Posts Tagged ‘GDP’

Weekly Update 4th – 8th October 2010

Global markets closed on a mixed note in the week gone by, with Indian markets closing in positive on weekly basis. To send a message to China to raise value of its currency, the U.S. House of Representatives this week approved a bill that would let domestic companies petition for duties on imports from China to compensate for the effect of weak yuan. U.S. Treasury Secretary Timothy F. Geithner said he is confident that tensions over China’s currency, the yuan, won’t lead to escalating trade sanctions or feed into a broader global currency conflict.

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European confidence in the economic outlook unexpectedly improved this month. An index of executive and consumer sentiment in the 16 euro nations rose to 103.2, the highest since January 2008, from a revised 102.3 in August. The European Commission forecasted a more “moderate” expansion in the second half of the year as governments from Ireland to Portugal step up spending cuts to push down deficits. ECB President Jean-Claude Trichet said that there is “continuing uncertainty” about the outlook.

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China’s manufacturing expanded at the fastest pace in four months in September. According to China’s logistics federation and statistics bureau, the purchasing managers’ index rose to 53.8 from 51.7 in August. The data is viewed very positively by the market as it shows that China’s economic momentum may counter weakness in the global recovery. It is believed that growth may be further aided in coming months as government plans to speed the completion of stimulus projects and boost public housing construction.

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In Japan, the jobless rate fell to 5.1 percent from 5.2 percent. After intervening few days back in the foreign exchange market in order to stem the yen appreciation, Japan’s Finance Minister reiterated that Japan is ready to keep intervening after selling yen for the first time in six years last month.

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Core infrastructure industry that account for 26.7 percent of industrial output in India slowed to 3.7 per cent in August, as compared to 6.4 per cent in the same month last year. Going forward we expect the markets would remain firm as it is supported by strong portfolio investments. The best strategy to ride the tide would be stay invested. Nifty has support between 5940-5870 and Sensex between 19640-
19200 levels.

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Bullions may continue to lead the charge in the commodities counter as both silver and gold recently tested life time highs in MCX. The latest boon to the metal has been increasing expectations that the Federal Reserve will further ease monetary policy with measures including the purchase of Treasuries. Jitters about European sovereign debt problems have also supported gold higher as a safe-haven investment. Better jobless claims data and a revised upward GDP in US supported the crude counter which can make further gains in next coming week. Base metals will take cues from LME as China markets will remain closed for a week. In agro counter pulses along with oilseeds may trade in range while spices can get some support from upcoming festive season. Mentha oil firm export demand and low crop will assist the prices to make fresh high in MCX.

Weekly Update 27th September – 1st October 2010

Indian Markets posted fourth weekly consecutive gains led by rising optimism of growth and portfolio investments. The run up in the market was phenomenal and beyond expectations of market participants. Global investors seems to be going more anxious about India consumption and growth, complemented by continued monetary accommodation by developed nations in  order to propel growth. Indian Government recently raised the cap of foreign investments by $ 5 billion in federal and corporate bonds with a residual maturity of over five years. The step is viewed very positively in the sense that the ease of limit in federal bonds will take out interest rate pressure from the banks. The ease in corporate bonds issued by companies in the infrastructure sector will fill the estimated financing requirement of $1 trillion in the five years to 2017.


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U.S. central bank kept its benchmark interest rate in the range of zero to 0.25 percent .The bank said that they are prepared to provide additional accommodation in the light of slower economic recovery. The statement raised the speculation that the bank may buy more treasuries down the year. Weaker growth has still kept the unemployment at above 9 percent levels and reflects that companies are still cautious. The U.S. markets surged to highest level since May as the orders for durable goods rose the double of market expectations.

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Another happening that market is keeping an eye on is the political pressure building on Obama administration to take a stance on the China’s currency policy. The yuan has appreciated about 2 percent against the dollar since the central bank said it would pursue a more flexible exchange. However U.S. wants to see more rapid and “significant” rise in the yuan’s value.

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With the visible positivity across the globe, Indian markets are maintaining up move and managed to close above the psychological mark of 6000 levels on the weekly basis. The weakness in the dollar index clearly strengthens the equity markets and lead to the fresh breakout especially in US and European counterparts.

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One should maintain the stance of buying on dips. The Midcap stock may provide handsome return in the near future. Nifty has support between 5900- 5810 and Sensex between 19640-19200 levels.

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It appears that bullion counter is taking advantage of every opportunity and making new highs now and then on rock solid fundamentals. Weaker than expected growth in manufacturing and services industries of euro zone, sovereign debt crisis in Ireland, plummeting dollar index amid some poor economic releases fuelled rally in bullions. Negative tone of global economy capped the upside of base metals and energy  counter, even fall in dollar index could not give much impact and they appeared shy to break the resistance. Local currency appreciation locked the movement of commodities. This week is full of event risk. GDP data of US and UK, consumer confidence data and employment data of US may give further direction to  commodities. Crude oil is witnessing lackluster trading and thus moving in range on ambiguity in the world economy. Energy counter needs big news for further direction. Spices should revive in this week.

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CRUDE OIL…. “Black Gold …Key driver of Global Economy”

Crude oil is the key driver of every economy therefore it is known as “Life blood of Economy”. It has shown lot of volatile movements but has shown resilience despite below expectation US economic numbers and euro zone crises in May this year. Crude prices have more than doubled since dropping below $35 late in 2008, but are still significantly lower as compared to the record high near $147 a barrel in July 2008.

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Crude prices have been trading in wide range of $65 to $90 since last August 2009 .Crude prices have weathered the euro  zone crises very well as they did not break this wide range.

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In the month of June and July, the fall in the greenback and recovery in global equity markets have supported the prices higher. The pace at which crude oil is being used across the globe as fuel in transportation and its other byproducts in industrial applications, it is expected that prices will be well supported. Furthermore, the lack of major alternative fuel of crude and ever shrinking oil wells, coupled with lack of new exploration will give the bull’s upper hand in long run.

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But, as we have seen in the stunning run up to $147 in 2008 and then plunge from that high to below $37, it can be said that it is the speculative forces that run the crude oil more than the true fundamentals of supply and demand.

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The other energy source is natural gas and it’s available due to new found Shale gas supply in US but due to lack of proper infrastructure in place it is quite tough to presume natural gas to become a tangible replacement for oil any time soon.

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Today, China is the world’s largest consumer of energy. Continued demand of Chinese and Indian economies may support the crude prices in long term. But China’s crude oil imports in July fell 3.2 percent from a year earlier after record inbound shipments in June which has capped the upside.

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As the hurricane season in US is from 1 June to 30 November so hurricane premium also support the prices during this period. Recently hurricane premium has been seen in the crude prices as the prices did not see major sell off despite increasing stockpiles. Furthermore recovery in the global equity markets tends to be supportive for the prices.

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As the cost structure of drilling and exploration has gone up so the marginal cost of production has also increased. Companies are benefiting at present where crude oil prices hover between at $75 to $80, but if we do see upward pressure on the cost structure, again, over time we do see a rise in oil price.

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Recently contrasting economic data between the US and Euro zone as well as the earnings performances of the banking sector has been seen which continues to shore up the euro on the premise of broadening stabilization of interbank concerns and to a lesser extent robust recovery in Germany.

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OPEC opted for production cuts in earlier this year and 11 countries adhered to compliance except Iraq. OPEC countries boosted output from 24.845 million b/d by 80,000 b/d to 26.82 million b/d for the July 2010. This exceeded the OPEC 11 target by 1.975 million b/d and puts the group’s compliance rate at 53%.But in order to meet the growing demand OPEC produced an estimated 29.4 million b/d of crude oil in the second quarter of 2010 after remaining relatively steady for the past four quarters.

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US Distillate demand —-Pointer to industrial recovery

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The fall in the distillate demand in US is also a concerning factor as far as the demand scenario is concerned. The main driver of distillates demand is heavy use by industrial sector, which has been severely lacking in the second quarter. The U.S. actually had a year on year increase for distillate demand between 2009 and 2010 as high as 17.1% for the last week in May but it has cratered to +2.2% year on year in two months time.

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The stockpiles of distillate fuel in July month is at the highest level since the week ended Oct. 16. 2009. And this distillate inventory builds will cap the upside in the crude oil.

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Analysis:-The absolute change in the EIA crude inventories has shown fluctuation in wide range of -8 million barrels to +8 million barrels in the total weekly crude oil supply data.

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Current scenario

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Crude oil which often tracks events in the global economy is very much affected by the turbulences that take place in various key economic powerhouses. At present when the hysteria around the euro zone crisis began to subside, fears of US economic slowdown have begun to intensify. US recovery is still causing as indicated by its weak housing and labor markets.

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This slowdown is also captured in all the economic reports over the last two months, from housing and manufacturing, to employment and GDP. All these economic reports are below the expectations, and prior reports are being revised down. It appears the US economy really slowed down over the last two months in particular.

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The crude oil outlook going forward in rest of the quarter is quite bleak as the bulk of the summer driving season in US is over, and now we have less demand and inventory is rising at the same time in this commodity.

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Weekly Update 30th August – 3rd September 2010

The global equity markets fell in the week gone by after a record plunge in U.S. home sales and slowing export growth in Japan raised concerns that developed economies are losing momentum. However losses in the equity markets were recouped during the end of the week when Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank “will do all that it can” to safeguard the recovery and growth and stronger-than-forecast U.S. economic growth eased concern the world’s biggest economy will return to recession. According to the EPFR Global, risk aversion led global investors to put some $5.2 billion into bonds and withdrew a net $7.1 billion from equity funds worldwide.

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European Central Bank President Jean-Claude Trichet called for immediate fiscal austerity measures. He said that the lesson from past history is that dealing with the legacy of accumulated imbalances is not simply a duty to be fulfilled after the economic recovery, but rather an important precondition for sustaining a durable recovery.

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However he was skeptical of the argument that cutting back deficits now would risk derailing the recovery. Bank of Japan is expected to hold an emergency meeting next week to consider more monetary easing and Japan’s Prime Minister is expected to give economic stimulus package as strong appreciation in Yen to 15 year high against the dollar is threatening the export-led recovery.

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On the domestic front, RBI in its Annual Report said that the growth outlook for the current fiscal year is robust but inflation has emerged as a major concern. It said that it would remain committed to contain generalized inflationary pressures through its calibrated monetary policy based on careful assessment of risks to both inflation and growth.

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Going next week, investors will keep an eye over the GDP growth number for the first quarter of 2010-2011 to be released on 31st August. The expansion in the economy is expected to match up the growth of 8.6 percent seen in the last quarter of the fiscal 2009-2010. Stock specific activity, specifically in Auto and Cement stocks may not be ruled out as companies would be reporting monthly production numbers.

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In comparison to world indices, Indian markets are still in the better position as it fell marginally lower as comparised to global counterparts. On the weekly closing basis, dollar index is struggling around 83.50 levels which may trigger technical recovery across the board especially in the US and European markets. Accordingly, one should opt for staying long for the next week till our levels withhold. Nifty has support between 5350- 5300 and Sensex between 17800-17600 levels.

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Risk aversion in the financial markets may continue to keep the safe haven appeal of bullions intact. US GDP came slightly lower than previous figure but was better than expected. Fed comments to safe guard the US economy may extend some support to the base metals counter however the continued weakness in the housing and job sector may keep the upside capped. Fed commented that the central bank will act if “unexpected developments” cause the recovery to falter. Euro zone GDP and US housing data next week will guide the movement in crude oil and base metals pack in near term. Crude oil may trade choppy as marginal short covering can be witnessed in near term.

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In Agri pack bears may keep the selling pressure intact especially in spices complex. Oilseeds complex may witness an increased activity as the fundamental storyline in the global markets as well as in the domestic, have improved. India’s new business opportunity of soy meal export to Thailand & China’s strong export demand for U.S soybean crop coupled with strength in crude oil futures may provide psychological support to attract buying. Outflow of Potato stocks from UP cold storages and farmers eying the exports to Pakistan may provide some support to the prices.

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FOOD SECURITY BILL, 2010……………. “Half baked, still cooking”

The Food Security Bill, proposed by National Advisory Council (NCA) is likely to be taken up during the month-long monsoon session of Parliament beginning on July 26, 2010. The 14- member NAC, headed by Congress chief Sonia Gandhi was constituted on 1st June and is expected to advise Indian government on various social programmes like food security guaranteeing cheap grains such as rice and wheat.

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On The Menu

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As a matter of fact, India suffered one of the worst droughts in 2009, resulting to low production of foodgrains. The burnt feeling of inflation is still being felt across India.

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India’s annual food inflation rose to 12.81% for the week ended July 3, 2010. The proposal aims to insulate the poor against surging inflation in the country where about 37% of the 1.2 billion population lives below the U.N. estimated poverty line.

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The Working Group on the proposed National Food Security Bill made a presentation. The NAC deliberated on the proposal of the Working Group and reached an initial agreement on the following:

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i. While time-bound universalisation of foodgrain entitlements across the country may be desirable, initial universalisation in one-fourth of the most disadvantaged districts or blocks in the first year is recommended, where every household is entitled to receive 35kgs per month of foodgrains at `3/kg.

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ii. In the remaining districts/blocks, coverage of universal PDS with differentiated entitlements (in terms of quantity and issue price), would progressively be expanded to all rural areas in the country over a reasonable period of time. There shall be a guarantee of 35 kgs of foodgrains per household at `3 a kg for all socially vulnerable groups including SC/STs, and 25 kgs for all others, at an appropriate price. There would also be a category that would be excluded based on transparent and verifiable criteria. Further details of this basic framework will be formulated by the NAC.

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iii. In urban areas, eligible households (identified by criteria developed by the Planning Commission based on the recommendations of the Hashim Committee), including slum-dwellers and the homeless, will be entitled to 35 kg per month at `3/kg.

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iv. Existing allocations for APL in the remaining districts/blocks should not be reduced.

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v. Comprehensive nutrition support schemes for infants, pre-school children, school children, welfare hostel students, adolescent girls, pregnant women, streetchildren, homeless, the aged and infirm, differently-abled, those living with leprosy, TB and HIV/AIDS etc., together with community kitchens and destitute feeding will be initiated throughout the entire country.

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The mainstay of the proposed Food Security Act is making available 25 kg of grains a month for `3/kg to the BPL (Below the Poverty Line) families across the country. The conservative estimates of the government are around 30 per cent of the population. More realistically, it is close to 75 to 80% people.

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Financial Implication India already provides cheap grains and pulses to nearly 180 million poor or low-income families through a public distribution system that will cost nearly $12 billion in the year to end-March 2011, accounting for about 1 percent of GDP and 5 percent of total government spending.

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Although there are no official estimates yet, the new scheme will definitely add to the subsidy burden. A Deutchse Bank report said the incremental cost could be about $1.27 billion, raising total food subsidy costs to around 1.1 percent of GDP in the current 2010/11 financial year and widening the fiscal deficit. The Centre spent `1,31,025 crore on food, fuel and fertiliser subsidies in FY10 and expects to bring down such payments to `1,16,224 crore in FY11 to cut fiscal deficit to 5.5% of GDP from 6.9% in the previous financial year.

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But Montek Singh Ahluwalia, the deputy chairman of India’s Planning Commission, has said the proposed food security bill will not lead to any breach of the 2010/11 fiscal deficit target.

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Tug-of-war

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The real challenge in implementing this scheme is an uncertain output from the country’s rain-dependent agricultural sector. Recently, govt. announce the fourth advance estimates, where the Agriculture Ministry has marginally revised downwards its estimates of the size of the 2009-10 wheat crop — from 80.98 MT to 80.71 MT (million tonnes).

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Accepting this proposal may divert the grains to the poor families’ kitchen instead of wasting tonnes of grains lying in the open space or near the railway tracks.

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RBI hikes policy rates by 25 bps, surprises on timing

The Reserve Bank of India (RBI) in the post market hours on Friday evening hiked its benchmark policy rates repo and reverse repo by 25 basis points (bps) in order to check the surging pace of price hike and cushion inflationary expectations which have been threatening to move out of central bank’s control.

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The hike while was well anticipated, the timing of the announcement was an absolute surprise. Analysts have been anticipating a mid-cycle hike right from the release of central bank’s annual monetary policy statement in April. However, the euro zone sovereign debt crisis and the recent liquidity crunch have been weighing on the side of keeping status quo on policy stance.

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The expectations of a mid-cycle action increased after the inflation data released in middle of May showed wholesale prices index (WPI) reaching double digit levels. The RBI however remained silent. Again when the empowered group of ministers (EGoM) hiked fuel prices on June 25, analysts expected RBI to act immediately to counter the inflationary impact of partial deregulation of auto fuels and hike cocking fuels. No action however came at that time.

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Now that the scheduled review is just around four weeks away (July 27), most economists were expecting that the RBI will wait for the policy review. However, surprising the markets in a classical way, the central bank increased the rates when no one was anticipating.

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Notwithstanding the surprise though, the policy action is a welcome move as inflationary tendencies have been increasing sharply over last few months. The central bank, according to many observers, is already behind the curve, and may have to pick up the pace of policy tightening going forward if the pace of prices hike in the non-food manufacturing space continues.

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The timing and extent of hike also suggests that the central bank will further raise policy rates in the scheduled review. In fact, by hiking by 25 bps now, the RBI has given itself more flexibility for the forthcoming review where it can now choose among a number of permutations and combinations of policy and reserve rate mix. It may choose to hike everything (repo, reverse repo and CRR) by 25 bps or may leave CRR alone and hike policy rates by 50 bps. A few other combinations are also plausible.

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Justifying the initial delay in policy action and the actual timing of the move, the RBI stated, “This mid-cycle policy action has been warranted by the evolving macroeconomic situation. Even as data for real GDP growth and WPI inflation became available by mid-June 2010, it was considered inadvisable to raise the policy rates as the financial system was dealing with liquidity pressures…Through the month of June, liquidity under LAF operations remained in deficit mode. Consequently, the call rate moved up significantly, resulting in an effective tightening at the short end of the yield curve. The liquidity situation has since begun to ease”.

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Since the RBI expects that liquidity may continue to remain tight for some time, it has also extended the additional liquidity support to scheduled commercial banks under the LAF to the extent of up to 0.5% of their net demand and time liabilities (NDTL) up to July 16, 2010. The measure was first put in place on May 26 after liquidity scenario tightened following the advance tax outgo and huge payments for the 3G spectrum by telecom operators and was earlier set to expire on July 2, 2010.

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While the two moves may seem contradictory, the RBI didn’t leave the matter to be explained by analysts and added in its statement, “It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit, which remains focused on containing inflation and anchoring inflationary expectations without hurting growth”.

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CRUDE OIL ECONOMIC RECOVERY IS HELPING CRUDE RALLY

Crude oil, the life blood of the economy, is rallying to highest levelssince 2008 highs, indicating that the global economy is back on track which is also supported by rise in key global equities markets. In the first quarter of 2010, front-month NYMEX crude prices rose 5.6%.

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Crude oil prices have negated the hike in dollar index and crude stockpiles in US. Traders have placed fresh bets on a rise in demand affirming a faster pace of economic recovery in the US. Crude prices have more than doubled since dropped below $35 late in 2008, but still significantly lower as compared to the record high neaar $147 a barrel in july 2008.

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Positive economic indicators of US like PMI, home sales and employment data are showing that economic recovery is back on track and that will increase fuel consumption. Data showing an unexpected increase in pending home sales and a survey result indicating service sector growth added to investors’ confidence in the US economy .

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The institute of supply management’s non-manufacturing index rose to 55.4 in the month from 53.0 in february, sharper than economists expectation for a modest increase to 53.6.

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A report from the National Association of Realtors the pending home sales index rose 8.2% to 97.6 in february,  from a downwardly revised 90.2 in the previous month, countering consensus expectations for a 51 decline.

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According to EIA “Projected economic growth this year is higher in this forecast, with U.S. real GDP growing by 208% and world oil consumption weighted real GDP growing by 3.4%”. Given expected oil demand growth in 2010, oil prices should continue to firm despite expected increase in both non- OPEC and OPEC production this year.

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According to EIA” projected growth in domestic crude oil production is more moderate in 2010, increasing by about 210,000 bbl/d” Crude oil future outlook looks promising as it is driven mainly with global economic recovery. And summer demand in US will also keep the prices well supported.