Escalating Trade Fear Surrounds Oil Markets

Indian Economic Update

  • Union Minister, Mr Arun Jaitley, said that the government’s fiscal deficit target would not be breached on account of higher Minimum Support Price (MSP) for 14 crops as large provisioning for food subsidy has already been made in the Budget for the current fiscal.
  • Seeking to address farm distress, the government hiked MSP for farmers for paddy and other kharif crops. Government officials have said it will cost the exchequer an additional INR 150 billion.
  • Activity in India’s services industry rebounded in June from a mild contraction last month, expanding at its quickest pace in a year on the back of a surge in new business orders. Services Purchasing Managers’ Index (PMI) climbed to 52.6 last month, its highest since June 2017, from 49.6 in May.

Global Update

  • The minutes of the US Fed’s June 12 to June 13, 2018 meeting that were released, showed officials committed to moving towards gradually tightening policy, given that robust labour markets are expected to lift wages and inflation. However, most Fed policymakers expressed concerns about trade policy. Fed policymakers also discussed the flattening of yield curve. A number of Fed policymakers said it might soon be appropriate to change the part of policy statement that refers to policy being accommodative. Many policymakers said that the Fed funds rate could move above the neutral level sometime in 2019-2020.
  • US President Mr Donald Trump confirmed that the United States would impose tariffs of USD 34 billion on Chinese goods.
  • The pound gained and gilts slid as Bank of England Governor Mr Mark Carney said the UK economy is supporting the case for higher rates. Sterling rose for a third day as Mr Carney said incoming data had given him “greater confidence” that a sluggish first quarter was due to poor weather. Market pricing for an August interest-rate hike from the central bank moved to 80%, from around 75% before his speech. He also talked about the rise in protectionism, stating that it will not only affect trade flows and push up import costs, but will also tend to affect confidence, investment and demand.

Equity

  • Domestic benchmark equities lowered, tracking losses across Asian peers, ahead of the deadline of the imposition of US tariffs on Chinese exports. There was broad-based selling across the sectors. The unabated slide of the Rupee against the Dollar further dampened sentiments.
  • Sometime during the week, domestic benchmark equities ended higher — at their highest level in nearly two weeks — after the government of India’s decision to raise the price at which it will buy new season common rice varieties from domestic farmers boosted sentiments.

 

During the week Sensex gained 0.66% to close at 35657.86 while Nifty inclined 0.54% to close at 10772.65.

Debt

  • Rupee’s weakness versus Dollar enhanced fear of Foreign Portfolio Investment (FPI) outflows. Yield on 10-year benchmark bond topped the psychologically significant 7.88% mark.
  • Government bond prices ended higher sometime during the week, as the government downplayed the fiscal inflationary impact of the hike in MSP for kharif crops. The government claimed that the MSP hike will cost around INR 150 billion and won’t stoke inflation.

 

The 10Y benchmark yield ended at 7.87% vs. previous week’s close of 7.90%.

Oil

  • Oil prices edged higher. President Mr Trump again accused the Organisation of Petroleum Exporting Countries (OPEC) of driving prices higher. Saudi Arabia, OPEC’s biggest member, has assured Mr Trump that the kingdom can raise oil production if needed, and that the country has spare capacity of two million barrels per day which could be deployed to help cool oil prices to compensate for falling output in Venezuela and Iran.
  • After hitting what seemed like an air pocket in American trading session on speculation that the Canada Syncrude facility could be back online earlier than expected, both Brent and West Texas Intermediate (WTI) fell sharply. However, crude prices quickly regained momentum after the American Petroleum Institute (API) data showed a fall in inventories by 4.5 million barrels, which was the second consecutive sharp decline. The Saudi Arabian cabinet also assured that they would be open to using their spare capacity for plugging in the deficit from countries such as Iran and Venezuela, but with market concerns over the rundown of spare capacity, the downside was limited.

Gold

  • Gold edged higher, extending its gains, showing signs of life after falling to its lowest levels this year. The yellow metal was buoyed due to a softer Dollar.

Currency

  • The Rupee depreciated substantially to hit a fresh closing of 68.95, sliding by 21 paise, driven by risk aversion.
  • The Rupee weakened against the Dollar due to increased demand for the greenback from importers and banks amid persistent foreign fund outflows. However, gains in the Euro and Yen against the greenback capped some of the Rupee fall.
  • The Reserve Bank of India (RBI) withdrew liquidity to the tune of INR 530.81 million (net) under the Liquidity Adjustment Facility (LAF) (including fixed and variable rate repos and reverse repos) as on July 04, 2018. It injected INR 14.5 billion and INR 23.93 billion under the Marginal Standing facility and Special Refinance Facility, respectively.

 

Source: ICICI Bank Research and Bloomberg.