Archive for May, 2010

Weekly crude oil and currency update May 29, 2010

Crude Oil

Crude oil traded with a negative bias towards the beginning of the week and touched a weekly low of $67.15 per barrel in the near term contract on NYMEX. But thereafter it regained all of the lost ground rising $2.76 on Wednesday and $3.04 on Thursday. Crude prices finally closed the week at $73.97, $3.93 or 5.6% above last week’s close.

The rise was boosted by expectations of higher demand given the three day weekend on account of Memorial Day holiday in US. The Memorial Day also marks the beginning of busy season for motorists as driving demand peaks between June-August. Hurricane season is also round the corner which might disrupt production and interrupt supplies.

Oil inventories for the week ended May 21 rose 2.4 mln barrels but the same had insignificant impact on prices.

Currency: USDINR

The rupee depreciated for the first two trading sessions of the week, before appreciating for the rest of the week, closing at Rs.46.35 per dollar (1.3% lower for week), as risk aversion over the euro zone debt crisis receded, bolstering dollar supplies from local exporters while a rally in domestic shares aided sentiment.

The euro gained on month-end fixing demand for euros and ahead of a long weekend in both the US and UK markets. The dollar index against six majors was down about 0.1%.

The People’s Bank of China said a Financial Times report that the State Administration of Foreign Exchange (SAFE) was concerned about its exposure to euro zone debt was groundless, lifting world stocks.

Authors: Praveen Bajaj, Abhijeet Ahir

Weekly G Sec update May 29, 2010

Benchmark 7.8% 2020 bond lost considerable ground in the week due to tightening liquidity conditions arising from the 3G spectrum payment and direction of US treasuries. Yield for the said bond closed at 7.52% on Friday, up 14 bps from close of 7.38% last week.

Bonds were bearish throughout the week tracking weak US Treasuries as rise in stock markets led to a fall in demand for safe heaven assets. In India, tightening liquidity exerted pressure on bonds along with the bond auction of Rs 12,000 cr lined up for the week.

Amount of funds parked at RBI’s reverse repo window reduced this week to an average of Rs 6,332 cr this week against Rs 42,779 cr last week.

Yields rose to the extent of 7.64% on Friday, but announcements of RBI regarding additional liquidity to be provided through Second LAF facility to the extent of 0.5% of their NDTL and waiver of penalty interest on any shortfall in maintenance of SLR arising out of availment of such facility along with RBI Governor’s comments depicting not so confident recovery induced some buying back in the bonds and led to correction in yields.

Spain rating downgrade again ignited concerns of debt crisis and increased demand for safe heavens. Liquidity conditions are expected to tighten further next week and banks are expected to avail funds from RBI through Repo facility.

Author name:Praveen Bajaj

Equity market round up: May 29, 2010

Helped by the 1.2% gain on Friday, equity markets posted 2.5% gain this week to close at 16863.06. This is the highest monthly gain since March 6.

Markets started the week on a bearish note and on Tuesday fell about 2.7% under the concerns of widening European Debt crisis and possible military actions between North Korea on one side and South Korea and US on the other side. But later in the week, short covering ahead of the expiry of the May contract and strength in the world equity markets led the markets to a considerable upside and gains for three consecutive days. World markets found strength after the Chinese Central Bank, People’s Bank of China (PBOC) said that Europe will remain its main investment market and Beijing would support actions to help Europe resolve its debt crisis.

Next week would be a busy week in terms of data release. On the start of the week, GDP data for Q4, FY 2009-10 will be released. Apart from this, companies in cement and steel sector will release their sales figure. Perhaps a more closely watched event will be progress of South west monsoon which is expected to hit India early next week. Any delay in arrival of monsoon will spark inflationary concerns and might lead to an increase in interest rates which is negative for the markets. Most of the bad news about Eurozone has been factored in the markets and any downside due to any unwanted developments on this front will be limited.

Author name: Praveen Bajaj

Weekly G-Sec update May 22, 2010

Developments on foreign front push yields down

Yields on benchmark 10 year bond 7.80% 2020 bond closed the week at 7.37, 12 bps down from last week’s close of 7.49. In the initial part of the week, yields rose 4 bps as RBI sold Rs 6,000 cr of cash management bills on Tuesday and announcement of issue of Rs 13,000 cr worth of bonds for the week. Comments of RBI Governor regarding rising inflation also kept the pressure on bonds but on Thursday as results of ongoing 3G spectrum came in yields started falling and closed at 7.38%.

Auction is now expected to fetch Rs 67,700 cr, about Rs 35,000 cr more than originally expected. This was taken as an indication that borrowing might be lesser than targeted and led to buying in bonds. Strength in US Treasuries and falling oil prices also kept the mood upbeat.

Liquidity conditions eased as compared to the previous week. Average daily funds parked at the reverse repo window stood at Rs 42,000 cr.

For the next week, we expect the liquidity conditions to remain comfortable and yields to trade within a range taking directions from US Treasuries.

Author name:Praveen Bajaj

Weekly Equity update May 22, 2010

Euro concerns drive markets down

Equity markets sank 3.2% this week to close at 16445. This is the 3rd weekly fall out of 4 weeks. Since the start of the week, markets carried a bearish tone and closed in red on 3 out of 5 trading days. Largest fall was observed on Wednesday when sensex fell 2.7% or 467 points and closed at 16408.49. Index did correct a 110 points on next day but Friday again saw markets plunging to day’s low of 16187, but bargain buying at lower levels made up for most of the loss.

Euro zone related concerns were main drivers of market this week. Euro fallout talks and German ban on short-selling of certain securities led to a considerable downturn in foreign markets which in turn affected Indian markets as foreign funds were withdrawn. So far in May, foreign funds have withdrawn $1.3 billon from stocks so far in May.

Earning results from companies like L&T and ITC did provide some comforts to the markets. L&T’s 4th quarter profit was up 44% whereas ITC reported a 27% rise in profits.

Govt approved a hike in Administered Price mechanism (APM) gas price from Rs 3,200/scm to Rs 6,818/scm which is close to $4.2/mmbtu price approved for RIL’s KG-D6 basin. This was a big positive for ONGC and OIL India as it substantially improves their profitability. As the news came in, both the stocks rse 9% above their previous day’s close. This however is negative for companies like NTPC which uses gas and would increase their costs.

For next week, major factors that would drive the markets would be earnings of companies like Tata Motors, Aban Offshore, Bank Of Baroda, HUL, BHEL, Tata Steel, BPCL and Sun Pharmaceuticals; roll over of F&O positions due to expiry of May contracts and ofcourse foreign factors. All these are expected to keep the market volatile but with a positive bias.

Author name: Praveen Bajaj

March IIP Update

  • The IIP registered a growth of 13.5% for the month of March’10. The same index registered a growth of 2.3% y-o-y in Mar’09 and a growth of 15.1% in the month of Feb’10
  • The IIP figure once again registered a growth below the street expectation of 15.1%, weighed down by a partial withdrawal of stimulus measures ad a rate-hike. But still, the IIP figure has registered a double digit growth for the sixth consecutive month driven by low base year effect and astounding performance of the manufacturing sector
  • The central bank is not expected to tighten the monetary policy so soon as it is going to wait for further cues on inflationary pressures and demand in the economy. The overall economic situation in the coming days will give a further insight and help both the government and the RBI to take the appropriate decision on the interest-rate hike
  • The mining sector leaped ahead with a big jump from 0.4% in Mar’09 to 11.0% in Mar’10 on a yoy basis while the electricity sector showed improvement from 6.3% to 7.7% in Mar’10. The mining and the electricity sector showed a growth of 12.2% and 6.7% in the last month respectively
  • The manufacturing sector grew by 14.3% y-o-y compared to -3.3% in Mar’09 y-o-y. It has been in an uptrend since few months and has also been one of the factors in helping the IIP soar. It registered a growth of 16.0% in the last month
  • In the use-based category the basic goods, capital goods and the intermediate goods sector registered a growth of 10.1%, 27.4% and12.7% y-o-y respectively compared to 1.4%, -8.2% and -4.4% y-o-y respectively in Mar’09. These sectors have performed moderately on a mom basis except the capital goods sector which reduced by almost 50%
  • The consumer goods sector has one again given a good performance registering a growth of 10.6% yo- y compared to its growth by -0.8% in Mar’09 y-o-y. The sector’s growth got injected by a boost in the consumer durables segment which grew by 32.0% y-o-y, a huge increase from 8.3% in Mar’09 y-o-y. The consumer non-durable goods too performed well registering a growth of 3.3% compared to a growth of -3.6% in Mar’09

    • Is the EU bailout package enough?

    Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.

    But the question is -

    • Is this something to get overexcited and start buying stocks ?
    • Is this bailout package enough to give a stability to the European financial system?

    Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.

    The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that

    • The yield on the Greece’s and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
    • The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement

    Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.

    Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.

    Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened

    Depriciation and Impairment – IFRS and Indian GAAP

    Link between Depreciation and Impairment under IFRS

    When an item of Property, Plant and Equipment (PPE) is impaired i.e. recoverable amount < carrying amount, carrying amount is reduced to the amount of recoverable amount.

    Asset should no more be carried more than their Recoverable amount.

    Such a decrease in carrying amount is impairment and is booked in Profit and Loss.

    After recognition of an impairment loss, the depreciation charge of the asset shall be adjusted in the future periods to allocate the asset’s revised carrying amount over its remaining useful life.

    Example 1: More >

    Weekly market update: May 3, 2010

    Dear readers, if you will remember we used to post monthly market review till some time back. Modifying that a bit, we have come out with the weekly version of the update covering equity, currency, gilts, crude oil and a brief note on China interest rate move.

    Equity markets

    • Sensex slid 135 points or 0.7% for the week to close at 17558. The index started the week on a bullish note but later in the week negative global sentiments created due to rating downgrade of Greek bonds pushed the market down by 1.7% on Wednesday.
    • Successive upward moves for the next two days helped the index to regain most of Wednesday’s loss. Federal Reserve of USA in its rate announcement re-iterated that “low interest rates are appropriate for an extended period of time.”
    • With earning season coming to an end, markets are looking towards international economy for direction. American and European indices closed in red on Friday which has led to a gap-down opening in Indian markets.
    • The news that EU and IMF have agreed for a bailout package for Greece will affect the markets positively. Markets are expected to remain range-bound with a positive bias and figures for cement sales and automobile sales will be watched closely.

    Currency – USDINR

    • Rupee started the week with a strengthening bias opening 13 paise up from last week’s close of Rs.44.22 per dollar but gradually during the week it weakened along with weakness observed in the equity markets.
    • But towards the end of the week, buying from FIIs led to a strong come back in the rupee and it closed at its highest level in 2 weeks at Rs.44.25 per dollar, gaining 17 paise or 0.4% up from last week. This is the 4th straight monthly gain in rupee.
    • RBI Governor Mr. Subbarao said in Washington that steps might be taken to curb the excess inflow of funds in the Indian markets as surging rupee is hitting exports. This would restrict any major upside move in rupee for the week but we expect that the rupee will strengthen this week buoyed by the inflow of funds.

    Government Securities (G Sec/Gilts)

    • 6.35% 2020 benchmark bond registered very low volumes for the week as new 10 year bond was to be issued by RBI. Yields on 7.02% 2016 bond fell 10 bps on Tuesday on short covering and value buying.
    • Bond yields remained almost at the same level thereafter only to strengthen a bit before the auction results were announced on Friday, but aggressive pricing of new 2020 bond led to a sell-off in the bonds and the 7.02% 2016 bond closed at 7.55%, 11 bps down from previous week.
    • The new 7.8% 2020 bond has been seeing good volumes in the first half of trading on Monday. We expect the trading volumes to shift to the new bond and bond markets to trade with a slight upward bias as traders resort to profit booking and markets take cues from international markets.

    Crude Oil

    • Crude oil opened the week on bearish note at $85.22 per barrel owing to concerns regarding Goldman Sachs case and growing uncertainty in the Euro region regarding Greece and fears of it spreading other Euro region economies. Crude fell for the first two trading sessions reaching a low of $ 81.70 on Tuesday.
    • Thereafter, crude showed a consistent rise over the entire week, rising $5 from the intraweek lows, ending the week at $86.15 per barrel on Friday owing to optimism regarding the Euro zone, pointing to a strengthening economy in the second quarter, lower unemployment figures in US and Greece readied severe austerity measures on Thursday to secure a multi-billion-euro aid from IMF and EU and avoid default.
    • Crude are likely to rise in the coming week as well, on expectations of strong international markets and announcement of bailout package for Greece of €30 billion by IMF and Euro region.

    China interest rate move

    • The People’s Bank of China (PBOC) announced Sunday it was increasing commercial banks’ reserve requirement ratio (RRR) by 0.5 percentage points, taking the RRR of large banks to 17% and that of small- and medium-sized banks to 15%.
    • The increase, which goes into effect May 10, is the PBOC’s third such hike this year and is estimated to drain out about 300 billion yuan ($43.9 billion) in liquidity from the Chinese banking system.
    • The RRR hike is viewed as a fundamentally positive tightening measure, as it is still in the early part of the tightening cycle, which should help contain inflationary pressures, prolong the current economic expansion cycle and provide cushion for future policy flexibility.
    • The RRR hike is likely to have a modest immediate impact on banks’ margins as they are forced to park more funds with the PBOC at low interest rates. But subsequently, banks’ interest-rate margins were likely to improve, as tighter credit conditions would boost interest rates in the interbank money markets, where most of the listed banks are net lenders.

    Hope this was informative. Your suggestions/comments would be highly appreciated.

    Authors: Praveen Bajaj, MBA Finance

                     Abhijeet Ahir,MBA Finance

    European Crisis: Alexander would be Crying in his Grave…!!!

    You must be wondering why am I mentioning about Alexander the Great in a finance blog. However, I believe that whatever is going on with Greece currently, the title of my blog is not inappropriate.

    Since, Tuesday when the Sovereign rating of Greece was cut down to JUNK status, the whole world is wondering whether or not Greece will get any bailout or will default. The Greek bonds are currently yielding around 22% and this makes me happy, that India despite being an developing nation is yielding only around 8%. (Since all the text books are proved wrong which says that a developing country like India will always yield more than a developed economy).

    The only possible thing that could save Greece from restructuring its debt (which is equivalent of a default) and bring some cheers to Alexander the Great is a bailout package. However, the biggest road block to this bailout package is the European super power Germany. The German public opinion is firmly set against dipping into the tax payers wallet to help the Greece. Thus the German Government is in a tight spot:

    • On one hand it can agree to extend the aid to Greece and face a voters backlash and send its party to a crashing defeat in the regional elections in Germany on May 9th
    • Or on the other just sit back and and let the Greeks default and trigger this credit problem into other larger debt burdened EU members.
    • This would also lead to a problem for different private sector banks in EU area who currently holds Greek Bonds and this would lead to another crisis of its kind

    However, if you believe conspiracy theory, what I see that the one of the key beneficiary of this whole Greece episode is Germany. What has this Greece problem done, is that it has substantially weakened the EURO and Germany whose major portion of GDP is export dependent is benefiting highly from this and in order to bring down the Chinese dominance the Germany is deliberately postponing the bailout, so that it can prosper in the export market.

    Hence, I see no clear direction for markets at least before 19th when Greece has to either fund its debt obligations from the bailout money (if it gets) of default. I had highlighted the kind of possible threat EURO area is to the world markets over a year back, you can use the link to re confirm. So, I would again say that the things are not as good as it looks like. Nifty has a major resistance around 5330-50 and any new long trading positions should be taken only once this hurdle is crossed.

    Till then keep doing SIP in the stocks I had already discussed in my earlier posts.

    Happy Investing…!!!

    To read earlier post on the same subject, click here

    Author name:Rahul Sonthalia, Research Head, Kredent