Knowledge Quotient

30th August, 2010

Weekly Economic and Market Analysis:

Global growth to continue at a moderate pace even though global outlook has deteriorated considerably. Concerns rise as US businesses turn defensive as seen in the downshift of private sector hiring.
Sensex and Nifty declined by 2.19% and 2.2% to close at 17,998 and 5,409 respectively. Sensex dropped below the psychological level of 18,000 on increased risk aversion.
During the week, the G-Sec yields continued to harden ahead of G-Sec auction and RBI's concerns about inflation. However, towards the end, it softened on value picking by the market participants. The 10-yr benchmark closed at 7.97%.
WTI Crude Oil prices, after prolonged streak of losses, rose for the third straight day, moving to $75.17/bbl. But, oil prices will be under pressure on demand slow down and increased supply.
Lower growth, fears of deflation in developed markets and investment demand to provide support for gold prices.

Global Data Watch
August 30, 2010

Data Review	Unit	Last	Consensus	Actual	Comments
Global
Euro area PMI flash manufacturing (Aug), Aug 23	Index	56.7	55.7	55.0	There was a big decline in the German manufacturing PMI in August.
Germany GDP final (2Q), Aug 24	% q/q, sa	0.5	2.2	2.2	The details of the German second-quarter GDP report showed that the economy was powered ahead by domestic final sales and net trade.
US Existing home sales (Jul)	Mn	5.37	4.30	3.83	Sales of existing homes in US plunged to their lowest level in more than a decade, down 27.2% in July compared with June.
US New home sales (Jul)	000s	330	330	276	Sales of new homes plummeted, to a record low since figures were first kept in 1963.
UK GDP (2Q), Aug 27	% q/q	0.3 (1Q)	1.1	1.2	As expected, strength in construction output saw the estimate for 2Q GDP growth revised up to 1.2% q/q from 1.1%, marking the quarter as the strongest for real GDP growth since 2001. But the details were disappointing. Real inventories contributed 1%-pt to the 1.2%q/q growth. Domestic demand was weak while net trade made no contribution to growth.
US GDP 2nd revision (2Q)	% q/q	3.7 (1Q)	2.4 (1st revision)	1.6	Real GDP growth rate in 2Q revised lower to 1.6% from 2.4% estimated in 1st revision.
India
WPI Primary Articles for the week ending Aug 14	% yoy	14.85	-	14.75	Primary articles sequentially increased by 0.1% w/w due to increased in prices of non-food articles (1.01% w/w).

Releases in bold are key releases; Out of 7 important data releases, 2 were better, and 4 were worse than expected and 1 was as expected.

Data Review	Unit	Last	Consensus	Comments
Global
India GDP (1Q), Aug 31	% yoy	8.6 (4Q)	8.7%	India's real GDP growth is expected to be one of the best in recent times growing a little below 9% driven by Industry and Services.
Japan Mfg PMI (Aug), Aug 31	Index	52.8	54.0	The Reuters Tankan large firm survey indicated a rebound in manufacturing activity in Aug, likely reflecting the front-loading of purchases of environmentally friendly cars ahead of the reduction of the govt support and a response to the extreme heat.
US ISM mfg (Aug), Sept 1	Index	55.5	52.2	The continued weakness in the regional surveys suggest that the ISM will fall more in August than it did in July.
Euro area GDP revision (2Q), Sept 2	% q/q	0.2 (1Q)	1.0	In 2Q, there were gains across private and public consumption and corporate capital spending. Net trade likely made a solid contribution to the GDP gain, and inventories a very small contribution.
US Pending home sales (Jul), Sept 2	Mn	75.7	74.9	Pending home sales expected to decline a more moderate 1.0%, bringing the index down to a new all-time low of 74.9.
US Employment (Aug), Sept 3	%	9.5	9.7	The drop in employment (as some of the Census workers who lost their temporary jobs will return to not-in-the-labor-force status) would imply a high-side unemployment rate,

Consensus forecasts are preliminary data, releases in bold are key releases.

Equity Market
August 30, 2010

Global Equity markets finished the week with a loss of 0.6%. After a disappointing week, global equities rose on Friday as Ben Bernanke announced that Fed will do all it can to ensure US recovery. The US performed best among the G-4 with a gain of 1.8% on Friday. Sales of existing homes and new homes in US plunged to their lowest levels last week. Both declines were worse than expected and added to fears that US might suffer a double-dip recession. Last week, Emerging Markets declined 1.8%. Within Emerging Market, EMF Asia declined the most at 2.6% followed by EMF Latam (-1.0%) and EMEA (-0.7%). Last week, Columbia was the best performing EM while Argentina was the worst performing.

Global Emerging Market Monitor, Aug 27, 2010

	Best Performing Market			Worst Performing Market
Market (MSCI)	Colombia	Peru	Morocco	Argentina	Pakistan	Mexico
Chg. over week (%)	4.7	4.6	3.6	-6.1	-4.1	-3.6

Indian Equity market
Sensex and Nifty declined by 403 points (-2.19%) and 122 points (-2.2%) to close at 17,998 and 5,409 respectively. Sensex dropped below the psychological level of 18,000 on increased risk aversion. FIIs sold $ 28 mn in cash. For current month total investment is $ 1,486 mn. For CY10 total investment is $ 4,184 mn.
In India, good weekly rainfall reduced cumulative (1 June to 25 August) rain shortfall to 2% from 5%. However, rainfall in North Eastern regions remained disappointing. Total cropped area affected by deficient rainfall is 29.5% compared to 74.3% at the same time last year. The new Direct Tax code was presented in parliament albeit after some dilution.
On sectoral basis last week, the BSE Consumer Durables was the only index to close in positive with a gain of 1.4%. Rest of the indices ended in red. The BSE realty with a loss of 8.5% was the worst performing index.

Index Performance

27th Aug, 2010	Index	% change
BSE Sensex	17,998	(2.2)
S&P CNX Nifty	5,409	(2.2)
CNX Midcap	8,758	(1.9)
BSE Small Cap	9,641	(2.4)
BSE 100	9,648	(2.1)
BSE 200	2,309	(2.1)

Sector Indices Performance

Sectoral Indices	Price as on 27th Aug’10	Performance (%)
Sectoral Indices	Price as on 27th Aug’10	Last week	1m	12m
BSE Consumer Durable	5,772	1.4	8.4	73.2
BSE PSU	9,695	(0.1)	2.3	16.3
BSE FMCG	3,355	(0.6)	3.8	29.1
BSE Capital Goods	14,723	(1.1)	(1.4)	11.7
BSE Oil & Gas	10,092	1.1	(3.6)	2.6
BSE Power	3,060	(1.2)	(2.8)	2.5
BSE Healthcare	5,536	(1.3)	(1.3)	40.5
BSE Teck	3,380	(1.5)	(2.3)	9.3
BSE Auto	8,710	(1.9)	4.5	51.6
BSE IT	5,408	(2.0)	(2.4)	26.2
BSE Bank	12,216	(2.5)	6.4	47.0
BSE Metal	14,911	(3.3)	(3.7)	18.7
BSE Realty	3,380	(8.5)	(2.3)	(18.2)

Credit Market
August 23, 2010

Sovereign Yield

10 yr yield%	Aug 27	1 wk prior	2 wk prior	10 yr yield%	Aug 27	1 wk prior	2 wk prior
India	7.97	7.98	7.82	US	2.66	2.62	2.68

Global Credit markets
US Treasury yields moved up on Friday after declining in the beginning of the week when 10 yr yields moved below 2.5%. On Friday, yield on 2s moved up 4bps to 0.56%. 10s moved up 16bps to 2.66% to close at levels above previous week.

GOI 10-yr Yield movement

Indian Credit Market
During the week, the G-Sec yields continued to harden ahead of G-Sec auction and RBI’s concerns about inflation. However, towards the end, it softened on value picking by the market participants. The 10-yr benchmark breached 8% mark during the week and traded between 8.00% to 8.07% and closed lower at 7.97%. The liquidity in the system eased. The net LAF balance turned positive and was on average Rs. 15,000 cr daily vs negative Rs 14,000 cr the previous week. Overnight call was in range of 2.00%-5.80%. Next week, the G-Sec markets are expected to take cue from G-Sec auctions, liquidity scenario, policy-makers actions and global developments.

RBI auctions
Last week, RBI conducted G-Sec auction on Aug 27 (Rs. 12,000 cr) namely – 7.17% GS 2015 (Rs. 5,000 cr), 7.80% GS 2020 (Rs.4,000 cr) and 8.26% GS 2027 (Rs. 3,000 cr) with cut-offs of 7.74%, 8.03% and 8.38% respectively. There was devolvement of around Rs. 1,387 cr in case of 7.80% GS 2020. RBI auctioned 10 year SDL (Rs. 3,783.34 cr) as against the notified amount of Rs. 3,550 cr). The cut-off yield ranged between 8.42% and 8.44% (previous: 8.32% and 8.42%). In T-bill auction, 91 day T-bill (Rs. 7,000 cr) and 364 day T-bill (Rs. 1,000 cr) saw higher cut-offs of 6.19% (previous: 6.27%) and 6.54% (previous: 6.42%) respectively.

This week, RBI will conduct auction of 91 day (Rs. 2,000 cr) and 182 day T-bill (Rs. 1,500 cr) on Sept 1.

Forex Reserves
Reserves went down by $242 mn to $282,549 bn for week ending Aug 20 primarily driven by Foreign currency assets ($222 mn).

US$ Mn.	Change over
US$ Mn.	As on Aug 20 2010	Last week	End-Mar, 10	End-Dec, 2009
Total Reserves	282,549	–242	3,492	–921
Foreign Currency Assets	256,369	–222	1,684	–2,214

Forex and Commodities
August 30, 2010

Currency Monitor

Base currency : INR	USD	GBP	EURO	YEN
August 27th	46.86	72.67	59.59	55.31
1 w prior	46.58	72.40	59.66	54.58
2 w prior	46.58	72.79	60.05	54.10

Source: RBI

Currencies: The US Dollar rose against the Yen and the Swiss Franc on Friday after US Federal Reserve Chairman Ben Bernanke said the Fed was ready to provide stimulus to boost a US economic recovery that had slowed more than expected. The Euro fell 0.2% against the US Dollar to 1.273 $/Euro. The US Dollar leaped 1.2% against the Yen to 85.37Yen/$ on Friday.

The INR depreciated a little against USD on Friday weighed by losses in local domestic market on concerns about sustained risk aversion in global markets ahead of a key speech by Federal Reserve chairman Ben Bernanke. INR ended the week at 46.86 vs US Dollar, declining 0.6% over the week.

Global Commodity Monitor

In USD	Gold	Silver	Crude (WTI)	Copper	Aluminium
August 27th (EOD)	1,238.10	19.09	75.17	7,459	2,058
1 w prior	1,227.80	18.00	73.46	7,255	2,040
2 w prior	1,215.50	18.15	75.39	7,156	2,110

Source: Bloomberg

Commodities: Commodity markets moved up a little last week. However, experts continued to stay underweight in Oil and Industrial Metals. The recent GDP numbers along with other lead indicators confirm the slowdown of momentum of global growth. WTI Crude Oil prices, after a prolonged streak of losses, rose for the third straight day, moving up $0.93 to $75.17/bbl. But, oil demand is expected to slow down sharply while the supply is expected to be augmented in the coming months. The risk of hurricane disruption in oil production is also reduced as hurricane activity thus far has been in the mid-Atlantic rather than the Gulf of Mexico. Lower growth, fears of deflation in developed markets and investment demand will provide support for gold prices. In India, the largest consumer of gold, the gold imports may exceed 2009’s level as near-record prices fail to deter consumers, partially helped by festival driven demands. Silver prices also moved high last week on higher industrial demand and some speculation.

* REER is defined as a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries, relates to the purchasing power parity (PPP) hypothesis. Here it is basically REER on trade basis for 6 countries.

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By : Geetima Das Krishna - Economic Research, Reliance Capital Asset Management Ltd

* Disclaimer

The information contained herein is the independent and personal view of the author and should not be construed as an investment advise or a standard investment procedure and are not the views of the Company. Neither the AMC, the Trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the authenticity of such information.

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