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Market Review
WEEK ENDED OCTOBER 29, 2010
International
Global equity markets exhibited divergent trends amidst mixed economic and earnings newsflow. The MSCI
AC World index was almost unchanged during the week as declines in Japan and UK offset gains in the US &
Latin America. For the month as a whole the index was up 3.53% and China was the top gainer with doubledigit returns. Global economic reports indicate slowdown in the pace of growth in industry and broad
economy, across many countries. All eyes are now on the US with speculation about the quantum of easing to
be announced by the Federal Reserve and mid-term elections. Global treasury yields rose on expectations the
asset purchases will fuel inflation. Rise in precious metals helped commodities post strong gains – the Reuters
Jefferies CRB was up 1.16% for the week and 4.82% for the month.The US dollar index eased further against
a basket of currencies.
• Asia-Pacific: Regional markets trended lower led by declines in Japan and Hong Kong. Japanese
economic data was lacklustre – consumer prices continued to dip and industrial production fell. However,
exports remained on an upward trend due in part to demand from Asian economies. Bank of Japan said
it will buy back ¥5000 worth of bonds, including corporate debt with lower credit ratings than it
previously purchased. South Korea GDP grew by 0.7%qoq on the back of robust expansion in private
consumption and construction. However, slowdown in exports led the pace of growth to decelerate from
1.4% seen last quarter. Taiwan reported slowdown in industrial production, partly due to impact from
typhoon. Bank Indonesia and Bank of Korea are reportedly evaluating options for regulating capital
inflows that have caused sharp rise in domestic currencies against the dollar.
• Europe: Mining stocks dragged UK markets lower by over 1% while Germany posted marginal declines
as relatively better economic data helped sentiment. Eurozone economic data was mixed – unemployment
rate inched higher to 10.1% from 10% and inflation rate accelerated to 1.9%. Industrial orders for August
were higher than expectations. German Gfk consumer confidence index was unchanged over last month
levels. Swedish central bank hiked rates by 25 bps to 1% and said it is likely to remain on hold in the near
future. Russia left refinancing rates unchanged at 7.75%. Sovereign debt issues in EU periphery came
under pressure due to developments in Ireland and Greece. UK economic growth came in ahead of
market expectations - GDP rose by 0.8% in the third quarter helped by increased construction activity.
On the M&A front, LVMH bought 17.1% stake in Hermes International for about $2 bln.
• Americas: US indices closed the week on a mixed note. Tech stocks firmed up on the back of good
earnings reports from majors such as Microsoft. US GDP growth accelerated to 2%qoq primarily on the
back of positive contributions from personal consumption. Consumer confidence index improved slightly,
demand for commercial aircraft pushed up durable goods orders index and new home sales bounced back
from lows. Goldman Sachs sold $1.3 bln of 50-year bonds. Canada’s GDP growth bounced back in August
(up 0.3% mom) after the July decline. Elsewhere in the region, Brazil announced it had discovered oil in
a deep-water field known as Libra, which could yield up to 15 billion barrels.
Weekly
change (%)
Weekly
change (%)
MSCI AC World Index
-0.04
Xetra DAX
-0.07
FTSE Eurotop 100
-0.12
CAC 40
-0.91
MSCI AC Asia Pacific
-0.42
FTSE 100
-1.15
Dow Jones
-0.13
Hang Seng
-1.79
Nasdaq
1.13
Nikkei
-2.38
S&P 500
0.02
KOSPI
-0.76
Equity Markets - India
Indian equities slid lower this week on global cues and mixed corporate earnings reports. This led frontline
indices to close in the negative territory for the month as a whole, underperforming global counterparts. Mid
and small cap stocks underperformed large cap stocks this week, narrowing their outperformance for the
month as a whole. During the week consumer durables and auto stocks emerged top gainers while real estate
and power indices posted large declines. FII flows into equity markets were to the tune of $310.4 mln in the
first four trading days of the week. Data indicates inflows for the month were close to $5.3 bln in October and
aggregate $24.6 bln for the calendar year to date.
Net FII inflow
Source: SEBI, CEIC, CLSA Asia-Pacific Markets
The recent surge in FII inflows (into equity as well as debt markets) can help ease concerns on the BoP
front and policymakers appear comfortable with the current trend in flows. Markets will closely watch
moves from central banks in India and the US closely next week for further direction.
• Macro/ Policy: The six core infrastructure industries index growth moderated further in September to
2.5%yoy compared with a 4.3%yoy growth last month. Drop in production of petro-products and coal
weighed on overall performance. In contrast, crude petroleum and finished steel sectors registered
acceleration.
With a view to check misuse of preferential share or warrant allotments by companies to promoters, SEBI
has tightened the framework for preferential allotment of shares. As per the new rules, the promoter/
promoter group would be ineligible for preferential allotment in case it has previously subscribed but failed
to exercise warrants last year or has sold shares in previous six months. SEBI also relaxed restrictions on the
maximum application size for retail individual investors to Rs 2 lakh from Rs. 1 lakh across all public issues.
Weekly change (%)
BSE Sensex
-0.66
CNX Nifty
-0.80
S&P CNX 500
-0.91
CNX Midcap
-0.95
BSE Smallcap
-1.18
Debt Markets - India
Indian treasury yields trended lower towards the close of week helped by RBI’s temporary liquidity measures
and weak growth in the infrastructure index..The IPO-related strain on liquidity and seasonal tightness pushed
up money market rates sharply.
• Market movements: Yields on the 10-year benchmark bond eased by 1 bp while those on the 5-year paper
increased 5 bps.Yields on 5-year corporate bonds were slightly up and consequently spreads over gilts reduced to
78 bps.Yield on the 1-year paper closed down 2 bps while those on the 30-year paper moved up 2 bps.As a result,
the yield curve steepened and spreads between long and short end of the curve expanded to 161 bps.
• Liquidity/borrowings: Call rates moved up to 12% during the week but RBI measures helped rates close down
at around 6.5% levels. Demand for liquidity under the RBI’s LAF window averaged close to Rs. 97,000 crores as
against Rs. 68,476 crores last week. Earlier in the week, RBI’s bond buyback programme met with limited success
– investors offered bonds of face value Rs 3,173.79 crorse and bids were accepted for Rs 2,148.29 crores.
RBI introduced additional liquidity support measures including a special second LAF for two days and a special
repo auction (will allow banks to temporarily hold 1% lower SLR).
• Forex: The rupee rebounded against the US dollar and closed the week up 0.4%. For the month as a whole, the
rupee stood up 1.1% against the greenback. India’s forex reserves fell by $1.03 bln over last week levels and stood
at $295.4 bln (as of Oct 22).
• Macro: Latest data from RBI indicates credit growth has remained steady at 20% while deposit growth has picked
up slightly to 15% (as of October 8). On the economic front, industrial and export data has softened in recent
months and there are some signs of easing in headline inflation levels, but there hasn’t been a meaningful dip.
Robust economic growth, growing income levels and global commodity prices are contributing to the pressure.
RBI is scheduled to meet on Tuesday for the next review of its monetary policy and is likely to be shaped by the
tight liquidity conditions, inflation levels and the strong capital flows.The latter are being led by the attractiveness
of the India story and also increase in ECBs due to the widening interest rate differential.The central bank needs
to balance between the inflationary impact of any sterilisation, import costs and India’s export competitiveness.The
ongoing liquidity crunch could provide some room for sterilization and the expected second round of quantitative
easing in the developed world needs to be taken into consideration as well. Hence, the monetary policy direction
and guidance will provide an insight into RBI’s views on this multitude of factors.
29.10.2010
22.10.2010
Exchange rate (Rs./$)
44.43
44.59
Average repos (Rs. Cr)
97,021
68,476
1-yr gilt yield (%)
6.88
6.91
5-yr gilt yield (%)
7.84
7.79
10-yr gilt yield (%)
8.13
8.14
Source: Bloomberg, RBI, Reuters
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is neither an offer for units nor an invitation to invest.This communication is meant for use by the recipient and not for circulation/reproduction
without prior approval.The views expressed by the portfolio managers are based on current market conditions and information available to them
and do not constitute investment advice.
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