Of Asia's Factory Activity, Bank Recapitalisation Plan, and the Rise in Rupee

Asia's factories ended the year 2017 on a mixed note. As per Reuters, activity was seen at multi-year highs in Taiwan and India and surprisingly picking up in China, but contracting in some places amid expectations that regional interest rate hikes likely will be gradual.

In China, manufacturing growth picked up to a four-month high in December amid a surge in new orders. Taiwan also saw manufacturing activity hitting its highest since April 2011 at 56.6 last month, according to a December survey.

Singapore, however, posted slower economic growth in the fourth quarter than the third as manufacturing shrank 11.5% following an 38% jump in the previous three months.

As for the Indian economy, the Nikkei/Markit survey for December showed factory activity expanded at the fastest pace in five years. This came on the back of a rise in output and new orders, which allowed firms to raise prices.

It would be interesting to see how the factory activity pans out in 2018 for the above economies. We will keep you updated on the developments from this space.

Global stock markets started the first trading week of the year on a positive note. US Benchmark index Dow Jones crossed 25,000 during the week to touch a record high. Strong corporate earnings, commodity price hikes have been the contributing factors for this record run.

Also, the recent tax amendments favoring US corporates passed by President Donald Trump has been appreciated by investors. US stocks ended the week higher by 2.3%.

European indices were also on the rise with technology stocks leading the way. Oil companies also rallied on back of rise in crude oil prices.

Stock markets in Asia also followed global sentiments. Japanese Index Nikkei touched 23,000 for the first time since 1992. The gains were mainly attributed to improvement in its domestic economy. Japanese stocks finished higher by 4.2% for the week.

Indian Indices End Marginally Higher

Back home, Indian share markets ended the week marginally higher. The BSE Sensex closed its session higher by 0.27%.

Metal sector, consumer durables sector, and capital goods sector led the rally for the week.

The government gave the GDP growth estimate of 6.5% for FY18. This is lower than FY17 GDP growth rate of 7.1%. Growth in the first half of FY17 was hampered by the after effects of demonetization and GST. The situation is likely to improve in the second half of the fiscal year.

In the news from the banking sector, the government has got Lok Sabha's approval for Rs 800 billion public sector bank (PSBs) recapitalisation.

Major beneficiaries of the above infusion will be State Bank of India, Bank of Baroda, Canara Bank and Indian Bank.

There won't be any net outflow or impact on the budget as the funds will be raised through bonds which the government had announced in October 2017.

As per the news, the above infusion is aimed at propelling credit growth and only performing lenders will get a bulk of this proposed amount over the next two months.

Note that credit off-take stood at a decade low of 5.1% in FY17 compared to 10.7% a year ago.

Rural regions bore most of the brunt of the lending slowdown. RBI data showed growth in rural loans between 30 September 2016 and 31 March 2017 was a mere 2.5%. The picture becomes clearer when you compare it with growth of 12.9% in the second half of 2015-16.

The above infusion will bring in the needed funds and further lead to an improvement in the credit growth ahead.

It would be interesting to see how the above trend pans out.

In the news from bond markets, as per an article in the Economic Times, Finance minister Arun Jaitley has unveiled the framework for electoral bonds which is aimed at cleaning up political funding.

The framework comes with conditions such as a limited tenure and eligibility restricted to parties with a track record of at least one election.

The move comes in Finance Minister's pledge to establish a system for party donations that would help stamp out black money as a source of funding in his February 2017 Budget in the wake of demonetisation.

Accordingly, the new framework allows donors to buy these bonds and give them to the party of their choice. The party can encash them through designated bank accounts within 15 days.

Electoral bonds would be issued/purchased for any value in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 1 million and Rs 10 million from specified branches of SBI.

The above development is a step in the right direction.

To ensure transparency in political funding in the country, the government had proposed that any maximum donation from any one source can only be Rs 2,000.

Earlier, the donation limit was Rs 20,000. The Finance Minister Arun Jaitley had also said these donations can be made either through cheques or digital means only.

The government had also proposed an amendment to the Reserve Bank Act to enable issuance of electoral bonds. These bonds can be redeemed by the political parties in registered accounts and within a specified time only.

Nifty 50 Index Hits New Life-time High
Nifty 50 Index Ends December Expiry 2.5% Up

The Nifty 50 Index traded the week on a volatile note. After opening on a flattish note on Monday, the index plunged nearly 100 points for the day. The selling pressure continued until mid-week, setting a low of 10,405. But the bulls came to rescue on Thursday, where the index recovered some of its losses. Finally, on Friday, the Nifty index opened gap up and rallied strongly to touch a fresh life-time high of 10,566. However, it ended the weekly session marginally up.

Last week, we saw the index breaking out of an important resistance level of 10,500, which could possibly act as a support now, according to the change of polarity principle . This week, it slipped below this level, but recovered immediately to touch a new life-time high. This indicates that the 10,500 level will be a big hurdle for the bears.

So will the bears challenge the 10,500 level in the coming week or can we see the bulls maintaining the momentum? Let's track it...

COMMODITIES

Gold Continues Momentum

Gold witnessed buying interest this week. Most of the gains were seen on the back of a firm global trend overseas. After opening on a positive note on Monday, the yellow metal gradually traded up throughout the week. The buying was seen amid firm global trend. The commodity also edged up as US dollar weakened. Finally, on Friday, gold continued its up move and ended the weekly session with 0.21% gains.

Gold Trades on a Positive Note

Crude Oil Continues Momentum

Crude oil traded on a positive note during the week. Most of the gains were seen on the back of expectations of a fall in US crude inventories and by the ongoing outage of the North Sea Forties pipeline system. The shutdown of the Forties North Sea pipeline has hit supply levels for crude oil from a market that was already tightening due to OPEC-led production cuts.

Note that crude oil prices have been on a rising trend this year. However, this is not good news from India's perspective.

As our friends at Equitymaster wrote in a recent edition of The 5 Minute WrapUp...

    Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.

    Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.

    Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

During the end of the week, crude oil continued its uptrend and ended its session in the green.

Crude Oil Trades in the Green

CURRENCIES

Dollar Trades in the Red

From currency markets, dollar witnessed selling pressure during the week. Most of this was seen on the back of dollar unwinding by banks and exporters amid bearish sentiment for the dollar overseas.

Apart from that, expectations of robust capital inflows into India supported by various economic policy measures also kept the forex markets buoyant.

The fall in dollar made rupee trade on a positive note during the week. It traded at a five-month high against the dollar.

Note that the rupee surged almost 6% against the dollar in 2017, mostly driven by strong inflows into capital markets.

The appreciation in the rupee comes as a welcome breather for importers in India. A softer rupee helps importers to buy goods and services at a cheaper rate that earlier. This is vital for a developing economy that relies heavily on imports. So this bodes well for the Indian economy as higher imports normally mean increased economic activity.

But on the other hand, the rise in rupee can spell trouble for exporters. The exporters are at a disadvantage owing to the currency appreciation as this renders their produce expensive in the international markets as compared to other competing nations whose currencies haven't appreciated on a similar scale. This tends to take away a part of the advantage from Indian companies, which they enjoy due to their cost competitiveness.

Nonetheless, a stronger rupee will pull down commodity prices and help in keeping a tab on rising inflation.

While there are advantages as well as disadvantages of a rising rupee, one needs to understand whether the rise in the rupee is sustainable to derive any reasonable conclusion at this stage.

For one, the weakness of the US dollar is largely due to the relative unattractiveness of US assets. This is in part due to a very low interest rate regime prevalent in the US economy. Already there are indications that this low interest rate regime may not be sustainable for long. This means that US interest rates may go up and this may likely strengthen the US dollar.

It would be interesting to see how the above trend pans out in 2018. We'll keep you updated on the developments.

Dollar Continues Downtrend

Commodities 29th Dec 05th Jan % Change
Gold/10 gms 29,156 29,217 0.21%
Silver/kg 39,237 39,253 0.04%
Crude Oil/barrel 3,850 3,887 0.96%
Natural Gas/mmBtu 189.70 177.10 -6.64%
Currencies 29th Dec 05th Jan % Change
USD / INR 64.06 63.51 -0.85%
EUR / INR 76.83 76.64 -0.25%
GBP / INR 86.55 86.07 -0.55%
JPY / INR 56.99 56.16 -1.46%

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