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Weekly Economic Review - UAE, India & Global Macro

|Includes: iShares Euro ETF (EURS)

Weekly Economic Review

Week ending December 6, 2014


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Dubai's DFM Index closed lower on all the three days that the markets were open this week. The selling on Sunday and Monday was to catch up with the change in the sentiment following the crash in Crude Oil prices in the previous week which happened after regional equity markets had closed for the weekend previous Thursday. Emaar, the Bellwether UAE stock, traded limit down 10% on Dec 1 the first day after the stock went ex-dividend adjusting for the large payout of Dhs. 1.257 per share. It had closed at 10.60 on Nov 30. Emaar continued its fall on Thursday after markets opened falling about 7% to adjust for the dividend payout. The price correction in Emaar which went ex-dividend was one of reasons for the exaggerated fall. Emaar has a weightage of 19.93% in the DFM Index and this has come down in recent times with more listings which were included in the Index. The split with Emaar Malls also helped with Emaar Malls having a weightage of 7.12%.

The recent start up IPO of Amanat holdings listed on the markets on Nov 30 and got caught up in the selling frenzy, trading a low of Dhs. 0.79 down 21% from its issue price of Dhs. 1 on its debut, but recovered some ground later on to close the week at Dhs. 0.965, still down 3.5% below its issue price, including the cost of leveraging investors (largely retail) are still sitting on larger losses. This could impact sentiment for the other IPO's that are in pipeline and these start-up IPO's going forward could receive a less enthusiastic response.

The recent fall in Crude Oil Prices & US Dollar strength which imports deflation due to the fixed USD/AED peg has resulted in talk about whether the USD/AED which has been in place since November 1990 is good for the economy. The USD/AED forwards which trade quite benign have been active recently with the one year forward quoting at around 20 bps due to this growing talk about a change in the Peg regime. The UAE Central Bank Governor Mubarak Al Mansouri in a statement doused there rumors by stating that the UAE will keep its peg to the US Dollar and media reports that the currency regime is under study are not true.

In India, the Reserve Bank of India (RBI) disappointed market participants by not succumbing to the massive pressure from all corners to cut interest rates. The rationale for not cutting the rates inspite of inflation dipping was concerns that there are some transitory factors in the recent lower inflation numbers, the large base effect impact will start to ebb off in December and the weak monsoon rains could impact food prices in the coming months. RBI Governor Raghuram Rajan also mentioned that the RBI wants to be sure about the future trajectory of inflation, after 4&1/2- 5 years of structural high inflation, before cutting interest rates. FII's seemed to be quite enthused about the fact that RBI did not cut rates and we witnessed over $1 billion of inflows into the bond markets after the RBI meeting on Tuesday. The 1-year yield on Indian Government T-Bills traded a high of just under 8.50% after dipping as low at 8.14% in mid-November on speculations of an impending rate cut, which was doused by non-dovish comments from RBI officials, who true to their comments did not cut rates. The carry on the one year T-Bill with the USD/INR rate expected to be stable is quite attractive and is one of the favorite plays globally for hedge funds currently. The RBI Governor also pointed out that interbank rates have fallen well below the 8% Repo Rate, but banks have not passed the benefit of lower rates to borrowers. Extending this argument, the RBI governor also mentioned that once banks are convinced that rates will remain low they will cut rates to borrowers and the transmission process will commence to work better & a rate cut in this scenario will only provide a mild change. The market is now looking for a cut in the Repo rate in March next year after the annual budget will be presented by the Finance Minister in the last week of February.

The Indian Rupee started the week above the 62.00 level and slipped below on Monday and continued to firm up on strong inflows of US Dollars and absence of buying from state run oil companies also helped. It traded in a range of 62.23-61.75 for most part of the week & RBI seems to be active on both sides to prevent large volatility in the spot rate. The Indian Rupee is expected to trade in a narrow range and moves will be rather subdued either side.

Equity markets in India witnessed a bout of profit booking and posted a weekly loss after 2 consecutive weeks of gains. There are some concerns about the amount of good news priced into Indian equities with fundamentals trailing. The P/E ratio is just below 20 and with the dividend yield at 1.19% we could see some market participants waiting to book profits before expectations build up ahead of the Annual budget presentation in end Feb, which is poised to be a path breaking budget. FII's continued to be bullish on the market with inflows of $650.67 million into Indian Equities.

Forex Reserves in India increased by $1.43 billion for the week ended Nov 28 to $316.31 billion. We could soon see FX reserves top the all-time high of $320.78 billion in Sept 2011 and had reached very close to this level in July earlier this year at $320.56 billion.

The Indian Government divested 5% of its stake in India's largest steel company, Steel Authority of India(NYSE:SAIL) on Friday, kicking-off the much awaited disinvestment plan for fiscal year 2014-15. This divestment of $276 million was oversubscribed by over 2 times with good participation from FII's. This encouraging start should help the government mop-up its target of $9.5 billion from the disinvestment process which will go a long way in keeping the fiscal deficit under control.

ECB President Mario Draghi for once failed to "talk" the Euro lower after the ECB meeting on Thursday. As Mario Draghi's press conference commenced the Euro was trading at around 1.2300 levels and it immediately shot higher to 1.2400 levels. While there was no change in the ECB overt "Dovish" bias the market now wants to see measures and not just words about impending liquidity measures. It is time for the ECB to "walk the talk." Mario Draghi's reluctance to spell out the time horizon for a US style Quantitative Easing, expressing concerns over the medium term outlook for price developments, such a measure would cause, sent the Euro searing higher.

US payroll data was a blowout and beat the most optimistic estimate with 321k jobs added in November and upward revisions of 44k for the previous two months. The unemployment rate which is derived from a survey of households remained unchanged at 5.8%. The broader unemployment rate U-6 dipped slightly lower to 11.4% in November from October's 11.5%. This was the largest number of jobs added in the economy since Jan 2012 and the 50th consecutive month of job additions in the current expansion phase that started in October 2010. In this 50th month period only in Jan 2012 & April 2011 more jobs were added. There were first signs of wage inflation as Average hourly earnings increased 0.4% in November over October; as compared to Nov 2013 it is up 2.1% which is still substantially lower than the range of around 3% which could get FOMC members worried about wage inflation. Other economic data from the US was mixed with ISM manufacturing PMI topping expectations at 58.7. Factory Orders for October at -1.4% was weaker than expected. Weekly Jobless claims dipped below 300k after its spike above 300k last week.

There were signs of further slowdown in the beleaguered manufacturing sector in China with the official PMI dipping lower to 50.3, getting even closer to the contraction level below 50. The Chinese Yuan daily fixing rate has inched higher for a few weeks now with the CNY trading at 6.15 it has moved high from the low of 6.10 it traded in End October. As China's economic & political problems (anti-corruption purge in the communist party and HongKong protests) gather pace in 2015 & with Japan's Yen surging to record lows, we could see China move on lowering its currency.

The US Dollar surged higher against most currencies hitting multi-year highs against the Euro, Japanese Yen, Sterling Pound and is reflecting the fundamental difference in economic outlook. The USD/JPY traded a high of 121.68 trading these levels for the first time since July 2007.

Precious Metals had huge trading swings on Monday this week. Silver was up about 17% on Monday after trading lows around $ 14.00 an ounce. Gold Prices climbed by about $70 an ounce intraday after steep falls. The strengthen of the rebound in both these precious metals could indicate that a medium term bottom has been formed and it could be difficult to break lower, inspite of the overwhelming bearish view in the market.

Compiled & Researched by: CA 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.