Fed Minutes Point Towards a Rate Hike in Next Meet

Minutes of the US central bank's last policy meeting released this week showed that a majority of policymakers expect interest rates to be raised in the foreseeable future.

They agreed that the economy was poised for strong growth and there is a higher chance that the US Congress will pass significant tax cuts which will boost business investment.

Some officials stated that they still needed additional data before deciding the timing of a rate hike. However, many officials, on the other hand, stated that the unemployment rate appeared to be too low for inflation to remain at the present level.

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 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 purchase houses, cars, and white goods will have to shell out more.

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

Regarding upcoming rate hikes, the Fed currently predicts one more rate hike this year and three more hikes in 2018. How this pans out and what impact it will have on the global financial markets remains to be seen. We'll keep you updated on the developments in this space.

Minutes from the European central bank's (ECB) last meeting showed the majority on the governing council believe it is appropriate to proceed very gradually with forward guidance in relation to Quantitative Easing (QE), but that opposition toward the extension of the program kept mounting.

However, the general consensus was that an ample degree of monetary stimulus was still needed for inflation to reach the ECB's target of below, but close to, 2%.

One shall note that, the ECB last month announced it would halve its bond purchases to 30 billion euros (US$36 billion) a month from January as the euro zone recovery gathers pace.

That reflected the euro zone's best economic performance in a decade. But the ECB has also extended the scheme by nine months to September 2018, since inflation is still barely rising.

The slower pace of purchases signified growing confidence that in inflation would eventually rise, as the risks of deflation had dissipated and there were nascent signs of rising price pressures. Extending QE, even at a reduced rate, reflected the need to be patient and persistent for policy to have the intended impact.

The extension went down well with bond markets, where borrowing costs have been underpinned by ECB bond-buying.

Further, policymakers said the purchases would continue until at least September 2018, and beyond if necessary, reassuring markets that the ECB stood ready to ramp up efforts again if needed.

The minutes highlights the split in the Governing Council and suggests that any further extension of the asset purchase scheme would run into opposition, even if inflation will miss the ECB's target of almost 2% for years to come.

But with inflation still being below the ECB's 2% target level, the asset buying program continues for some more time. But sooner or later, this will end. 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.

Global indices ended the week on a positive note. European stocks traded on a positive note. Germany (DAX) ended with a gain of 0.51% and France (CAC) ended with a gain of 1.34%. The London market (FTSE) was up 0.39%. Asian markets ended the week on a mixed note. The Nikkei Index was up 0.69%, the Hang Seng index surged 2.29%, and the Shanghai index was down by 0.84%. US markets witnessed buying interest and ended their session with a gain of 1.41%.

Indian Indices Log Around 1% Gains

Back home, Indian indices traded on a positive note during the week. The BSE Sensex and the NSE Nifty were up 1% each.

All the sectoral indices ended the week in the green. Realty (+4.74%), Energy (+3.60%), and Healthcare (+3.34%) were the biggest gainers for the week.

In news about the economy, government bonds rallied the most in a year after the Reserve Bank of India (RBI) cancelled its open market operations (OMO) plans to sell bonds.

To absorb excess liquidity, the RBI scrapped plans to sell bonds in the open markets. The benchmark yield dipped 16 basis points on Monday to close at 6.89%.

The RBI cancelled a bond sale via open market operation worth Rs 100 billion scheduled this week citing evolving liquidity conditions. The central bank has been regularly selling bonds in the market to ensure that its policy remains effective. It has absorbed more than Rs. 900 billion in excess liquidity that has kept the market rates above the policy rate of 6%.

The government bond market went through a volatile session after the first sovereign upgrade by Moody's Investors Service in more than a decade. The yield erased its initial gains after macro worries weighed on market participants.

It's pertinent to note that most of India's public debt is internally funded. While scheduled commercial banks, insurance companies, provident funds, and RBI invest in 85% of the government bonds, there is a miniscule 4% participation by the overseas investors. Therefore, the rating upgrade has arrived a bit late.

What is ironical is that despite a benign business environment, the bond yields in India have been ascending. Since the global financial crisis, India's bond yields have firmed up by a whopping 1.7%, putting it in line with countries like South Africa and Russia whose economies are in a state of mess.

In the short term, India's fiscal deficit is likely to remain high given the initial revenue losses due to GST, higher public spending on infrastructure, and the recapitalisation program for state-run banks. But in the long run, the economic reforms are likely to strengthen the economy and drive growth.

Moreover, the government remains committed to long term fiscal consolidation. Given Moody's thumbs up, its high time that bond markets desist from juvenile behaviour and adopt a rational long-term view of the country's fiscal situation instead.

From the other news, days after upgrading India's sovereign rating to Baa2 from Baa3 with a stable outlook, global credit rating agency Moody's Investors Services in its latest report has stated that Indian companies will see an improvement in its credit profile in the year 2018.

The report notes that companies will improve margins with increased sales as it expects Goods and Services Tax (GST)-related activity disruption to diminish, leading to an all over recovery in economic activities.

Besides, it noted that refinancing needs in 2018 would be manageable for most companies, given their improving access to capital markets and their large cash balances. It added that corporations' cross-border bond maturities will be manageable for the next three years.

The rating agency expects that the country's Gross domestic product (GDP) growth of around 7.6% will result in higher sales volumes, which, along with new production capacities and benign commodity prices, will support an EBITDA (earnings before interest, taxes, depreciation and amortisation) growth of 5-6% over next 12 to 18 months.

Adding further, it said that further simplification of GST and other structural reforms, or an improvement in commodity prices, resulting in higher operating profit could improve the companies' credit profiles. Apart from this, it noted that an improvement in asset valuations, providing a means of deleveraging for some corporates will also result in improvement in their credit profiles.

Nifty 50 Index Inched a Percent Higher
Nifty 50 Index Inched a Percent Higher

The Nifty 50 Index traded on a positive note during the week. On Monday, it opened the session on a higher note before slipping down only to recover immediately to close the session in the positive. It opened gap up the next day and gradually inched higher for the remainder of the week. Finally, on Friday, the Nifty index continued the positive momentum and ended its weekly session 1% up.

Last week, we mentioned that the index found a strong support from the 50-day exponential moving average (EMA), and horizontal support level (previous resistance now support). After bouncing up from this support level, the index is gradually moving higher. And now, it is only 100 points away from its life-time high.

So will the index hit a new life-time high in the week to come? Let's wait and watch...

COMMODITIES

Gold Trades on a Negative Note

Gold traded on a negative note during the week. On Monday, it opened the session lower and continued to trade weak until the end of Tuesday. The yellow metal recovered a bit mid-week, but the selling pressure continued going towards the end of the week. Gold prices nudged lower on weaker US economic data and concerns by some Federal Reserve policymakers about lower inflation. Finally, on Friday, gold continued to trade negative and ended its weekly session with 1.04% loss.

Gold Ends in the Red

Crude Traded in an Uptrend

Crude oil traded in an uptrend during the week. On Monday, it opened the session higher, but witnessed minor selling towards the end of the session. But this was temporary as the black gold recovered strongly and traded in an uptrend throughout the week. The gains were seen on the back of the shutdown of the Keystone pipeline and a drawdown in fuel inventories. The buying continued on Friday as well and the commodity ended its weekly session with 3.31% gains.

Crude Oil Surged 3% for the Week

CURRENCIES

Dollar Witnesses Selling Pressure

The dollar traded on a negative note during the week. On Monday, it opened its weekly session lower, but recovered to end the session in the positive. However, the buying was temporary as the greenback witnessed selling pressure for the remaining day of the week. The selling pressure was seen after FOMC minutes signaled shallow rate hike path. Also, the slide in dollar forced banks and exporters to unwind their long dollar bets, paving the way for rupee to gain strongly. Finally, on Friday, the currency recovered a bit but ended the weekly session with loss of 0.62%.

Dollar Trades on a Negative Note

Commodities 17th Nov 24th Nov % Change
Gold/10 gms 29,690 29,380 -1.04%
Silver/kg 40,013 39,241 -1.93%
Crude Oil/barrel 3,685 3,807 3.31%
Natural Gas/mmBtu 203.00 182.10 -10.30%
Currencies 17th Nov 24th Nov % Change
USD / INR 65.11 64.71 -0.62%
EUR / INR 76.87 76.76 -0.15%
GBP / INR 85.97 86.18 0.24%
JPY / INR 57.85 58.03 0.31%

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