Oil prices slip on trade fears

Indian Economic Update

  • India may roll back higher tariffs that it announced last week on imports from the US if talks on the matter, scheduled to be held in Washington, D.C., next month, prove fruitful. The government is also hopeful of securing exemption from the Donald Trump administration on steel and aluminium tariffs, which had been imposed earlier by the US against all trade partners.
  • According to the Financial Stability Report (FSR) released, under the baseline scenario, Scheduled Commercial Banks’ (SCB’s) Gross Non-Performing Asset (GNPA) ratio may rise from 11.6% in March 2018 to 12.2% by March 2019. The system level Capital to Risk-Weighted Assets Ratio (CRAR) may come down from 13.5% to 12.8% during the period.
  • As per industry chamber Confederation of Indian Industry (CII), overseas investments by Indian companies are likely to go up given the stable market conditions and the significant impact created by Indian companies on local economies. Citing a World Investment Report of United Nations Conference on Trade and Development (UNCTAD), the chamber said India’s total cumulative stock of Overseas Foreign Direct Investment (OFDI) amounted to USD 155 billion in 2017.

Global Update

  • US Federal Reserve Chairman Mr Jerome Powell reiterated to the House Ways and Means Committee during a meeting on Wednesday that the US central bank is pursuing a patient rate-hike path. Powell said inflation has been low, and so policymakers are moving cautiously.
  • The US economy showed the weakest performance in consumer spending in nearly five years in Q1 FY2018. Gross Domestic Product (GDP) rose at a 2% annual rate in the January to March period, a reading revised slightly lower from the earlier 2.2% QoQ. Initial joblessness claims climbed by 9,000 to 227,000 in the week ending June 23, 2018.
  • US consumer confidence declined in June, with households pessimistic about their short-term income prospects, suggesting that an apparent acceleration in economic growth in the second quarter was unlikely to be sustained. The Conference Board’s consumer confidence index fell to a reading of 126.4 this month from an upwardly revised 128.8 in May.

Equity

  • Domestic benchmark equities ended lower sometime during the week, as shares of oil marketing companies slipped on higher crude prices and a weakening Rupee.

During the week Sensex lost 0.75% to close at 35423.48 while Nifty declined 1.00% to close at 10714.30.

Debt

  • Government bond prices ended lower sometime during the week as the weakness in the Rupee heightened fears of a rate hike by the Reserve Bank of India (RBI) at a faster-than-expected pace. Rise in crude oil prices also weighed on bond prices.
  • Weakness in Rupee versus Dollar fuelled fears of Foreign Portfolio Investment (FPI) outflows in the Indian government debt market. A sharp rise in crude oil prices last week disrupted risk appetite. However, hope of more open market bond purchases by RBI provided some support to prices.

The 10Y benchmark yield ended at 7.91% vs. previous week’s close of 7.82%.

Oil

  • India’s oil ministry has asked refiners to prepare for a ‘drastic reduction or zero’ imports of Iranian oil from November, two industry sources said, the first sign that New Delhi is responding to a push by the United States to cut trade ties with Iran. Oil prices surged, with US crude hitting a three-and-a-half year high, bolstered by supply concerns due to US sanctions that could cause a large drop in crude exports from Iran.
  • Oil rallied, building on gains from its previous session where Brent rose by more than 2% while the American benchmark surged by almost 4%. Crude prices have reversed their losses from the start of the week and edged higher due to supply disruptions in Canada and Libya and a stricter stance from US state officials released where they are attempting to convince countries to bring down their oil imports from Iran completely to zero. This is more severe than the earlier sanctions in 2012 where some countries had received waivers from the US and the outage was close to 1 million barrels per day (bpd). API reported a steep drop in crude inventories by 9.2 million barrels the week ending June 29, 2018 , which has narrowed the spread between the two benchmarks.

Gold

  • Gold edged lower towards a fresh six-and-a-half-month low sometime during the week as the Dollar steadied and investors preferred other safe havens such as treasury bonds amid expectations of more rate hikes by the Federal Reserve this year.
  • An escalating trade dispute between the US and China — the world’s two largest economies — continues to rattle world markets, but is not yet providing much support to safe-haven gold and silver markets. However, bulls are working to stabilise the yellow metal after prices late last week fell to a six-month low.

Currency

  • The Rupee crossed its all-time weakest level of 69 intraday, plagued by growing trade tensions, weak equities and a multi-month surge in crude oil prices.
  • The weakness in Indian Rupee is largely attributable to the depreciation in the Chinese Yuan that has also set the direction for other Asian currencies. The Yuan has weakened as trade tensions between China and the US have persisted. Higher oil prices over the last three trading sessions have also put pressure on the Indian currency.
  • RBI injected liquidity to the tune of INR 191.77 million (net) under Liquidity Adjustment Facility (LAF) (including fixed and variable rate repos and reverse repos) as on June 29, 2018. It injected INR 23.93 billion under the Special Refinance Facility.

Source: ICICI Bank Research and Bloomberg.