Of US Data, Bitcoin Crash, and the Bull Run in Indian Stock Markets

US industrial production increased more than expected in December. This was seen as unseasonably cold weather at the end of the year boosted demand for heating.

Industrial output surged 0.9% in December after slipping 0.1% in November. This was seen on the back of robust gains in mining production.

For all of 2017, industrial output rose 1.8% - the first and largest increase since 2014.

In another report, the Federal Reserve also stated that the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher.

As per the report, several regional Fed districts observed increases in manufacturing, construction, and transportation input costs. Others reported expectations of further wage increases in the coming months, though prices pressures were still mixed.

Whether the report will alleviate the Fed's concerns about tepid inflation is still unclear. Note that the inflation in US has remained below the central bank's 2% target for more than five years now.

Despite the weak inflation overall, Fed policymakers currently expect to raise interest rates three times this year. The central bank raised rates three times in 2017 against a backdrop of steady growth and low unemployment.

Note that with the US economy chugging along for many months, the Fed is now gradually easing off the stimulus it provides to the economy by raising interest rates to more normal levels.

Yet, so far, the cost of lending has been slow to respond to the interest rate increases. But as the Fed continues with this policy, consumers who borrow to buy houses, cars, refrigerators, and other items will have to pay more for those goods.

US Federal Reserve rate hikes generally have a negative impact on emerging economies. But currently, India is seen as better equipped than other emerging markets to ride the impact of higher US interest rates on the back of stronger economic growth.

How this pans out and what impact it would have on the global financial markets remains to be seen. We'll keep you updated on the developments in this space.

In the news from cryptocurrency space, Bitcoin witnessed selling pressure this week amid fears of regulator clampdowns.

The correction was seen on the back of news that South Korea is considering banning the trading of cryptocurrencies.

Bitcoin and cryptocurrencies are a curious bunch. They have no central bank backing and have not yet been regulated. Yet, these seem to have found favour among a large number of people, with demand growing every day. There are over 800 cryptocurrencies in existence today, with new ones being added to the list every day.

While the world of digital currencies is intriguing, it can get very confusing for the layman. Indeed, a lot of people are still skeptical about the currency's future. Our own government and the central bank certainly don't like Bitcoins.

And yet, it would probably not be wise to dismiss bitcoins and the blockchain industry entirely.

At least, not without understanding the mechanisms that make cryptocurrencies and blockchain work in the first place.

As is the case globally, there is tremendous interest in bitcoins in India as well. The good news is that expertise is at hand to help you navigate the seemingly complex world of cryptocurrencies.

Prasheel Vartak and his guru Tama Churchouse, who have been researching cryptos for years, are on a mission to educate Indian investors about this fascinating investment. To make sure you're not left behind in the bitcoin movement, join them here.

And remember, whatever you do, stay informed.

In other news, as per a leading financial daily, the World Economic Forum (WEF) ranked India at 30th position on a global manufacturing index. This is below China's 5th place but above other BRICS peers, Brazil, Russia and South Africa.

As per the rankings, Japan has been found to have the best structure of production and is followed by South Korea, Germany, Switzerland, China, Czech Republic, the US, Sweden, Austria and Ireland in the top 10.

The report stated that the 25 leading countries are in the best position to gain as production systems stand on the brink of exponential change.

India has been placed in the 'Legacy' group along with Hungary, Mexico, Philippines, Russia, and Thailand, among others. The countries under this group are ones which have strong current base, but are at risk for future.

Note that while India has jumped 30 places to 100 in the World Bank's Ease of Doing Business rankings, there isn't much to cheer about the manufacturing activity.

The Nikkei manufacturing index recorded a low of 50.3 in October 2017 as compared to 51.2 in the previous two months. Also, new export orders were at their lowest level since September 2013.

Long-term planning for the manufacturing base could be one of the factors that can aid the manufacturing activity in coming years. It would be interesting to track the developments in this space and see how things pan out in the coming period.

Global stock markets ended the week on a positive note. Benchmark indices in US grew by 1% during the week.

The Down Jones Industrial Average topped the 26,000 mark for the first time during the week. This is a new landmark in the Wall Street stock market boom that has gathered pace since the new year. The rally is fuelled by an upswing in the global economy coupled with the corporate tax rate cuts brought in by Mr. Donald Trump.

Stock markets in Asia too ended on a good note as the benchmark indices in Hong Kong and China posted gains of 2.7% and 1.7% during the week.

Hong Kong stock markets hit a record high on upbeat China data. China's economy expanded at a faster pace than expected. China's economy grew at a pace of 6.8% in the fourth quarter of 2017 from a year earlier, beating estimates compiled by Reuters and Bloomberg.

Indian Indices Close at Record Highs; Sensex Crosses 35,000 Mark

Back home, benchmark indices in India too logged gains of 2.7% as BSE Sensex closed at 35,512. Good corporate earnings coupled with heavy inflows from foreign institutional investors (FIIs) led to the spurt in the indices.

The Sensex crossed its 35,000 level for the first time this week. Most of the buying interest was seen on announcement of reduction in additional borrowing by the government and expectations of big changes in the Goods and Services Tax (GST) Council's next meet scheduled on Thursday.

The domestic equity markets have been in an uptrend lately. In 2017, India was among the three emerging markets, which gained more than 35% in dollar terms. The other two were Hungary and South Korea.

The BSE Sensex earned a 35.1% return in the dollar terms and 28% in the local currency in 2017. However, this wasn't enough to beat the midcap and smallcap indices. The midcap and smallcap indices saw a sharp increase of 47% and 58% respectively in 2017.

Now that the markets are at an all-time high, investors should brace themselves for the increasing volatility. Although, earnings are likely to recover, profit margins could get squeezed as companies face rising input cost pressures.

Further, rising oil prices may prompt the government to abandon fiscal prudence at a time when GST collections have been lower than expected.

2018 will, therefore, be critical for Indian companies to justify their valuations with earnings growth.

If the earnings growth does not materialize, a stock market correction could be on the cards.

In other news, India cut its additional market borrowing requirement for the current fiscal year by 60%. This was done after reviewing trends in revenue receipts and expenditure patterns.

The Finance Ministry said that the government would only borrow an additional Rs 200 billion versus an initial plan of Rs 500 billion for FY18.

This comes as a welcome breather as it would help in achieving the fiscal deficit target during this financial year.

Note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18. This will be the lowest target compared to the last couple of years.

That said, challenges remain in achieving the above stated target. The notebandi exercise resulted in a slowdown. Further, government announced flurry of projects but execution is still pending. This means the government needs to relax its spending to spurt the growth again.

This means, once again, the government needs to fight dual challenge. First, maintaining its stance on fiscal consolidation and sticking it fiscal deficit target of 3% of GDP for FY17-18. Second, it must relax the deficit target for reviving the economic growth from the shock of demonetisation.

It is also worthwhile to note that creating economic growth by the government spending its way out of trouble, cannot continue indefinitely.

As Vivek Kaul writes in one of his recent editions of the Vivek Kaul's Diary... 'At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for.'

It would be interesting to see how the above reduction in borrowing aids the economy. We'll keep you updated on the developments from this space.

In the news from macroeconomic space, Finance Minister Arun Jaitley said that India will cut rates on some products and services under the new Goods and Services Tax (GST). This will be done in a bid to encourage greater compliance as revenues have dipped since the rollout of the tax regime in July.

The goods on which GST will be lowered include biofuel-run buses, used motor vehicles and diamonds and precious stones.

In the services segment, taxes will be cut on transportation of crude, gasoil, gasoline, jet fuel and services relating to mining, exploration and drilling of oil and natural gas, among other things.

The above relaxation can lead to increased compliance and higher tax revenues. The higher tax revenue receipt will help bolster the country's financials and also provide further ammunition for the government to spend on social welfare and providing additional infrastructure to its citizens.

How this pans out remains to be seen. We will keep you updated on the developments from this space.

After studying these and other finer aspects of GST, our colleague Vivek Kaul, has penned his views on what could go right and wrong. Get a balanced perspective on the entire GST saga from Vivek. The report is titled The Good, the Sad and the Terrible (GST). Claim your own copy of his special report now.

In other news, India's December trade deficit widened to its highest in more than three years. This was seen as higher import bills for gold and crude oil weighed on rising exports.

In December, exports increased by 12.3% to US$27 billion, while imports increased by 21.1% to US$41.9 billion, while imports of gold, precious stones and crude oil surged during the last month.

As per the data released by the commerce ministry, the trade deficit or the difference between imports and exports was US$14.88 billion, up about 41% YoY. The gap had touched US$16.2 billion in November 2014.

A wider current account deficit in the midst of a sharp rise in oil prices, fiscal slippage risks, and above-target inflation point to a weaker macro backdrop for the economy.

Market participants were tracking IDFC Bank share price and Capital First share price this week. The two companies announced their merger to form a combined entity.

The boards of directors of IDFC Bank and Capital First at their respective meetings approved a merger of Capital First with IDFC Bank. As per the agreement, IDFC Bank will issue 139 shares for every 10 shares of Capital First. V Vaidyanathan, currently the Chairman and MD of Capital First, will succeed Rajiv Lall as MD and CEO of the combined entity.

Following the merger, the combined entity will have assets under management (AUM) of Rs 880 billion, branch network of 194 and customer base of over 5 million.

Nifty 50 Index Ends at Life-time High
Nifty 50 Index Ends at Life-time High

The Nifty 50 Index traded on a strong note during the week. On Monday, it opened the session 61 points gap up to touch a new life-time high of 10,782 before correcting a bit in the next session. But the selling was temporary as the index continued the bullish momentum and hit a new life-time high daily for the next three sessions. Finally, the Nifty index ended its weekly session 2% up.

The RSI indicator, which suggest the strength of the trend, is now trading in its overbought territory.

So can the index maintain the bullish momentum in the week to come or will it see some correction before scaling up? Let's keep a close watch on it...

COMMODITIES

Gold Trades on a Positive Note

Gold traded on a volatile note during the week. It opened its week on a positive note on Monday amid a firm trend in precious metals overseas. However, slight losses were seen midweek on the back of a firm dollar. During the end of the week, gold managed to recover losses and ended its session on a positive note.

Gold Ends Marginally Higher

Mixed Trades for Crude Oil

Crude oil traded on a mixed note during the week. While it opened its session on a positive note, losses were seen during the end of the week amid a weak trend in Asian trade. Losses were also seen on the back of a recovery in US oil production, as well as by an expected fall in demand when winter ends in the northern hemisphere. Despite these losses, crude oil managed to recover some losses and ended its session marginally lower.

Crude Oil Ends Marginally Lower

CURRENCIES

Dollar Continues Downtrend

In the news from currency markets, the dollar is witnessing selling pressure this week. Most of the losses were seen amid concerns over a US government shutdown.

Owing to the above fall in dollar, the rupee traded on a firm note this week.

Note that the rupee is witnessing appreciation of late. 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. 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. This will help in keeping a tab on the 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.

Dollar Trades on a Negative Note

Commodities 05th Jan 12th Jan % Change
Gold/10 gms 29,547 29,755 0.70%
Silver/kg 39,063 38,969 -0.24%
Crude Oil/barrel 4,065 4,038 -0.66%
Natural Gas/mmBtu 204.00 203.50 -0.25%
Currencies 05th Jan 12th Jan % Change
USD / INR 63.73 63.89 0.26%
EUR / INR 77.31 78.36 1.36%
GBP / INR 86.84 88.77 2.23%
JPY / INR 57.40 57.75 0.61%

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