Of Japan's Budget, US Tax Code, and Gujarat Elections

Japanese Prime Minister Shinzo Abe's cabinet has endorsed a record 97.7 trillion yen (US$860 billion) budget for fiscal 2018. This was opted to keep the economy on a sustained recovery with aggressive monetary stimulus.

The budget is recorded the biggest amount ever and slightly more than this year's initial plan to spend 97.5 trillion yen.

The budget is also influenced by welfare spending to respond to a fast-ageing population and a record military outlay amid regional tensions related to North Korea.

The above development come after the recent win of Japanese Prime Minister Shinzo Abe in elections and signal the continuation of Abenomics - the ultra-loose monetary and fiscal policies. These policies have influenced excessive money printing, too much debt, and too much government intervention in Japan.

As Ankit writes in one of the editions of Equitymaster Insider... "With Abenomics, Japan has gone overboard trying to revive its economy. The Bank of Japan is a Top 10 holder in over 90% of Japanese stocks. And it remains one of the biggest buyer of Japanese stocks."

It would be interesting to see the impact central bank's ultra-easy money policies will have on the economy going forward. Meanwhile, we'll keep you updated on all the recent developments in this space.

Apart from the above, market participants are also tracking the US tax code, which the Senate Republicans passed this week.

The Senate approved the US$1.5 trillion tax bill, which includes permanent tax breaks for corporations and temporary tax cuts for individuals, by a final vote of 51-48.

The bill lowers the top individual tax rate from 39.6% to 37% and the corporate tax rate from 35% to 21%.

Once enacted, the above legislation will represent the most drastic changes to the US tax code since 1986.

The US federal deficit is projected to grow by US$1.5 trillion as a result of this tax overhaul.

Market participants are widely tracking the US tax overhaul as it has a significant impact on both domestic and global financial markets.

We will be sure to keep an eye on the developments on this front and keep you updated.

Global stock markets ended the week on a positive note. Benchmark indices in US grew marginally by 0.5% during the week.

Benchmark index in Brazil grew by 3.5% during the week. The index gained on the back of healthy gains as witnessed in the industrials, finance and real estate sector.

Stock markets in Asia too witnessed gains on account of investors optimism over Beijing's plans to deepen structural reforms and curb financial risks while maintaining steady economic growth in 2018.

BJP Victory in Gujarat Cheer Indian Indices

Back home, benchmark indices in India too logged gains of 1.4% as BSE Sensex closed at 33,915. BJP victory in the Gujarat and Himachal Pradesh elections led to the surge in the indices.

The poll showed BJP managed to win 99 seats- way lower than the expectations of the exit polls.

BJP was expecting a thumping majority. Though this remained a distinct dream and was a validation of the fact that people weren't happy with the government's move of demonetization. The data too revealed that a majority of agriculture-dominated constituencies voted against the BJP.

The closely contested Gujarat elections would ensure that the road to the 2019 general elections would not be a one-way contest. As far as the stock markets are concerned, the markets have a Modi premium attached to the stock prices on account of his big bang reforms which have immensely benefited the organized and corporate sector. A not so thumping majority could possibly undermine the 'Modi premium' that the markets are fetching right now.

In the news from the macroeconomic front, the government has planned an additional expenditure of Rs 661 billion with a net cash outgo of Rs 333 billion.

As per the news, the government has presented the second supplementary demand for grants seeking nod for additional spending in the current fiscal.

From the above allocation Rs 34 bn has gone to the department of food and public distribution for food subsidy related spending, Rs 35.9 bn for the Mahatma Gandhi Rural Employment Guarantee Scheme and Rs 59 bn for meeting additional pension requirement following Seventh Pay Commission.

The development comes as a concern as it is said to have a negative impact on the fiscal deficit for the current financial year. Rising government expenditure will widen the fiscal deficit target for this year.

Also, it is worthwhile noting that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely.

As Vivek Kaul writes in one of his recent editions of the Vivek Kaul's Diary... 'At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for.'

One must also note that in the last one decade, India is making serious efforts to reduce the fiscal deficit level. Ever since, the new government came in it has been in favor of fiscal consolidation and meet the long term fiscal deficit target of 3% by FY17-18.

In other news, India's exports rose at a faster clip in November.

As per the data released by the commerce department, exports grew 30.6% in November from a year ago.

Rising trend was also seen for imports, which rose 19.6% during the same period.

The above trend reversed the contraction in the previous month and allayed lingering concerns that the goods and services tax (GST) will dent shipments.

Note that India's goods export growth declined by -1.1% YoY in October this year to US$23 billion, the lowest pace of growth since - 6.86% in July 2016.

The above decline was seen because exporters struggled with a liquidity crunch on the back of delayed refunds under the goods and services tax (GST) regime.

The fall was seen on the back of the impact of the GST on the export segment. Particularly micro, small and medium enterprises (MSMEs), were facing liquidity problems after paying GST for four months in a row without getting any refund.

While the rise in exports in November come as a welcome breather, it would be interesting to see how this trend unfolds in upcoming months.

Nifty Index Hits a New Life-time High
Nifty 50 Index Trades on a Volatile Note

The Nifty 50 Index traded on positive note during the week. On Monday, it opened 70 points gap down and plunged to a low of 10,075. However, it swiftly recovered to end the session 55 points up.

The volatility was seen on back of Gujarat and Himachal Pradesh election results. The index continued the bullish momentum, and it surprised investors with a new life-time high of 10,494 mid-week. It witnessed minor profit booking towards the end of the week.

Finally, on Friday, the index up move continued till it touched a fresh life-time high of 10,501 and ended the weekly session 1.55% up.

For past few week, we have mentioned that 10,000 - 10,100 level is a strong support level for the stock. Despite the index sliding more than 250 points on Monday, it did not go below the 10,000 level. And showed strong resilience when it bounced back to a tough a new life high mark. Now the 10,500 level, November 2017 high, could prove to be an important resistance for the stock.

So, will the stock break above the resistance point and continue with its upside momentum or will it have to see the 10,000 level once again?


Gold Witnesses Buying Interest

Gold witnessed buying interest this week. Most of the gains were seen on the back of a firm global trend overseas. The yellow metal had witnessed losses last week on the back of an interest rate hike by the Fed. However, it managed to cover losses this week and ended its session with marginal gains, as can be seen from the chart below:

Gold Trades on a Positive Note

Crude Oil Continues Momentum

Crude oil traded on a positive note during the week. Most of the gains were seen on the back of expectations of a fall in US crude inventories and by the ongoing outage of the North Sea Forties pipeline system. The shutdown of the Forties North Sea pipeline has hit supply levels for crude oil from a market that was already tightening due to OPEC-led production cuts. During the end of the week, crude oil continued its uptrend and ended its session in the green.

Crude Oil Trades in the Green


Dollar Trades in the Red

From currency markets, dollar witnessed selling pressure during the week. Most of the losses were seen amid the tax reforms.

The fall in dollar made rupee trade on a positive note during the week. It was seen hovering near its 3-month high. The domestic currency witnessed buying interest and built its momentum after the BJP's win in Gujarat and Himachal Pradesh (HP) Assembly polls.

The appreciation in the rupee comes as a welcome breather for importers in India. A softer rupee helps importers to buy goods and services at a cheaper rate that earlier. This is vital for a developing economy that relies heavily on imports. This bodes well for the Indian economy as higher imports normally mean increased economic activity.

But on the other hand, the rise in rupee can spell trouble for exporters. The exporters are at a disadvantage owing to the currency appreciation as this renders their produce expensive in the international markets as compared to other competing nations whose currencies haven't appreciated on a similar scale. This tends to take away a part of the advantage from Indian companies, which they enjoy due to their cost competitiveness.

Nonetheless, a stronger rupee will pull down commodity prices. This will help in keeping a tab on the rising inflation.

While there are advantages as well as disadvantages of a rising rupee, one needs to understand whether the rise in the rupee is sustainable to derive any reasonable conclusion at this stage.

During the end of the week, dollar continued its downtrend and ended its session on a negative note.

Dollar Continues Downtrend

Commodities 15th Dec 21st Dec % Change
Gold/10 gms 28,254 28,501 0.87%
Silver/kg 37,205 37,530 0.87%
Crude Oil/barrel 3,681 3,732 1.39%
Natural Gas/mmBtu 166.50 166.90 0.24%
Currencies 15th Dec 21st Dec % Change
USD / INR 64.14 64.06 -0.12%
EUR / INR 75.82 76.09 0.35%
GBP / INR 86.11 85.71 -0.47%
JPY / INR 57.25 56.48 -1.34%

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