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US President announced much-awaited Tax Reform Plan

Indian Economic Update

Prime Minister, Mr. Narendra Modi launched an INR 16,000 crore scheme, dubbed Pradhan Mantri Sahaj Bijli Har Ghar Yojana (shortened to Saubhagya) that the PM said will deliver free electricity connections by December 2018. Prime Minister also set up a five-member panel of economists headed by NITI Aayog member, Mr. Bibek Debroy to advise him on economic matters.
The Indian Government will raise INR 2.08 tn through market borrowings in the second half of FY 2018, sticking to its budget, but does not rule out the possibility of selling more government bonds for additional spending. The Economic affairs secretary added that discussions are on with RBI on additional surplus.
Collections under the Goods and Services Tax dropped marginally to INR 90,669 crore for August from the revised figure of INR 94,063 crore for July.

 

Global Update

Chancellor, Ms. Angela Merkel emerged victorious in the German election held on last Sunday. However, Ms. Merkel is likely to face challenges leading a much less stable coalition in a fractured parliament as support for the far-right party surged.
North Korea’s foreign minister, Mr. Ri Yong Ho said on Monday that President, Mr. Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures, including shooting down U.S. bombers even if they are not in its air space. However, the White House has rejected claims that the US has declared war on North Korea, asserting that any suggestion in this regard is 'absurd'.
Japanese leader, Mr. Shinzo Abe called a snap general election in a bid to consolidate power in the midst of a diplomatic crisis with North Korea. The announcement followed an order to his cabinet to compile new economic stimulus measures in a package worth around JPY 2 tn (USD 17.80 bn) by the end of the year.
US President, Mr. Donald Trump announced his long-awaited tax reform plan.  Dubbing it “the largest tax cut in our country’s history”, The President offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals. However, the proposal faces an uphill battle in Congress, with Mr. Trump’s own party divided and the plan already prompting criticism that it favours the rich and could add trillions of dollars to the deficit.

 

Equity

Indian equities started the week sharply lower following the developments around economic stimulus that is most likely to enhance fiscal deficit. Equity benchmarks Sensex and Nifty both slipped for the fifth straight session as foreign investors have remained in exit mode by pulling out nearly Rs. 5,500 crores from stock markets due to increased global uncertainties and weak global cues. Concerns of escalating tension in the Korean Peninsula also turned global sentiment risk-averse. However, reports that the US was open to a diplomatic solution with North Korea limited the losses.
BSE Sensex shed over 300 points and NSE Nifty 50 over 100 points on Wednesday as the Indian Army inflicted “heavy casualties” on NSCN(K) cadre during an operation along the India-Myanmar border.
Equities halted the seven session long losing streak towards the end of the week.  US President, Mr. Trump announcing the details of his long awaited tax plan led to a rally in the global equity markets.

 

During the week Sensex lost 2.00% to close at 31283.72 while Nifty declined 1.80% to close at 9788.60.

 

Debt

Indian Government bonds started this week higher. India’s 10-year yield has jumped post the announcement of relaxation of fiscal deficit target this year in order to boost economic stimulus. However, prices fell in the subsequent session as investors resorted to selling spree after the yields breached the 6.65% mark. Overall market sentiment remains subdued given the concerns of an increase in the government's market borrowing.

Gilts gained sharply towards the end of the week. Prices got a boost as traders covered short positions on the view that the government is unlikely to increase its Oct-Mar market borrowing. Further, expectations of the RBI not accepting bids at the OMO sale and quarter end purchases supported bonds.

 

The 10Y benchmark yield ended at 6.66% same as previous week’s close.

 

Oil

Oil prices rally, with Brent trading at multi-month highs. The US benchmark was trading relatively flat as it came under fresh selling pressure from investors and a stronger US Dollar. However, Brent crossed the USD 57/ barrel mark for the first time since June 1 this year as markets digested the latest upbeat remarks from the UAE’s Energy Minister and OPEC’s Chief Secretary General, Mr. Barkindo hinting on better compliance and pressing forward until a stable oil market is achieved.
Oil takes a breather, after WTI reached five months high while Brent touched its 26-month high. The black gold rallied sharply as the sentiment remained lifted on the latest reports of Turkey threatening to cut Kurdish exports as tensions intensify over the Kurdish independence referendum.
The supply disruption in US took the spread between WTI and Brent to ~USD 6.5/ barrel. Iraqi PM said that Turkey had promised to deal only with the Iraqi government on crude oil exports, “restricting oil export” operations to Baghdad.

 

Gold

The yellow metal eased as the prospect of an unstable government in Germany following its election result knocked the euro lower, to strengthen the dollar again. The recent geo-political tensions have failed to support the yellow metal. Meanwhile, a mildly positive sentiment around US treasury yields, further drove away investors from the safe haven asset.
The strengthening dollar has weighed on the yellow metal, however, the tensions over the Korean Peninsula will aid the metal and will prevent sharp decline in the price. The commodity plunged further as US tax reform plans led to strengthening of the dollar index and Treasury yields rising. In the near term, gold has more downward bias due to increased probability of rate hike and renewed optimism on fiscal reforms.

 

Currency

India Rupee stared this week weaker. Weak cues from equity market and concerns about growth on the domestic front kept the rupee under pressure. Persistent purchases of the greenback by the foreign banks also weighed on the rupee. Further, the across the board strengthening seen in the dollar index also weighed on the domestic currency.
The month end dollar demand from oil importers weighed on the domestic currency. However, dollar sales by exporters supported the domestic currency. Further, positive performance of local equities along with fall in dollar index also supported the currency.

 

 

Source: ICICI Bank Research, Bloomberg and CRISIL