Economic Update

Wednesday | October 03, 2012

Content
Global scenario Developed economies performance Emerging and developing economies performance

Nalini Rao Sr. Research Analyst Nalini.rao@angelbroking.com (022) 2921 2000 Extn. 6135 D. Vijiya Rao - Research Analyst Vijiya.d@angelbroking.com (022) 2921 2000 Extn. 6134 Anish Vyas - Research Associate anish.vyas@angelbroking.com (022) 2921 2000 Extn. 6104

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Economic Update
Wednesday | October 03, 2012

Markets seesawing between positives to negatives in the second half Amid uncertainties in the global environment with the US facing persistent unemployment, euro zone in debt crisis and emerging economies like China and India facing inflation and stalling economic growth, the US Federal Reserve announced yet another stimulus programme, famously known as QE3 on September 14, 2012, in which it would purchase mortgage backed securities worth $ 40 billion per month until the outlook of jobs market improves and inflation also remains contained. This step would increase the Feds holding in the long term securities by $85 billion. The Fed also kept the interest rates unchanged and would keep these rates exceptionally low till mid 2015 (earlier it was 2014 end). Markets surged on the stimulus measures After the announcement by the Fed, the S&P 500 hit 1,448.64 up by 16 percent since the beginning of 2012, Dow Jones industrial average was up by 0.59 percent at 13,411.87, Nasdaq Composite Index increased to 3,134.34 up by 0.64 percent. The metal prices which are broadly influenced by the fundamental demand supply factors as well as the global liquidity scenario gained at the announcement. During the recent quantitative easing by the US, improved expectations on the liquidity lead to rally in the metals prices including bullion. Gold soared to 13.2 percent so far this year, rising for an eleventh straight year of gain. Gains were also witnessed in the base metals pack such as copper 5.8 percent and aluminum 1.99 percent. The prices of copper soared to 14 percent touching a four and a half month high (June 2012 till 14th September 2012), on the expectations that the stimulus measures would boost growth in the stalled economies through the measures adopted by the European Central Bank, Federal Reserve and Bank of Japan.

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Source: Reuters

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Economic Update
Wednesday | October 03, 2012

But weak economic data continues to loom large

The final GDP of the US grew at a slower pace of 1.3 percent in the second quarter of 2012 as compared to rise of 1.7 percent in the first quarter of 2012. The unemployment claims too declined by 26,000 to 359, 000 for the week ending September 21st, 2012 as against a rise of 385,000 during the previous week. The Chicago Purchasing Managers' Index (PMI) also declined by 3.3 points to 49.7-mark in September as against to earlier level of 53 in August. On the housing sector front there was some relief with housing starts increasing by 0.75 million in the month of August from previous rise of 0.73 million in July on the back of record low borrowing costs and availability of cheaper properties in turn increasing the sales. The existing home sales also increased by 4.82 million in August with respect to rise of 4.47 million in July. Investors were encouraged towards the housing market as there are favorable borrowing costs with the average rate on a 30- year fixed mortgage held at 3.55 percent in the week ended September 13, 2012.

Despite earlier efforts of the European Central Bank's (ECB) to bolster the euro zone economy by injecting 1 trillion ($1.3 trillion) of cheap money and reducing the interest rates to a record low, the euro zone manufacturing index declined for 14 consecutive month below the 50 mark. The Euro zone Manufacturing Purchasing Managers' Index (PMI) rose 46.1 in September from 45.1 in August and the unemployment rate remained at a record high of 11.4 percent in the month of August with more than 34,000 more people losing their jobs. The week economic indicators from the region suggest that the growth will not return to the euro zone any time soon and would further add pressure on the ECB policy makers. A series of meetings of European leaders is scheduled during the month of October to announce its latest monetary measures to revive growth in the stagnating economy. It is expected that the ECB could cut the key rates which currently stands at 0.75 percent. Although, the German manufacturing activity shrank at a lesser rate in September rising to 47.4 from August reading of 44.7, the outlook for the manufacturing seems to be gloomy as there is fall in the new orders according to German industry group VDMA . French Consumer Spending decreased by 0.8 percent in August after an increase of 0.4 percent in July. Continuous weak economic data in emerging economies sees rolling out more reforms The global downturn is also dragging the growth of China and Japan with manufacturers facing tepid demand from the US and Europe. The manufacturing sector in Japan continued to worsen with Manufacturing Purchasing Managers' Index (PMI) rose by 0.3 points to 48 mark in September as compared to rise of 47.7 level in August. The
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Chinese Manufacturing Purchasing Managers' Index (PMI) rose by 0.6 points to 49.8-mark in September against the rise of 49.2-level in August. The central bank of China has cut key interest rates two times which freed about

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Economic Update
Wednesday | October 03, 2012 1.2 trillion Yuan ($190 billion) for lending and approval of more than $150 billion worth of infrastructure projects have so far failed to arrest the decline in countries overall growth. The Indian economy mirrored the macroeconomic headwinds emanating from the global developments as well as the domestic environment. With the Mr. P Chidambaram taking over as the honorable Finance Ministers of India in late July, sent positive sentiments amongst investors anticipating affirmative steps to revive the economy as initiated in the past. A slew of positive measures were announced which revived the investor confidence and till today the markets have remained in the positive terrain.

Source: Financial Express

Measures such as rise in the diesel prices and cap on subsidized LPG will help in reducing the ever rising burden of debt of energy companies. With much opposition the government was able to bring in the measure. Further, governments approval of the much awaited FDI in the various sectors of the economy is likely to boost infrastructure sectors and in turn generate job opportunities thus augmenting economic growth. As the government unveils its reforms the market participants and investors around the globe have become optimistic about the nations growth. This has been showcased in the strength in the domestic stocks and rise in the participations of the foreign inflows. FII inflows year till date have risen to Rs.82, 331.50 crore. Month on month FII inflows have risen 78 percent and stood at 19,261.50 crores in the month of September 2012.

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Indian rupee too outperformed in the month of September observing upbeat sentiments in the domestic markets after the government took affirmative steps to boost the market confidence. It also raised the confidence of the

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Economic Update
Wednesday | October 03, 2012 global investors. With rise in the foreign inflows and several reforms to augment growth has led to reduce the deficit and thereby supported strength in the domestic currency. Sharp appreciation in the Indian rupee has been registered in the last month, with the currency appreciating to the tune of 4.8 percent and closed at 52.84 after remaining at a low of 55.53 in the beginning of the month.

Source: Reuters

The countrys current account deficit (CAD) improved to 3.9 percent of GDP in the June quarter as compared to 4.5 percent in the March quarter. Merchandise imports fell 3.6 percent as against a growth of 41.8 percent a year earlier. Indias manufacturing activity witnessed a steady growth in September with manufacturing Purchasing Managers' Index (PMI) at 52.8 as compared to August on the back of pick up in export orders and output. The country has been facing high stubborn inflation with the rate increasing to 7.55 percent in August 2012 as compared to 6.87 percent in July 2012. On the other hand, the IIP of July also demonstrated a marginal growth of 0.06 percent mainly due to negative capital goods sector growth. Despite of persistent high inflation the Reserve Bank of India (RBI) moved in hand with the Government of India by reducing the cash reserve ratio (CRR) by 25 basis points. This rate cut would infuse about Rs.17,000 crores of liquidity in the banking system.

Conclusion
No doubt the recent stimulus measures announced by the US Federal Reserve and the ECB have a bearing but the whether the liquidity in the markets would remain will depend on the upcoming ECB policy makers meeting. The Fed would continue its bond buying programme until the outlook of the labour market improves. The announcements have bought in additional liquidity in the markets wherein increased inflows are expected in the

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various asset classes both in developed and emerging markets. There are also hopes that the Chinese government may also go in for a fresh stimulus programme in order to revive the slowing economy.

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Economic Update
Wednesday | October 03, 2012

In the domestic market, the Government of India too, though lately has announced a set of reform initiatives. In a pursuit to reduce the subsidy burden, it has increased the diesel prices and limited the availability of subsidized LPG. Apart from this, the Government has allowed foreign direct investment (FDI) in the multi-brand retail, aviation, power exchanges and segments of broadcasting. The withholding tax on foreign borrowings has been reduced to five per cent from 20 per cent. The Rajiv Gandhi Equity Savings Scheme which was announced in the budget has also been formally approved. These measures by various countries would bring in hopes of recovery through flow of cheap money in the system which would revive the investments and there on generating demand and jobs but the old fears of declining economic data would pass through the second half of the year also.

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