Brexit Referendum Takes Most of the Headlines

The Brexit - the question of whether the UK will leave the European Union - was the most touted affair during the week. The Brexit (British exit) campaign began in the United Kingdom when Prime Minister David Cameron received assistance for his call for the UK to remain in the European Union (EU). It was reported that nearly 200 business leaders employing over 1.2 million people and the UK's Trade Union Congress representing six million workers came out in support of the 'stay' campaign.

However, the 'leave' campaign had a lot of support as well. The news made the pound the worst performing major currency during the week. And now everyone is looking to the referendum that David Cameron will call on June 23rd.

In other news, it was reported that the US service sector contracted in early February. The fall was recorded as the first since October 2013. Data firm Markit reported that its flash US services PMI business activity index fell to 49.8 early this month from 53.2 in January. To note, a reading below 50 indicates a contraction in services sector activity.

US single-family home sales also tumbled in January, particularly in the western states. The Commerce Department noted that single-family home sales dropped 9.2% last month to a seasonally adjusted annual rate of 494,000 units.

On Friday, it was reported that US economic growth slowed in the fourth quarter. Gross domestic product (GDP) increased at a 1% annual rate. This was as against the previously reported 0.7%. Businesses accumulated US$ 81.7 billion worth of inventory as against the US$ 68.6 billion reported during the last month. This reflected an upward revision to inventory valuation adjustment. It was noted that inventories subtracted only 0.14 percentage point from GDP growth instead of previously reported 0.45 percentage point. Further, there were also downward revisions to consumer spending, which accounts for more than two thirds of US economic activity. Consumer spending rose at a 2% pace rather than the 2.2% rate reported last month.

This new data increased concerns over the health of the US economy.

China's central bank hinted that Beijing is preparing to launch another round of stimulus. China's central bank governor Zhou Xiaochuan said that China has more room and tools in its monetary policy to tackle downward pressure in the economy, and its fiscal policy would be more proactive. These comments helped stock markets in the Asian region with Chinese shares witnessing maximum buying interest.

One shall also note that the People's Bank of China set the yuan mid-point rate at 6.5273 per dollar on Tuesday. This was the weakest guidance rate since February 5.

Market participants are now looking for signs of actions that may be undertaken by the finance ministers to bolster global growth after the meeting of G20 economic officials in Shanghai.

Global markets ended their week on a positive note after tracking the above developments. On Friday, Asian markets closed higher, with Hong Kong leading the gains. The Hang Seng was up 2.52%, while China's Shanghai Composite was up 0.95% and Japan's Nikkei 225 was up 0.30%. European markets were trading sharply higher with shares in Germany leading the region. The DAX was up 2.40%, while France's CAC 40 was up 2.05% and London's FTSE 100 was up 1.26%.

Indian Indices Witness Volatility Ahead of Budget

Back home, Indian Indices booked losses during the week. For the week, the Sensex plunged 2.3% and Nifty lost 2.5%.

However, the markets closed their session on a positive note on Friday. There were several triggers that supported this rally. Some to be named are the rise in crude prices, the rebound in Chinese markets and a strong opening for European markets. Further, the Economic Survey which unveiled a path towards fiscal consolidation lifted market sentiments.

On Friday, Indian indices began the day's proceedings on a positive note and continued this trend throughout the day ahead of the Union Budget which is to be announced next week. At the closing bell, the BSE Sensex finished up 178 points while the NSE Nifty closed higher by 59 points. The S&P BSE Mid Cap also finished up 0.3%, and the BSE Small Cap continued its weak trend and finished lower 0.5%. Gains were largely seen in metal and banking stocks.

Indian Markets End Higher

The index managed to break out above the resistance level of 7,200 but couldn't sustain above those levels for long. It dropped by 125 points on Tuesday and has entered back in to the trading range of 6,900 to 7,200. The Nifty could trade choppily until it decisively breaks out on either side of this trading range. Traders would probably wait and take cues from the Union Budget before taking any positions.

During the week, the Reserve Bank of India (RBI) announced certain changes to the strategic debt restructuring scheme (SDR). According to the scheme, banks were allowed to convert loans into majority equity shareholding (at least 51%) in case of a default by the borrower. Once loans were converted into equity, banks had to dilute the majority shareholding and find a new buyer within 18 months. However, it was challenging for the banks to dilute such a big portion of shareholding in just 18 months.

Considering this, the RBI revised the guidelines and stated that banks can upgrade an asset to the standard asset category if they divest at least 26% of the stake to the new promoter within the specified period of 18 months. The balance equity shareholding could be divested at a later stage. This is a significant departure from the norms released on June 2015, when the regulator asked banks to divest their entire 51% holding within the same time-frame.

This may give some relief to banks as they will get additional time to find the right buyer.

It was reported that telecom service providers installed 65,000 cellular sites in the last six months in 2G and 3G services across the country. The same was undertaken to arrest call drops. It was noted that around 20,000 additional sites were added for 2G (GSM) services across India while around 45,000 sites have been added for 3G services during the last six months.


Gold Trades on a Positive Note

Gold traded on a positive note for most of the part during the week. On Monday, it opened its session on a negative note compared to its previous week's closing levels. This was seen as the dollar and the equities strengthened. Also, a weak global trend dragged the yellow metal lower (subscription required). However, trades were reversed in the following days. On Tuesday, gold edged up as big inflows were seen into bullion funds. Further, the dollar slipped and Asian shares reversed their gains which supported the upward rally of gold. Similar trades were seen midweek. On Friday, gold witnessed mixed trades. It booked some losses as investors reduced their bets and went for profit booking. The MCX Gold April contract opened the session at 29,101/10 grams. It traded at a high of 29,936/10 grams before finally closing the session at 29,337/10 grams.

Gold Inch Upwards

Mixed Trades for Silver

Silver traded on a mixed note during the week. On Monday, it opened its session on a bearish note. This was seen after a surge in equities that made precious metals less attractive. However, silver gained momentum midweek. A downturn in equity markets and a weak dollar made silver the safe haven asset. However, these gains were limited and silver lost its ground during the end of the week. This was witnessed as market participants cut down their bets amid a weak global trend. The contract for March opened the session at 37,115/kg. It traded at a week low of 36,145/kg and settled at 36,250/kg on Friday.

Saudi Arabia Rules Out Crude Oil Production Cuts

Crude oil traded on a mixed note during the week. Prices jumped on Monday on the back of projections from the International Energy Agency (IEA) that pointed US shale oil production could fall by 600,000 barrels per day (bpd). It should be noted that key oil exporters, led by Saudi Arabia and Russia, have proposed to freeze output at January levels to stop the growing oversupply. However, they would only initiate this if other major exporters follow suit. Moving forward, crude oil witnessed selling pressure on Tuesday amid worries that rising Iranian output would deepen a global crude oversupply. Come midweek, prices went on trading in the red amid a weak trend in Asian trade. Further, OPEC (Organisation of the Petroleum Exporting Countries) kingpin Saudi Arabia shut the door on an output cut. This dragged crude prices lower. Some positive trades were seen on Thursday. Mixed trades were seen on Friday and finally crude oil ended its session in the green. The MCX March contract opened on Monday at 2,220/barrel and closed the Friday session at 2,316/barrel.

Crude Oil Ends Higher

Natural Gas Trades in the Red

Natural gas started its session on a negative note. Prices settled down on Monday on expectations of continued mild demand. Some positive trades were seen midweek on short covering. During the end of the week, natural gas traded on a negative note. It went on to trade in the red after tracking weaknesses from Nymex natural gas prices. The MCX March contract opened the week at 129.40/mmBtu and finally closed the Friday session at 121.60/mmBtu.


Dollar Trades in the Green

The dollar traded on a positive note during the start of the week. The uptrend was fuelled by renewed demand for the dollar from banks and importers. On Monday, the dollar index stood up by 0.53% against a basket of major currencies in the late afternoon trade. Some losses were seen midweek. On Thursday, the dollar stood firm as against the rupee on fresh demand. On Friday, the dollar edged down as investors focused on a two-day Group of 20 (G20) summit of finance ministers and central bankers in Shanghai. However, it still remained on track for weekly gains. On Monday, the rupee opened the session at 69.03 against the US dollar and settled at 69.06 to close the week.

USD Witness Buying Activity

Euro Trades on a Mixed Note

The euro was down to start the week as market participants reduced their positions on bets that the UK will leave the European Union. Britons will go to the polls on June 23 to decide whether to remain in the EU. Midweek, the euro traded on a mixed note and finally ended its session in the green after realising gains on Friday. On Monday, the euro opened at 76.65 against the INR. It reached a high of 76.80 and a low of 75.69 and closed the week at 76.07 against the INR..

Pound Nosedives on Brexit Fears

On Monday, sterling witnessed its biggest one-day loss against the dollar in 11 months. The fall came in after London Mayor Boris Johnson announced his support for the UK to leave the EU. Going forward, the pound fell nearly 2% on Tuesday. This was recorded as its biggest one-day drop in almost six years. The negative trend was stretched till the end of the week and the pound ended its session on a negative note. On Monday, GBP opened at 98.67 against INR. It touched a low of 95.74 and closed the week at 96.51.

Safe Haven Bets Support Yen

The yen started the week on a negative note as investors opted out of the Japanese currency amid the steady gains realised in Tokyo stocks. However, it gained on Tuesday as risky assets lost their charm and investors sought safe haven bets in the yen. Similar trades were seen midweek. The fall in crude oil prices boosted demand for yen during the end of the week. JPY against INR traded at a low of 60.76 and a high of 61.75. Finally, it stood at 61.12 against the rupee to end its session.

Commodities 19th Feb 26th Feb % Change
Gold/10 gms 29,515.00 29,337.00 -0.60%
Silver/kg 37,517.00 37,250.00 -3.37%
Crude Oil/barrel 2,203.00 2,316.00 5.12%
Natural Gas/mmBtu 129.70 121.60 -6.24%
Currencies 18th Feb 26th feb % Change
INR / USD 68.92 69.06 -0.20%
INR / EUR 76.62 76.07 0.71%
INR / GBP 98.86 96.51 2.37%
INR / JPY 60.36 61.12 -1.25%

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