Fed Maintains Status Quo and Another Roadblock For Indian IT Companies

The US Federal Reserve kept its benchmark interest rate unchanged at a time of low inflation, which remains persistently below the Fed's target level.

The Fed noted Wednesday in a statement that inflation has stayed undesirably low, even though the job market keeps strengthening, with the unemployment rate just 4.4%.

Normally, solid job growth drives up wages and prices. But the Fed's preferred gauge of inflation has moved further below its 2% target in recent months.

The central bank decided after ending its latest policy meeting to leave its key rate unchanged in a range of 1% to 1.25% after having raised rates twice this year in March and June.

With the US economy chugging along for many months, the Fed has been 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, the reports noted.

But, why should we in India be worried about which way the American economy and interest rates are headed? As Vivek writes in The Vivek Kaul Letter:

    The answer is simple. The United States still forms around one-fourth of the global gross domestic product (GDP). It remains the largest consumer in the world. And any global recovery isn't going to happen, without the American economy finding its way back to where it was during its heydays or somewhere close to it.

The Fed also plans to start normalisation its US$4.5 trillion balance sheet 'relatively soon'. It would follow a plan outlined in June to trim its holdings of US Treasury bonds and mortgage-backed securities. Normalising the balance sheet could impact emerging markets.

As per an article in a leading financial daily, Singapore has sought to defend its visa regime, saying that one-third of its workforce is 'already foreign' and it would be 'mindless' to have an open border without any policy framework to control the flow of people.

The statement of Singapore Deputy Prime Minister Tharman Shanmugaratnam assumes significance as Indian IT companies use that country as a gateway to serve clients in the region, the reports noted.

Notably, all major Indian tech companies including TCS, HCL, Infosys, and Wipro have a presence in Singapore.

Indian IT companies have also been subject to tighter visa norms in the US, which is home to 60% of India's IT products.

So are you worrying about IT stocks? If so, Tanushree's (co-head of Research at Equitymaster) 5 Minute WrapUp from 3 February - How To Act On the Trump Crash in IT Stocks. Here's an excerpt:

    We believe, if they respond to this challenge well and differentiate themselves from their peers, certain Indian IT companies could not only survive but thrive.

    In this new era of disruption, only firms run by managements who believe in agility will do well. Thus, in this sector, it is imperative to bet on the jockeys as much as it is the horses. Taking a blanket negative view on the sector would be wrongheaded.

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Global indices ended the week on a mixed note. European stocks traded on a negative note. Germany (DAX) ended with a loss of 0.63%, France (CAC) ended with gains of 0.27%, and the London market (FTSE) was down 1.13%. Asian markets ended the week on a mixed note. The Nikkei Index was down 0.70%, the Hang Seng Index ended up 1.02%, and the Shanghai Index was up 0.49%. US markets traded in the red and ended their session with a loss of 0.20%.

Indian Stock Markets Achieve Another Landmark

Back home, the Indian indices ended their weekly session on a positive note. The BSE Sensex was up 0.88% for the week, while the NSE Nifty was up 1%. During the week, the Nifty index crossed the 10,000 landmark figure.

Finance (+3.11%) and Telecom (+1.07%), were the biggest gainers for the week. Healthcare (-2.85%) was the biggest loser.

Despite concern about the country's growing trade deficit with China, foreign direct investment (FDI) inflows into the country increased 23% YoY in the first two months of the current fiscal.

The cumulative foreign direct investment in April-May was US$10.02 billion, or about Rs 645.24 billion, compared with US$8.12 billion, or about Rs 522.89 billion, a year earlier.

Commerce and Industry Minister Nirmala Sitharaman pointed that the government has put in place an investor-friendly policy for FDI. Most sectors are open for 100% FDI. She added that the government reviews FDI policy on an ongoing basis with a view to liberalise and simplify the policy to provide ease of doing business in the country and increase FDI inflows.

The minister said the trade deficit with China is a matter of concern. She added that efforts are being made to increase overall exports by diversifying the trade basket with emphasis on manufactured goods, services, resolution of market access issues, and other non-tariff barriers. India's trade deficit with China in 2016-17 declined slightly to US$51.08 billion, from US$52.69 billion in 2015-16. It was at US$48.48 billion in 2014-15.

Foreign direct investments (FDI) plays an important role in the economic development of a country. It is a source of long-term capital that helps build critical infrastructures. It also supports technology knowledge transfers, fosters innovation, and helps raise productivity. In short, a steady inflow of FDI helps India accelerate economic growth and development.

FDI inflows are also a catalyst for domestic industrial development. Since 2014, the Modi government has laid a great emphasis on welcoming global best practices to be employed in India.

In other news, in a bid to develop India's infrastructure, improve economic growth and community wellbeing, the Global Infrastructure Hub (GI Hub) in its report titled 'Global Infrastructure Outlook' said India will need investments to the tune of around US$4.5 trillion by 2040. It also noted that this will make India the second largest infrastructure market after China.

The report has stated that the significant demand for infrastructure investment in India over the next 25 years is likely to be driven by increasing income levels and economic prosperity.

In absolute terms, it explained that the total investment needed to meet the sustainable development goal is greatest in India, a total of US$ 1.3 trillion of investment is needed by 2030, more than China, which is US$257 billion.

As per the report, the cost of infrastructure to support global economic growth and to close the infrastructure gap is forecast to reach US$94 trillion by 2040, with a further US$3.5 trillion needed to meet the UN SDGs of access to drinking water and electricity by 2030, bringing the total to US$97 trillion. It added said that rural to urban migration continues with the urban population growing by 46%, triggering massive demand for infrastructure support.

Retaining its growth forecast of 7.2% for India for the current fiscal year, the International Monetary Fund (IMF), in its latest update report, World Economic Outlook, July 2017, said the country would grow at 7.7% in 2018-19, keeping growth rate forecasts in line with its April 2017 forecast.

The IMF further mentioned that even though activity in India slowed following the currency exchange initiative, the growth rate of 7.1% in 2016 was higher than anticipated due to strong government spending and data revisions. It added that the growth in 2016-17 would have been lower had the government not intervened in terms of capital expenditure.

It also said that despite China's growth projections being raised by a couple of notches, India's economy would still be the fastest growing among large economies. As per its projections, while India's economy is projected to grow in both 2017-18 and 2018-19, China's economy will expand at the same rate in 2017 - 6.7% - as it did in 2016.

The IMF added that inflation in advanced economies remains subdued and generally below targets and noted that it has also been declining in several emerging economies, such as Brazil, India, and Russia. Furthermore, the report kept its global growth projections unchanged for this and next year at 3.5% and 3.6% respectively.

Nifty 50 Index Ends July Expiry Above 10,000

The Nifty 50 Index ends its July expiry this week. Let's have a look how the index performed during the expiry.

The index traded on a strong note during the expiry. It opened gap down on the first day of the expiry and hit a low of 9,449. But the selling was temporary as the index recovered later that day and went on to hit a fresh life high in the second week of the expiry. The bulls did not stop and the index kept hitting new life highs to achieve the landmark figure of 10,000 in the last week of the expiry. Finally, it ended the expiry 5.44% up.

In our previous rollover report, we mentioned that it would be quite difficult for the bears to penetrate the 9,400 level as indicated by the strong open interest (OI) outstanding in the 9,400 put. As a result, the index reversed up from 9,449.

But as indicated, the bulls also needed to push the index above its 20-day exponential moving average (EMA) as well as the RSI indicator above 50 to regain strength, which they did in the first week of the expiry. This lead bulls to dominate the expiry and the index hit the 10,000 mark in no time.

So will the bulls continue to dominate in the August series as well? Watch out for our next rollover report in Profit Hunter newsletter in the Market Notes section.

COMMODITIES

Gold Ends Marginally Higher

Gold traded on a positive note during the week. On Monday, it opened the session higher but slipped a bit to close the session marginally down. The down move in the yellow metal continued until midweek. The selling was seen on the back of weak trends overseas. On Thursday, gold witnessed minor profit booking on a dovish Fed outlook. Finally, on Friday, gold continued to move up and ended the weekly session with marginal gains of 0.14%.

Gold Ends in the Green

Silver Follows Lead from Gold

Silver too traded on a positive note during the week. It opened the weekly session flat and traded in a downtrend until midweek. The weak global cues drag the white metal down. On Thursday, the commodity witnessed some buying interest as the Fed indicated a slow path of monetary tightening. The metal traded up on the final day of the week to end its weekly session with 0.81% gains.

Crude Oil Surged 8% for the Week

Crude oil traded in an uptrend during the week. It opened its session flat on Monday and traded north throughout the week. The Saudi's pledge on export curbs and lower US crude oil inventories spurt demand in the black gold. Finally, on Friday, the buying accelerated and the commodity ended its weekly session up by 7.66%.

Crude Oil Witnesses Buying Interest

Natural Gas Trades in a Downtrend

Natural gas traded on a negative note during the week. On Monday, it opened the session down and witnessed selling pressure the entire day to close the session 3.5% down. The price plunged as the weather forecasts suggest that temperatures will remain very hot in a large proportion of the US during the week ahead. But the commodity recovered gradually coming into the mid-week on small inventory buildup in US. Finally, on Friday, the down move resumed and natural gas ended the weekly session 2.07% down.

CURRENCIES

Dollar Traded on a Negative Note

The dollar traded on a negative note during the week. It opened its session higher on Monday but slipped to end the session negative. The currency recovered a bit midweek, but selling pressure intensified on Thursday after the Federal Reserve policy decision. Finally, on Friday, the currency witnessed some short covering but ended the weekly session with marginal loss of 0.32%.

Dollar Ends Marginally Lower

Euro Trades in an Uptrend

The euro traded on a positive note during the week. It opened the weekly session higher but slipped to end the session flat. But the selling was temporary as the currency traded in an uptrend for the remaining days of the week. The buying was seen German business confidence beats expectation. The Fed dovish outlook also ushered in demand for the currency. Finally, on Friday, the euro continued to trade up and ended its weekly session 0.20% up against the rupee.

Pound Witnesses Buying Interest

The pound traded on a positive note during the week. It opened the weekly session higher and continued to trade in an uptrend throughout the week. The buying was seen as British preliminary GDP matches forecast. The currency some profit booking on Friday and ended the weekly session with 0.26% gains.

Yen Trades on a Volatile Note

The yen traded on a volatile note during the week. On Monday, it opened the session gap up to trade positive until the Tuesday as Japanese inflation matches expectations and better employment figures. The currency witnessed some selling pressure from midweek onwards on Japan's political woes. Finally, on Friday, the yen recovered a bit and ended the weekly session with flat.

Commodities 21st July 28th July % Change
Gold/10 gms 28,541 28,580 0.14%
Silver/kg 38,150 38,460 0.81%
Crude Oil/barrel 2,965 3,192 7.66%
Natural Gas/mmBtu 193.50 189.50 -2.07%
Currencies 21st July 28th July % Change
USD / INR 64.61 64.40 -0.32%
EUR / INR 75.36 75.51 0.20%
GBP / INR 84.14 84.36 0.26%
JPY / INR 57.98 57.96 -0.03%

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