekly change (%)
S&P BSE Sensex 3.31
CNX Nifty 3.08
CNX 500 2.05
CNX Midcap 0.32
S&P BSE Smallcap -1.29
India - Debt
Indian bond yields and the rupee managed to close the week off lows on better macro data and policy progress.
• Yield movements: Bond yields closed slightly higher across maturity buckets.Yields on the 10-year
and 5-year papers increased by 3 bps and 1 bp respectively, while those on the 1-year paper were
flat at 7.47%.Yield on the 30 year Gilts firmed up 13 bps. Corporate bond yields also stood higher
over the week.
• Liquidity/ Borrowings: Demand for liquidity at RBI’s LAF window averaged about Rs. 65,500 crore this
week and overnight call money rates hovered around the 7.25% levels. Scheduled bond auctions of GOI
securities worth Rs. 14,000 crores received bids of close to Rs. 42000 crores and were fully subscribed.
• Forex: Towards the close of week, the rupee bounced back sharply from all-time lows of Rs.60.71/$ on the
back of lower CAD, reform moves and corporate inflows. As of Jun 21, 2013, India’s forex reserves stood at
$288 bln, $2.8 bln less than previous week levels.
• Macro: Fiscal deficit for Apr-May 2013 stood at 33.3% of budgeted estimates vis-à-vis 27.6% recorded during
the corresponding period last year. Government spending seems to have normalized in the current fiscal as
expenditure increased 13.9%yoy in the period under review compared to 2% growth recorded in the second
half of last fiscal. However, data showed tax receipts have been below expectations in FY14YTD – gross tax
collections have fallen by 8% compared to 19.2% growth assumed in the Budget. Investors will closely watch
revenue trends for any negative surprise amidst the economic slowdown.