Market review

September 2017

Global

Global equity markets have moved beyond the geopolitical tensions between the US and North Korea over Pyongyang's nuclear weapons programme to end the month in positive territory. Markets drew strength from the continuing global economic upswing and were dominated by the chance of major corporate tax cuts in the US towards the end of the month. The Republicans unveiled a sweeping tax reform proposal aimed at lowering the corporate tax rate from 35% to 20%.

Indeed, the US Federal Reserve (Fed) gave a broadly optimistic take on the economic outlook for the US when Fed chair, Janet Yellen, warned that they should be wary of raising interest rates too gradually. The Fed said that it would stick with plans for further interest rate rises - another this year, probably in December, as well as three further increases in 2018. 

Bank of England made clear its intention to 'ease its foot off the accelerator' with an expected interest rate rise in November. In Japan sentiments were posotive after Prime Minister Shinzo Abe called a snap general election for 22 October. China's equity market ended the month higher, despite a sell-off towards the end of September on the back of a ratings downgrade from S&P due to high debt and property measures aimed at curbing rising house prices. However, Chinese economic activity data in August continued to suggest economic expansion, with industrial profits showing strong growth Brent Crude, the international benchmark, has continued to rise since hitting its low for the year-to-date on 21 June.

Equity Markets

Market in September was down by around 1.3%. Witnessed consolidation over the past month given: a) geopolitical tensions pertaining to North Korea's weapon tests, b) higher crude prices putting pressure on macro-economic variables, c) Widening Current Account Deficit (CAD) as 2Q17 Current Account Deficit (CAD)widened sharply US$14.3bn vs. US$3.5bn in 1Q17 

Sectorally, Utilities (on the Government's push to electrify around40mn households towards the 'Power for All' program by end of 2018,), Healthcare, Consumer Discretionary (strong auto wholesales from up-stocking post GST implementation coupled with early onset of festive season) were outperformers whereas Telecom, Consumer Staples were the main laggards. 

Foreign Portfolio Investors (FPIs) were sellers of around US$1.8 bn. Domestic investors net buying was at around US$3.2 bn during the month. 

October will be crucial from a regional perspective with Japan elections and the announcements around the 19th Communist Party Congress in China. Developments around N Korea would also bring in periodic bouts of volatility. 

Locally, earnings season gets underway in October and these would be watched from the perspective that this is the first quarter post the implementation of the GST regime in July 2017. Further RBI's outlook on India growth in its monetary policy review would be of interest.

Fixed Income Markets

Fixed Income markets saw yields hardening in the month of September. Yield on the 10 year benchmark moved to 6.66% from 6.53% in August higher by 13 basis points. Indian Rupee depreciated by 2.14% to 65.28 from 63.91 as on September 29, 2017. 

Index of Industrial Production (IIP) in July grew by 1.2% vs 0.1% contraction in June. Manufacturing output contracted by 0.1% in July vs 0.4% in June as Capital goods continued to remain subdued. Mining expanded in June and electricity generation also picked up.

Consumer Price Inflation (CPI) in August rose to 3.4% vs 2.36% in July led by a combination of spike in food and fuel prices, HRA and GST impact. The core CPI also rose to 4.5% vs 3.9%. August WPI also inched up to 3.2% vs 1.99% in July in tandem with CPI led by food and fuel inflation.

Trade deficit in August was flat at $11.4 billion vs $11.45 billion in July led by normalization of gold imports. Gold imports fell to US$1.9 billion in August from an average of US$3.8 billion in 1QFY18. Strong non-oil, non-gold imports was another encouraging sign. 

The Indian Met Department had forecasted normal monsoon at start of the year which has fallen short by 5% with uneven geographical distribution. Among states, 24 had normal rainfall, six were deficient, five had excess and one had "large excess" rainfall. RBI Monetary Policy Committee meeting, movement of Indian Rupee, FPI flows, movement of retail inflation, global central banks stance and commodity price movements especially crude oil will be watched for future cues on interest rates.