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Weekly Economic Review - UAE, India & Global Macro

Weekly Economic Review

Week ending November 29, 2014


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Lower oil prices are starting to impact sentiment and investors believe that this will eventually compel GCC countries to claw back on the huge state spending which has been the key driver for growth after the onset of the Arab spring. The markets were closed by the time OPEC announced "No cut" in production sending crude oil prices down over 10% on Thursday and Friday and this will impact sentiment in the GCC stock markets when it reopens on Sunday. Dubai's DFM Index is up 36% in 2014 and is up 56% from last November when Dubai won the bid for the Expo 2020 event which marked the beginning of the rally that gathered pace through this year in the midst of improving fundamentals. The DFM Index hit a post 2008 high of 5406.62 on May 14, 2014 after rallying from the post 2008 low of 1294.10 on Jan 16, 2012 a move of 318%. If we apply the Fibonacci levels to this move the first retracement level of 23.60% is at 4436, which was breached on two occasions this year and it has traded around this level since early October. The next support level below this is at the 38.20% retracement level, which is at 3835 which could be tested before the end of the year or in Q1 2015.

The fall in oil prices is already creating ripples in the lesser resilient economies in the region like Oman which is facing the prospect of running a budget deficit next year. Oman' state news agency reported this week that if oil prices remain at $80 next year and with no additional steps to boost revenue, the budget deficit is likely to be about OMR 3.05 billion ($8 billion approx). The measures recommended by the various government committee's include levies on revenues of telecom companies, a 2% tax on all expat remittances, increase in royalties paid for mineral exploitation, tax on LNG exports. The recommendations included cuts to spending in oil & gas production, defense and also some development projects. Massive government expenditure across the GCC countries has been one of the key drivers of growth ^ increased liquidity, the fall in Crude oil Prices in the late 1990's and the subsequent recession in the GCC region would still be fresh in the minds of most policy makers who are still around from those times.

In India, regulator Securities Exchange Board of India (SEBI) issued a clarification on the P-notes (participatory Notes issued by registered Foreign Portfolio Investors to their clients who do not have a structure in place in India to invest in equity markets), that these can be issued only to subscribers that do not have an opaque structure. This created a sell-off in equities mid-week which was not sustained as equities rallied on the back of lower crude oil prices (India imports about $10-12 billion a month) & hopes of a rate cut next week from Reserve Bank of India (RBI) as the Finance Minister lobbied hard for a rate cut with the RBI. Indian equities continued their rally into record highs boosted by rate cut hopes and lower oil prices. FII flows into equity markets this week was at $480.89 million. The fall in crude oil prices of about 40% from its peak in mid June will provide a welcome relief for the pressure fiscal deficit, which has a large component of oil sector subsidies.

As per data by Ministry of Finance the government's fiscal deficit for the first seven months of the fiscal year hit 90% of its full year estimate at 5.31 trillion rupees ( $86 billion). This is the highest it has been at this point of time since 1998-99 and in the last fiscal year at this same point of time it was at 84%. There are growing concerns whether the ambitious target of 4.1% of GDP will be met. Revenue collections both tax & non tax revenue has been trailing with tax & non-tax revenues only at 38% & 52% of full year estimates. The government had budgeted $9.5 billion from disinvestment which had yielded zero till now. With the stock markets in a buoyant phase the government should be able to complete this to alleviate some of the pressure on the fiscal deficit.

Third quarter GDP in India was lower at 5.3% from 5.7%, the key laggard was the manufacturing sector which expanded at only 0.1%. Agriculture sector growth was softer at 3.2% compared to 3.8% in Q2. Slower growth will put increased pressure on the RBI to cut rates when the monetary policy committee meet on Dec 2 next week. The Indian Rupee fell to 9 month lows below 62.00 and closed over 62.00 for the first time since March this year amid large US Dollar buying by state oil companies and importers. The Rupee was under pressure also from the higher fiscal deficit numbers and slower GDP growth. Increased expectations of a rate cut also put upward pressure on the USD/INR.

It was a data heavy week in the US inspite of the Thanksgiving holiday on Thursday & some economic data points were weaker than expected. US 3rd quarter GDP was revised higher to 3.9% from 3.5% in the advance estimate. The largest contributor to this upward revision was accumulation of privative inventories in the non-farm sector which created a 49 bps impact on overall GDP. Personal consumption expenditures were revised higher creating a 29 bps impact on GDP. Some of this was offset by upward revision of imports and downward revision to exports creating a net 54 bps impact on GDP. The Case-Shiller 20 City Price Index for September increased by 4.9% and this has been below 10% mark for the fifth consecutive months after posting greater than 10% growth for 14 consecutive months from April 2013 to May 2014. The investor activity which pushed prices and constituted about 40% of all purchases during that period has abated and the real-estate sector is showing signs of easing off. US consumer confidence as measured by the Conference Board dipped surprisingly lower to 88.7 the lowest since June this year. The headline Durable good number grew 1%, but the core number that excludes defense and aircraft orders fell 1.3% which was way off the consensus at +1% to post its second consecutive monthly fall which bodes ill for business spending plans and growth in the coming months. Weekly Jobless claims moved back over the 300k level for the first time since September 7 after trending below 300k for 10 weeks. New home sales were also below expectations at 458k and this crucial number seems to have plateaued out since Q1 2013 after the rally from its all-time low of 270k in Feb 2011 to the 450k level in Feb 2013. Just to keep in perspective at the peak of the housing boom in the US, new home sales hit a record high of 1.389 million in July 2005.

In the data box at the top, other than Crude Oil, another big move this week was in US Treasury yields. The crash in oil prices and also other commodity prices over the last few months will prove to be disinflationary and with no wage inflation in sight, US treasury yields plummeted lower.

In contrast, Economic data coming out from Europe largely Germany was slightly better than expected. Germany's Ifo Business Climate Index posted its first gain in 6 months to move higher to 104.7 from September's 103.2. In the wider Eurozone, European Commission's economic sentiment Index increased to 100.8 in November for the second consecutive monthly increase. Unemployment in Germany fell to another post-unification low of 6.7% with 14k more jobs added in November much better than market expectations of only 1k jobs to be added. Another data point this time from France the Business Survey Index was a tick higher at 99, so was French consumer confidence at 87.0. We need to be vary of upward surprises from Eurozone data as expectations are very low and the worst is being priced in currently on the other hand we need to be vary of downward surprises in the US as expectations are high after 2 strong quarters of GDP growth and average of 212k+ of job additions in the past 9 months.

On Thursday, at the keenly watch OPEC meeting in Vienna after 5 hours of discussion there was no agreement to cut production. The next meeting is schedule on June 5, 2015 and Saudi Arabia seemed to be happy with the outcome as its Oil Minister Ali al-Naimi emerged from the meeting stating "It was a great decision." OPEC members account for about a third of global production and Nigerian Petroleum Minister & OPEC President Diezani Allison-Madueke said that non-OPEC oil producers had to "share the burden" of any future cut in production. The OPEC decision sent Crude Oil prices plunging with both Brent & WTI at one point of time loosing over 8%. WTI traded below $70 a barrel for the first time since April 2010 and with oil producers expected to fight for market share we could see further lower prices. Crude Oil Benchmark WTI closed at 66.15 which is down 39% from its 2014 high of 107.73 traded just 5 months back on June 20, 2014. The profound impact of lower oil prices will be on the US shale oil producers who have high cost of production and it could be one of OPEC's objectives to slow down shale oil exploration which has risen dramatically over the last few years.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: The views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.