A Week Of Central Banks

Globally, this week was dominated by the central banks. The common thread between the actions by the central banks is that these apex banks in the respective regions have kept the key policy rates unchanged. The equity markets in the world except for US and China have shown a growth of 2-3% during this week.

In India, the RBI has decided to keep the CRR and Repo rates unchanged which will put the pressure on the government to take appropriate measures in order to cut the fiscal deficit. The bank has cut the SLR by 100 bps, which however failed to woe the markets. During the week Indian equities gained 2% ignoring the RBI action. The USD during the week saw appreciation of 1.2%. The markets in India, we believe grew as the country got the new finance minister P Chidambaram. It is now expected that the new finance minister will kick start the reforms in the country.

The Federal Reserve’s two day meeting ended with no action. Earlier, markets were expecting some action from Fed. The Fed however said that it will watch the economy over next few weeks and will come with its observations. At the moment it has done nothing. The IMF on the other hand has said that there is still room for the rate cut if the outlook worsens.

The European markets which tumbled on Thursday shown a recovery on Friday. During the week however the European indices have shown gains despite the ECB remaining firm on the monetary policy. The ECB president Mario Draghi, who had said that ECB will do whatever possible for the Euro Zone integration, has failed to deliver his commitments at this time. The bank of England has also kept the base rate unchanged to 0.3%. The bank has recently launched the funding for lending scheme which would have led the bank to keep the rates untouched.

Later today markets across the globe will be waiting for nonfarm payroll numbers and the current unemployment rate from the U.S. The markets are expecting relatively good data.

The week also saw PMI numbers from various countries. UK’s services PMI numbers shrunk to 19 months low to    51 indicating showdown in the sector. Its manufacturing PMI at 45.4 indicates sharp fall in the industrial activity. In UK the house prices have also fallen 2.6% on YoY basis. The Japan PMI was also at 10 month low to 47.5 in July. China services PMI declined to 55.6 from 56.7 in June 2012.

The Indian services PMI numbers remained nearly unchanged at 54.2 in July 2012 from 54.3 in June 2012. India’s manufacturing PMI however fell to 52.9 from 55 due to the lower overseas orders.

The Chinese markets during the week largely remained flat due to the PMI numbers. Besides, the leaders in China had earlier said that they will intervene in terms of monetary easing for the growth of the country. This was however not seen as the People's Bank of China said the stable growth is the priority and kept the rates unchanged.

On the political front, the Anna Hazare’s fast was mainly ignored by the government. Hazare has said the he will now start a movement in order to give the country a political alternative. The week also saw new Home Minister and Power Minister. The grid failure in the northern states left the 21 states powerless for many hours. CCI has demanded urgent power sector reforms or the country will face many issues.

The slower progress of the monsoon has further kept the farmers waiting. Planning Commission Deputy Chairman Montek Singh Ahluwalia has said that the monsoon will pull down the economic growth by 6% this year. He also said that the agriculture rate will be slow down due to which there will be pressure on income and employment front in the rural areas.

The inflation would be a concern in the case of lower monsoon. RBI has also forecasted that the inflation would remain 7% in this year indicating that the RBI may hold the higher interest rates for some time now.

On the indices front Power, CG and HC were the top gainer indices. Coal India has agreed to supply at least 80% of the contracted coal to the power projects. It has however deferred the penalty clause. Capital goods stocks also saw their future in this news. Most of the other indices were up between 1-2% except metal which was trading flat during the week due to the Sterlite result.

The top Sensex Company, RIL has said that it is lining up a capex of USD 1 billion in the aerospace segment. Among the IT companies, the three premier companies Infy, TCS and Wipro are currently in hiring spree.  Besides FMCG company Marico beat the street estimates by June quarter by 46% jump in the net profit to Rs 124 cr.

Jet airways has come to profits after five successive quarters of losses.  The profits have come due to the cost cutting measures. The airline has also witnessed increased passenger load due to the decreased operations by rival Kingfisher airlines. Jet’s CEO is however concerned due to the high fuel costs, rupee depreciation and economic slowdown.

While this week was majorly of the central banks, the trigger for the next week will be the individual June quarter results of companies like Coal India, Tata Motors, Tata Steel, Tata Power, Tech Mahindra, Andhra Bank, BEML, Britannia, Cadila Health, DLF, PTC India, Wockhardt, NHPC, ABB, GVK Power, Oil India, PFC, Adani Enterprises, UB group companies etc. India inc has not surprised with a robust result this week and hence we don’t expect surprise except for Cadila health. Among others Tata Power, NHPC may show bad results.

In our opinion the outlook for the next week is flat to positive as the RBI’s action has been ignored and there is no key economic data besides the US jobs data on unemployment and farm payrolls.