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Oil trading at two years high

Indian Economic Update

Important development during the week:

  • Chief Economic Adviser says the government may combine the 12% and 18% slabs for Goods and Services Tax (GST) into one in the near future and reserve the 28% rate only for demerit goods.
  • India improves its ranking by three notches to 51 on the IMD World Talent rankings.
  • Government proposes a two-percentage point discount in the GST for consumers who make digital payments.
  • The Cabinet approves an ordinance to amend the insolvency law which will bar willful defaulters from bidding for companies going insolvent.
  • The Cabinet approves a new scheme - Mahila Shakti Kendra - to empower rural women with an outlay of Rs.3637 cr.

Global Update

Important development during the week:

  • Talks of a coalition government deal collapsed in Germany, creating an impasse for German Chancellor, Ms. Angela Merkel. A month of exploratory coalition talks ended when the Free Democratic Party, one of the prospective partners, walked out of the deal.
  • Germany’s Chancellor, Ms. Angela Merkel has indicated that she is not planning to form a minority government. She has added that she prefers new elections to ruling with a minority coalition.
  • President, Mr. Donald Trump has announced that the US will officially designate North Korea as a state sponsor of terrorism. President, Mr. Trump also suggested that government would impose new sanctions and penalties on the North Korean regime.
  • Federal Reserve Chair, Ms. Janet Yellen cautioned that raising interest rates too quickly risked stranding inflation below the US central bank’s 2% target. She added that there has been “some hint” that expectations for future price increases may be drifting down.
  • 10Y bond yield in China touched 4.03% on Thursday (highest in over three years). Fears of regulatory crackdown has hit investor sentiment. The surge in yields comes despite PBoC’s significant liquidity injection.  Subsequently, Chinese equities (CSI 300) also suffered their worst fall (~3.0%) in a year and a half on Thursday.

Equity

Indian equities started the week on a flat note. Negative cues coming from Asian equity peers weighed on market sentiment. Lack of any major triggers for the market led to a lackluster trade. Meanwhile, equities made a modest gain following positive cues from Asian equity peers on Tuesday. The overall sentiment continues to remain buoyant after rating agency Moody’s upgrade of Indian outlook. Further, CEA’s comments that the government is contemplating simplifying GST rate structure even further also boosted investor sentiments.


Among major announcements, the Cabinet approved amendments to the Insolvency and Bankruptcy Code and the setting up of the Fifteenth Finance Commission. Tentative dates for the Winter Session of Parliament were announced as December 15, 2017 to January 5, 2018.
Investors remained cautious, looking for fresh triggers after the end of earnings season.

 

During the week Sensex gained 1.01% to close at 33679.24 while Nifty advanced 1.02% to close at 10389.70.

Debt

Indian bonds started this week significantly higher. RBI’s withdrawal of the OMO sale buoyed the market sentiments. Traders also refrained from selling their current bond holdings as yields are expected to remain in their current range going forward. Markets consolidated marginally after steep increase in prices.

 

Government bonds declined on selling pressure from banks and corporates and the overnight call money rates also turned lower due to lack of demand from borrowing banks amid comfortable liquidity situation in the banking system. Rising oil prices also gave rise to concerns about higher inflation and muted hopes for a rate cut.

 

The 10Y benchmark yield ended at 7.00% as compared to the previous week’s close of 7.05%.

Oil

Oil fell during beginning of the week as traders were reluctant to take on big new positions ahead of an OPEC meeting. The Baker Hughes rig count showed that number of oil rigs stayed flat at 738 in the previous week, ending a short-lived downward trend in weeks prior. Prices were however, supported by Iran’s oil minister comment that a majority of OPEC members support extending output cuts.


Oil edged higher in anticipation of an extension to the supply cut by the 24 nations in the OPEC meeting held on November 30, 2017. The UAE Energy Minister said late on Monday in Abu Dhabi that he saw a need to extend the output cuts but didn’t suggest the length of an extension. Energy consultancy Westwood Global Energy Group said US output would climb even faster than implied by the rising rig count, which has jumped from 316 rigs in mid-2016 to 738 last week, as producers become more productive per well. Oil continued to edge higher to mark its highest level since mid-2015.


Meanwhile, prices were weighed down as Russia’s economic minister said that OPEC deal to cut oil output will negatively affect the country’s economy. Baker Hughes rig count also showed that drillers added nine oil rigs in the previous week.

Gold

Gold started the week lower, a stronger US dollar was responsible for the dip. Money managers raised their net long positions in COMEX gold contracts in the previous week. Uncertainty around the US tax overhaul combined with a flattened yield curve are likely to support gold prices at this level. A weaker dollar along with news of President, Mr. Donald Trump putting North Korea back on a list of state sponsors of terrorism on Monday helped revive safe-haven demand for the precious metal after the sharp sell-off.

 

Gold prices were aided by the dovishness witnessed in Fed minutes. The movement, however remained range-bound as concerns over soft inflation was balanced by high probability of a December rate hike by the Fed.

Currency

Indian Rupee started weaker, dollar purchases by public sector banks weighed on the domestic currency. Dollar demand from oil importers also put the domestic currency under pressure.


Persistent dollar sales by foreign banks triggered multiple stop losses. The weakness of the dollar index and absence of significant dollar purchases aided the domestic currency. Rupee gained significantly as foreign banks sold dollars noting fall in the dollar index post the dovish FOMC minutes. On the domestic front, positive trade in equity markets underpinned the rupee.

 

Source: ICICI Bank Research, Bloomberg and CRISIL.