US Economic Data, NAFTA Negotiations, and IPOs in the Indian Stock Markets

US industrial production rebounded modestly in September as the lingering effects of hurricanes Harvey and Irma hobbled activity at factories. Industrial production increased 0.3% in September after a 0.7% drop in August. But the outlook remains positive amid a strengthening global economy and weakening dollar.

US import priced jumped 0.7% in September, the biggest gain since June 2016, as against 0.6% rise in August. In the 12 months through September, import prices climbed 2.7 percent after advancing 2.1 percent in August.

US retail sales recorded their biggest increase in two and half years in September as demand rose for building materials and motor vehicles in areas hurt by hurricanes. The retail sales jumped 1.6% in September after slipping 0.1% in August. This increase was the largest since March 2015. Retail sales increased 4.4% on an annual basis.

The above data looks positive calling for another rate hike by end of 2017 as indicated by Federal Reserve. The US Fed also forecasts two rate increases in 2019 and 2020, respectively.

Apart from this, Trade ministers from the US, Mexico, and Canada agreed to extend talks on the North American Free Trade Agreement (NAFTA) renegotiation into the first quarter of 2018. The earlier deadline set was December-end, but since the three sides could not arrive at a consensus, the deadline has been mutually extended.

The Trump administration, which is demanding big changes to the NAFTA, has presented a series of hardline proposals that Canada and Mexico say will be tough to accept.

The demands were in line with Trump's 'America First' agenda. One trade official said that the demands were pretty harsh and horrible. He added, the US stance has a clear protectionist bias that is trying to eradicate, minimize, and eliminate the mechanisms that existed in NAFTA in the last 20 years.

Trump blamed NAFTA for shifting US manufacturing jobs to Mexico and a US$ 64 billion trade deficit with Mexico. He repeatedly vowed to scarp the treaty unless it can be renegotiated on more favorable terms.

The former Mexican trade minister Jaime Serra said, there was no economic logic to the U.S. demands. The issues being put forward on the table are practically absurd.

US trade chief Robert Lighthizer said, he is not focused on terminating the NAFTA and is only trying to negotiate an update that rebalances the pact to reduce U.S. trade deficits.

Thus, there are lot of conflicts and a myriad of issues to be resolved for the NAFTA agreement to go through. Whether the three nations reaches an agreement or not remains to be seen.

But why should we, here in India, worry about which way the American economy and interest rates are headed?

Vivek Kaul has answered this in one of the recent editions of The Vivek Kaul Letter. He writes:

    "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."

Global indices ended the week on a positive note. European stocks traded in an uptrend during the week. Germany (DAX) ended with gains of 0.60%, France (CAC) ended with gains of 0.70%, and the London market (FTSE) was up 0.10%. Asian markets ended the week on a mixed note. The Nikkei Index was up 1%, the Hang Seng Index ended up 0.80%, and the Shanghai Index was down 0.30%. US markets traded in the green and ended their session with a gains of 0.50%.

Flood of IPOs in the Indian Stock Markets

Indian share markets traded on a positive note during the week. The BSE Sensex was up 0.47% for the week, while the NSE Nifty was up 0.43%.

Telecom (5.10%), Energy (+3.10%), and Oil &Gas (2.40%) were the biggest gainers. Bankex (-2%) was the biggest loser for the week.

In the news from IPO space, Godrej Agrovet has made a stellar debut this week. The stock got listed at Rs 621 on Indian bourses today, a premium of 35% to its issue price of Rs 460. The Rs 11.6 billion initial public offering (IPO) was a huge hit and was oversubscribed over 95 times.

MAS Financial Services too made a stellar debut on the bourses. The Gujarat based non-banking financial company's (NBFC) shares surged as much as 46% to Rs. 670 compared to its issue price of Rs. 459. The IPO was oversubscribed a whopping 128 times.

Meanwhile, the Rs 113.7-billion IPO of state-owned General Insurance Corporation of India (GIC) is oversubscribed 1.37 times. GIC Re's IPO received bids for 170.7 shares against the total issue size of 124.7 shares.

GIC Re's IPO is the largest in seven years. It is the third largest IPO till date after state-owned Coal India Ltd's Rs 152 billion initial share sale in 2010 and Reliance Power's Rs 117 billion initial share sale in 2008.

The reinsurer had set a band of Rs 855-912 per share for the IPO, which values it at Rs 750-800 billion. The GIC Re IPO will see a total stake dilution of 14.22%.

The IPO is part of the government's disinvestment program. So far in FY 18, the government has raised Rs 197.58 billion through disinvestment and strategic disinvestments of public sector enterprises as against its target of Rs 725 billion. GIC Re's IPO could fetch about Rs 98.04 billion to the government and the remaining Rs 15.68 billion to GIC Re.

Apart from this, as per an article in a leading financial daily, Mahindra Group's logistics arm has received the go-ahead from market regulator to garner about Rs 7 billion through an initial share-sale offering.

Also, HDFC Standard Life Insurance Company has received capital markets regulator's approval to raise an estimated Rs 75 billion through an IPO.

Interestingly, fund-raising through the IPO route has hit a record high so far in 2017, crossing Rs 400 billion mark. Around 28 companies have collectively mopped up Rs 448.5 billion through IPOs.

During such a time, it's beneficial to be very selective when investing in IPOs. Carefully analyze each company for its own merits and don't give in to the hype surrounding the public offering.

That's Ankit Shah's approach at Equitymaster Insider. He keeps a sharp eye on the developments in the IPO space and keeps his readers up-to-date on the big-ticket IPOs. Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It's free. Just click here.

In the news about the economy. According to data released by the Central Statistics Office (CSO), retail inflation as measured by the Wholesale Price Index (WPI) eased to 2.6% in September, as compared to sharp rise of 3.2% in August 2017.

Wholesale inflation rate, measured by the wholesale price index (WPI), is a marker for price movements in bulk buys for traders and broadly mirrors trends in shop-end prices.

The index portrays new series of WPI data released by the government earlier this fiscal, with 2011-12 as the base year, replacing the existing base year of 2004-05.

Food articles turned out to be major drivers as the data showed that prices of food articles tapered by 2% in September, as against 5.8% on a yearly basis. Vegetable inflation stood at 15.5%, as compared to an astronomical 44.9% in August.

Fuel and power segment, too cooled slightly to 9%, from 9.9% in August.

The Reserve Bank of India (RBI) in its monetary policy review meeting in August, announced a cut to its policy rate by a quarter of a percentage point.

The decision to cut rates is in line with the RBI's neutral monetary policy stance, tracking the rate of inflation.

The RBI's monetary statement in June had projected quarterly average inflation in the range of 2-3.5% in the first half of fiscal 2018, and 3.5-4.5% in the second half. Now it expects inflation to be about 4% by the year end. As long as inflation follows this track, the possibilities of rate cuts during this fiscal year remain slim.

Divergence in Nifty and Bank Nifty

The Nifty 50 Index traded on a positive note during the week. On Monday, it opened the session 40 points gap up and continued to trade higher to close the session well. The steady momentum continued as the index hit a new lifetime high during the week. The index witnessed some profit booking on the final day of the week, but ended its weekly session 0.43% up.

We mentioned last week that the index broke above the 9,700 - 10,150 range, which indicates that the bulls party might continue for some more time. But now we have observed one interesting thing on the charts.

The above is the chart of Nifty index and the Bank Nifty index. As you can see, the Nifty made a new high during the week, but Bank Nifty failed to do so. We call this a price divergence. Usually, markets are said to be healthy when both nifty and bank nifty confirm each other. But currently, Bank Nifty does not confirm the Nifty's price action.

Does this indicate a sign of a market top? Or, is it just a matter of time before Bank Nifty will confirm Nifty's movement? It is an interesting setup, let's keep a close watch on it.

COMMODITIES

Gold Trades on a Negative Note

Gold traded on a negative note during the week. On Monday, it opened the session a bit lower and recovered to end the session positive. But the bulls couldn't hold the gains as the yellow metal witnessed selling pressure on back of firm dollar and weak overseas trend. Finally, on Friday, it ended its weekly session with 0.85% loss.

Gold Ends in the Red

Silver Follows Lead from Gold

Silver too traded on a negative note during the week. Like gold, it opened its session a bit higher on Monday and slipped to close the session negative. The selling pressure accelerated as the white metal closed its weekly session 1.56% down. The selling was seen due to profit booking by speculators and weak global cues.

Crude Oil Witnesses Buying Interest

Crude oil traded on a positive note during the week. On Monday, it opened the session higher and continued to trade up to end the session positive. The buying was seen amid rising political tensions between US - Iraq. The black gold witnessed minor profit booking on the final day of the week, but it ended its weekly session with 1.30% gains.

Crude Oil Trades in an Uptrend

Natural Gas Ends in the Red

Natural gas traded on a weak note during the week. On Monday, the commodity opened its weekly session lower and plunged 2% to end the session negative. Although natural gas some of its losses on the final day of the week, it ended the weekly session with a loss of 1.18%. The selling was seen on back of warmer weather forecasts.

CURRENCIES

Dollar Trades on a Volatile Note

The dollar traded on a volatile note during the week. It opened its session lower on Monday and continued to trade negatively as banks and exporters sold the dollar amid a strong domestic equity market. But the selling was temporary, as the dollar recovered its losses on renewed Fed rate hike fears. Finally, the currency ended the weekly session flat.

Dollar Ends on a Tepid Note

Euro Trades in a Downtrend

The euro traded in a downtrend during the week. It opened the weekly session lower and continued to trade down throughout the week. The euro witnessed selling on back of political uncertainty in eurozone and as German economic sentiment falls short. The currency ended its weekly session 0.48% down against the rupee.

Pound Trades on a Negative Note

The pound traded on a negative note during the week. On Monday, it opened the weekly session lower and recovered a bit before it closed the session negative. The selling pressure continued despite inflation data turning positive. The currency ended its weekly session 0.65% down against the rupee.

Yen Trades on Flattish Note

The yen traded on a flattish note during the week. On Monday, it opened the session lower, but recovered and traded flat throughout the week on back of mixed North Korea headlines. The yen ended the weekly session flat.

Commodities 13th Oct 17th Oct % Change
Gold/10 gms 29,851 29,598 -0.85%
Silver/kg 40,399 39,769 -1.56%
Crude Oil/barrel 3,310 3,353 1.30%
Natural Gas/mmBtu 195.20 192.90 -1.18%
Currencies 13th Oct 17th Oct % Change
USD / INR 65.03 65.05 0.03%
EUR / INR 76.93 76.55 -0.48%
GBP / INR 86.46 85.89 -0.65%
JPY / INR 58.00 58.01 0.01%

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