Weekly Economic Review – Week ending April 30, 2016

Current Week Previous Week Change Current Week Previous Week Change
DFM 3491.91 3583.82 -2.56% USD/INR 66.33 66.48 -0.23%
ADSM 4543.53 4636.75 -2.01% EUR/USD 1.1451 1.1222 2.04%
SENSEX 25606.62 25838.14 -0.90% USD/JPY 106.50 111.79 -4.73%
NIFTY 7849.80 7899.30 -0.63% USD/CNY 6.4780 6.4995 -0.33%
DOW 17773.64 18003.75 -1.28% Gold 1293.53 1233.03 4.91%
NASDAQ 4775.36 4906.20 -2.67% US 10 yr 1.83 1.89 -3.17%
S&P 500 2065.30 2091.58 -1.26% Brent 47.37 45.11 5.01%

Saudi Arabia announced its blue print for “Saudi Arabia 2030” which will help transition its economy and make it less reliant on crude oil.  The plan is to increase the share of non-oil exports in GDP & large scale privatization and creating the world’s largest sovereign fund with assets of over $3 trillion.  The move from away from oil will involve amongst other initiatives; renewable energy, industrial equipment sector, focus on the mining sector and creating high quality tourist attractions. There is also a plan to have a “green card” for overseas workers. Deputy Crown Prince Mohammed bin Salman addressed a press conference where he mentioned that to achieve this vision a price of $30 a barrel will be sufficient.  The IPO of Aramco is part of this plan and less than 5% of its stake is expected to be sold to investors and this could be as early as next year.  Currently, Apple has the largest market cap globally at around $500 billion (was $580 before the poor results this week), in comparison Aramco which controls about 15% of global crude oil reserves is estimated to have a market cap of over $2 trillion. The world’s largest oil company Exxon Mobil has a market cap of about $365 billion.  Aramco’s IPO when it happens in Q4 this year or sometime next year will take center stage in global financial markets and make it the world’s largest company.

The largest bank by assets in UAE, National Bank of Abu Dhabi reported a first quarter drop in net profits of 11%.  The impact of the slowing economy could be witnessed in the results with higher provisions for bad debts & lower non-net interest income.  Abu Dhabi Commercial Bank reported a 18% drop in net profits in Q1 bogged down by higher provisions for bad loans & its net interest rate margin also got compressed.  The third largest bank in Abu Dhabi, First Gulf Bank also reported a 6% drop in Q1 profits, lower fees and commission income was the main cause and provisions were only marginally higher.  As large banks are under pressure to hold on to profit levels, in a slowing environment, customers both on the retail as well as corporate clients will feel the pressure of higher credit costs in the coming months as banks set aside higher amounts for bad debt provisions.  On the cost side banks in UAE have cut jobs, though this has been relatively marginal as yet.

As per a statement by the Secretary to the Department of Industrial Policy & Promotion, Ramesh Abhishek, Foreign Direct Investment into India has touched all-time high in the fiscal year 2015-16.  With one month more to go, FDI for the period April to Feb 2016 was at $51 billion. The previous record high was in 2011-12 of $46.55 billion. As per the secretary, ease of doing business is critical for creating a suitable business climate and the government is making a lot of efforts to improve it.  The increase in FDI is a positive sign for GDP growth in the coming quarters and the medium term.

The story of India’s disinvestment of PSU stakes continued unchanged with Government owned Institutional Investors bailing out the government in the divestment of National Hydroelectric Power Corporation (NHPC).  The first divestment of the current fiscal year of sale of 11.4% stake raised Rs. 2,700/- crores ($407 million) of Rs. 56,500 crores ($8.5 billion) targeted in the fiscal budget. This issue was oversubscribed by 1.65 times but the quota for retail investors was undersubscribed and this portion will also be allotted to Institutional Investors.  This company which is controlled by the Power Ministry in the Central Government traded in the market below the offer price of Rs. 21.75 resulting in lukewarm interest from retail investors who were offered this at a 5% discount.

Indian equities gave back gains this week after two previous weeks of upward moves.  One of the largest private sector banks in India, ICICI Bank reported a 75% plunge on profits for the first quarter due to increased provisions.  Foreign Institutional Investors (FII’s) continued to pour money into Indian equities with $ 252.49 million of inflows this week.  As per data from the Reserve Bank of India, foreign exchange reserves hit an all-time high for the fourth time this year as of April 22 at $361.6 billion.  These numbers add credulence to the rumors that RBI has been intervening in the FX market buying US Dollar to refrain appreciation in the Indian Rupee. In March & April, FII inflows into Indian equities were at $4.423 billion.  The large amount of US Dollars flowing into the economy in the form of FII inflows, FDI and other flows has resulted in the Indian Rupee trading in a rather narrow range with the downside protected from further strengthening by RBI buying US Dollars.

US stock sold off on Thursday with the Dow Jones Index closing lower by 210 points.  The fall was led by two factor, firstly disappointment from lack of further stimulus from BoJ in early Asian trade and second billionaire investor, Carl Icahn, in an interview with cable television network CNBC, said he was “still very cautious” on the U.S. stock market and there would be a “day of reckoning” unless there was some sort of fiscal stimulus. This statement was preceded by his comment that he no longer holds any stake in Apple, which reported lower quarterly sales for the first time since 2003, due to weaker IPhone sales.  Carl Icahn’s cautionary view on the stock market send stocks tumbling lower.

US economic data was broadly weaker with the US economy showing clear signs of weakness across various parameters.  New home sales for March disappointment coming is lower than consensus estimates and below February’s level.  New home sales were down to an annual pace of 511k, but February’s upward revision to 522k made it amongst the highest numbers since 2008.  The run-up in house prices in the US also seems to be abating, with S&P CaseShiller 20-city Index increasing 0.7% in February.  As compared to the previous year, home prices are up 5.4%, which is the lowest rate since October last year. The forward looking durable goods orders data was weak with the headline number increasing 0.8% but well below economist consensus forecasts of 1.6%. The core capital goods number which excludes the transportation and defiance sector posted negative growth of 2.4%.  Transportation equipment which forms about a third of all durable goods orders increased by 2.9% and accounted for most of the gains.  This number raised concerns that the soft patch that the US economy has hit in the first quarter could spill over into the second quarter.  The trade deficit in March fell to $56.9 billion which as the lowest number since February 2015, though the details are not really encouraging. Exports dipped lower by 1.7% with exports at $178.1 billion with the good component at $116.7 billion, which is the lowest level since 2011.  Imports were lower by 1.4% indicating lower domestic demand in a slowing economy and within this consumer goods imports were down a steep 9.1%.

The first estimate for Real GDP for Q1 released by the Bureau of Economic Analysis showed growth of  0.5%, which is significantly below 2015 Q4 growth rate of 1.4%.  This is the slowest rate of growth since Q1 2014, when the polar vortex resulted in one of the most severe winters ever, which slowed economic growth.  The only sector that pushed growth higher was housing which has had a good run for over 2 years now. One big reason for the slowdown in GDP was consumer spending which increased by 1.9% well below the 2.4% growth on the previous quarter.  The increased disposable income due to growth in jobs and lower gasoline prices has found its way into saving which jumped 5.01% to $712.3 billion.

At the FOMC meeting held this week, as expected interest rates were left unchanged. There were some changes in the statement with the reference to economic activity which was “expanding at a moderate pace” change to “economic activity appears to have slowed.”  There was a reference to consumer spending which has “moderated.” The labor market was one bright spot where “conditions have improved further.”  The FOMC also deleted the reference to global markets which pose a risk to the US economy.  From the wordings of the statement the Fed does not seem to be in a hurry to raise rates as growth and lack of inflation is a matter of concern with job growth being the one number that is coming closer to the FOMC zone where it could look to raise rates.  Next Friday, watch out for the all-important jobs data where 200k jobs are expected to be added in April.

Weak economic data, disappointment from Bank of Japan & some weak corporate results sent stock sharply lower this week. The biggest gainer from this “risk aversion’ was gold which traded close to the psychologically important $1,300 an ounce number and is now up 22% in 2016.  Silver prices were not far behind probing $18 an ounce and is up 28% in 2016.  USD/JPY another favorite asset for “risk aversion” had a double blow, also impacted by lack of BoJ action trading at its strongest level since October 2014. Speculative silver longs went further higher at 78.8k contracts, showing further momentum for a commodity that is largely momentum driven when it trends higher or lower.

Disclaimer: This is not a research report of Quantum Auditing. These reviews should not be taken to constitute advice or recommendation. Quantum Auditing does not claim it to be accurate nor accept any responsibility for the same.

Source of information: Bloomberg.com, Investing.com