ECB Maintains Status Quo, Fed's Final Rate Hike of 2017 Dubious

We are two weeks away from the Federal Reverse's next policy meeting and it is highly likely that it will hold the rates given the recent economic data.

The Fed conducted a survey on the US economy that suggested the economy expanded at a modest to moderate pace from July to mid-August. But inflation is still a major concern.

Inflation retreated to 1.4% in July YoY, the slowest pace in more than one and a half years.

The report also noted that businesses were having difficulty filling job openings at all skill levels. Also limited wage pressures and modest to moderate wage growth was reported. Consumer spending increased but a slowdown in the auto industry was a reason to worry.

US home refinancing activity hit an eleven-week high on the back of home borrowing costs declining to their lowest level since November. The refinancing activity rose 5.1% to 1,502.6 in the week ended 1 September, the strongest since 1,526.8 in the week of 16 June.

US factory goods orders tumbled 3.3% in July, the biggest drop in nearly three years. The drop was seen on the back of weak demand for transportation equipment.

US business spending accelerated amid strong demand for capital goods.

US service sector activity accelerated in August amid strong gains in new orders and employment. The non-manufacturing activity index increased 1.4 points to 55.3 in August, rebounding from an eleven-month low in the prior month. A reading above 50 indicated expansion in the sector.

The economy further received a boost by a moderate rise in the trade deficit in July. It rose 0.3% to US$43.7 billion in July.

However, the above strength could be snapped by Hurricane Harvey, which devastated parts of Texas. Harvey could significantly impact commodity prices and trade volumes, and eventually impact the trade deficit in September.

Policymakers have raised interest rates twice this year but the prospects of a third rate hike in 2017 as promised by Fed looks uncertain. This is mainly due to inflation at subdued level despite the US economy growing and unemployment being at low levels.

The Fed rate hike may be slowing inflation, wage growth, and job growth and doing 'real harm' to the US economy, Fed Bank President Neel Kashkari said at the University of Minnesota's business school. He also mentioned that, there may be a lot more slack in the labour market than we appreciate.

This confirms our view that the Fed will hold rates in its next policy meeting. In fact it is unlikely that it will further raise rates in 2017 - at least until inflation turns favourable.

The tension between the US and North Korea continues to loom over the global financial markets. Stock markets over the world witnessed volatility after North Korea's conducted its sixth and most powerful nuclear bomb test. A top North Korean diplomat warned that his country was ready to send 'more gift packages' to the United States. Besides stock markets, the dollar dipped and Treasury yields too dropped sharply as tensions rose. And traders moved towards safe havens like the Japanese yen and gold. The risk off was also seen due to devastation in Texas from Hurricane Harvey.

Trump has been indulging in trade wars ever since he become President. First, Trump formally withdrew from the Trans-Pacific Partnership (TPP), thereby distancing the US from Asian allies. Then he warned that he might terminate the North American Free Trade Agreement (NAFTA). And now he's hinting at withdrawal from the US-South Korea Free Trade Agreement (KORUS).

This would all have repercussions here in India. As Vivek Kaul rightly said in a recent edition of The Vivek Kaul Letter, the United States still forms around one-fourth of the global gross domestic product (GDP). So naturally the events occurring in the US will have implications on emerging markets economies and the world at large.

The European Central Bank (ECB) maintained the status quo at its policy meet and left its ultra-easy monetary policy unchanged. Policy makers kept asset purchases at 60 billion euros (US$72 billion) a month until December. They also reiterated to increase the size or duration if the economy worsens.

The central bank also left interest rates unchanged and repeated that they expect borrowing costs to stay at present levels until well past the end of net asset buying.

The ECB is not in a hurry to taper stimulus as inflation is still not at the bank's target level.

After ECB chief Mario Draghi raised the prospect of policy tightening in June, he signaled that any policy tweaks would come only gradually, setting the scene for a possible discussion in September about the long-awaited tapering of its asset buys.

The ECB has been pouring money into the eurozone to boost inflation from a near-deflationary level.

Most of the economic problems we see today are fueled by the easy money policies that central banks have adopted around the world. However, with the changes happening at central banks of late, it seems that the end of easy money is near.

Indian Stock Markets React to Geopolitical Tensions

Back home, the Indian indices ended their weekly session on a negative note. The BSE Sensex was down 0.64% for the week, while the NSE Nifty was down 0.39%.

Metal (+3.14%) was the biggest gainer for the week. Telecom (-3.81%), Healthcare (-1.92%) were the biggest losers.

According to the Nikkei Services Purchasing Managers' Index (PMI) survey by Markit, Indian manufacturing activity rose after contracting for the first time in July following the launch of the Goods and Services Tax (GST). Services sector activity continued to contract for the second consecutive month in August.

Manufacturing PMI rose to 51.2 in August, from 47.9 in July. Notably, the PMI reading in July was at its lowest point since February 2009, indicating the first deterioration in manufacturing and business conditions in 2017. The services PMI for August finished at 47.5, signaling slow recovery from the 45.9 in July.

The PMI is the reading of the country's manufacturing and service sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

Although manufacturing production rebounded from July's downturn, growth was insufficient to offset the contraction in services activity. According to the survey, the downturn was often associated with the implementation of the GST, though there was also a mention of shortages of inputs.

Though Indian manufacturers remained cheerful about growth prospects, worries about the possibility of unexpected policy decisions weighed on confidence. Going forward, manufacturing activity is set to grow as manufacturers begin production for the festive season.

Moving on to the news from the economy. The finance ministry has given its nod to four foreign direct investment (FDI) proposals, worth Rs 5 billion in the previous two months.

The proposals approved, include AMP Solar India that alone will bring investment of Rs 5 billion. One proposal of CVC Asia of entailing investment of Rs 33.2 million got approval. Proposals of Aditya Birla Capital and Firstspace Development Management were also cleared by the department.

FDI into India increased 9% to record level of US$43.48 billion in 2016-17 on account of reform measures undertaken by the government.

In May this year, the Union Cabinet decided to abolish the Foreign Investment Promotion Board (FIPB) - an advisory body comprised of secretaries to various departments for vetting of FDI applications and making recommendations to the government.

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 in the economy.

Since 2014, the Modi-led government has laid great emphasis on welcoming global best practices to be employed in India.

The government began this with the launch of 'Make in India' initiative in September 2014. Further, the government has carried out FDI reforms in sectors like rail infrastructure, defence, finance, medical devices, construction, etc.

In addition, initiatives such as introduction of composite caps in the FDI policy and raising the FIPB approval limit were also undertaken to promote ease of doing business in the country.

All of this has meant ever rising inflows of FDI into India. FY17 saw the highest inflows at US$60 billion in the past four years.

It will be crucial for the country going forward to maintain this momentum of inflows to help drive the economic development of the Indian economy.

Besides this, Domestic rating agency Crisil has lowered India's growth forecast to 7% for fiscal 2018, down from 7.4% earlier, as it sees disruptions arising from the implementation of the new uniform tax regime to continue to impact the economy for a few more quarters.

According to the Association of Mutual Funds in India (AMFI), total mutual fund assets under management (AUM) rose 2.3% in August to hit a record Rs 20.6 trillion. This was backed by a 60% jump in net inflows in equity schemes to Rs 203.6 billion, the highest ever, from the month before.

Foreign institutional investors (FIIs) were the net seller in August. They pulled US$2 billion out of Indian markets in response to the global uncertainty. In response to this, the domestic institutional investors (DIIs) pumped US$1.5 billion into the markets.

Usually, when FIIs sell, the market tanks. But not these days. Huge amounts of money coming into the market from mutual funds, insurance companies, and pension funds has kept the market afloat.

Nifty 50 Index Traded on a Negative Note


The Nifty 50 Index traded on a negative note during the week. On Monday, it opened gap up but slipped sharply over 100 points taking cues from global markets. It recovered a bit on the next day but the selling continued going into midweek. On Thursday, it again recovered some of its losses. Finally, the index traded on flattish note on the final day of the week to end the weekly session 0.39% down.

The index is finding support from the channel's support line. If it breaks below the channel's support line it might open up lower level for the index. In that case, 9,700-9,800 is the level to watch. This is the strong support zone for the index as mentioned in our August rollover report.

COMMODITIES

Safe Haven Demand Lifts Gold Prices

Gold traded on a positive note during the week. On Monday, it opened the session gap up and traded positive until midweek. After some minor profit booking the yellow metal resumed its up move. The demand for safe havens like gold increased as North Korea tensions escalate. The Fed rate outlook also supported gold prices. Finally, on Friday, gold witnessed minor profit booking and ended the weekly session with gains of 1.50%.

Gold Ends on a Positive Note


Silver Follows Lead from Gold

Silver too traded on a positive note during the week. It opened the weekly session gap up and continued to trade upwards throughout the week. The metal gained in global markets amid geopolitical tensions and firm trends overseas. Silver traded down on the final day of the week but ended its weekly session with 1.57% gains.

Crude Oil Traded on a Positive Note

Crude oil traded on a positive note during the week. It opened its session lower on Monday but recovered immediately and trade positive until midweek where the black gold found some minor profit booking. The buying was seen on back of sharp drop in US production. On Friday, the commodity witnessed some solid selling pressure and almost gave up all of its gains. Finally, it ended its weekly session up by 0.79%.

Crude Oil Ends in the Green


Natural Gas Slipped 6% for the Week

Natural gas traded on a negative note during the week. On Monday, it opened the session down and traded negative until Tuesday close. The commodity witnessed some short covering on the next day but the selling continued going into the midweek. The prices witnessed selling pressure as market participants expects cooler weather going forward. Finally, on Friday, the down move accelerated and natural gas ended the weekly session 5.74% down.

CURRENCIES

Dollar Traded on a Negative Note

The dollar traded on a negative note during the week. It opened its session lower on Monday but recovered immediately to trade positive until midweek. The rupee declined on back of foreign capital outflows and demand for the greenback from importers and corporates. But the buying was temporary as the dollar witnessed heavy selling pressure from midweek on concern about North Korea and Fed rate outlook. Finally, on Friday, the currency witnessed some more selling and ended the weekly session with loss of 0.42%.

Dollar Ends with Marginal Loss


Euro Trades in an Uptrend

The euro traded on a positive note during the week. It opened the weekly session gap down but recovered sharply to end the session flat. The currency then traded in an uptrend throughout the week. The euro traded up as ECB President Mario Draghi sounded dovish in policy meeting held this week. Finally, on Friday, the euro continued to trade up and ended its weekly session 0.76% up against the rupee.

Pound Witnesses Buying Interest

The pound traded on a positive note during the week. It opened the weekly session lower but recovered immediately and traded in a strong uptrend throughout the week. The buying was seen on the back of strong UK housing report. The currency continued to trade higher on Friday as well and ended the weekly session with 1.55% gains.

Yen Spurts on Safe Haven Demand

The yen traded on a strong note during the week. On Monday, it opened the session bit lower but recovered immediately and traded strong until midweek where it witnessed minor profit booking. The currency rose as traders rushed to safe haven as US - North Korea tensions escalates. Finally, on Friday, the yen continued its up move and ended the weekly session with gains of 2.09%.

Commodities 1st Sep 9th Sep % Change
Gold/10 gms 29,823 30,268 1.49%
Silver/kg 40,926 41,570 1.57%
Crude Oil/barrel 3,021 3,045 0.79%
Natural Gas/mmBtu 196.90 185.60 -5.74%
Currencies 1st Sep 9th Sep % Change
USD / INR 64.19 63.92 -0.42%
EUR / INR 75.54 77.12 0.76%
GBP / INR 83.10 84.38 1.55%
JPY / INR 58.10 59.53 -2.09%

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