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Weekly Economic Review - UAE, India & Global Macro

|Includes: Market Vectors Indian Rupee/USD ETN (INR)

Weekly Economic Review

Week ending March 21, 2015


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Dubai's DFM Index lost more than 2% on three trading days this week. The trigger for the fall in stocks across the GCC region was the sharp fall in crude oil prices we have seen over the last week or so. Historically in the GCC region whenever oil prices have stayed low the region has experienced a recession; in 1986, 1998 & 2008-09 as oil revenue is the key driver which pushes aggregate demand due to higher government spending. New developments of oil fields & refineries and downstream plants will slow down which will impact all sectors of the economy. Diversified economies like Dubai could be better placed as tourism and retail could absorb some of this slack. In Dubai the trigger for the large dip was the fall in Bellwether stock Emaar which accounts for 16.36% of the weightage for the DFM Index. There was speculation that the Chairman Mohammed Alabbar, who has been at the helm of the company since its establishment, could scale back his role in the company given his other commitments in the industry. Egypt announced "billions of dollars' worth of projects" to develop a new city and Emaar was conspicuous in its absence as a participant in these projects. The speculation resulted in an official statement from Emaar that "Alabbar is fully committed to the company he founded"

The vibrant bond markets in the Middle East had a different and possibly trend setting issuance this week. Emirates NBD issued 7 year bonds under its MTM program in Euro's at a spread of 135bps over mid-swaps. The issuance raised Euro 550 million and the order book was over Euro 1.2 billion which helped push the yield lower from the initial guidance of 140-150 bps. The abundance of liquidity in Euro combined with record low rates makes it attractive for issuers in a currency where investors are craving for yield pick-up. This should set the trend for more Euro issuances from Middle Eastern Banks. Middle Eastern banks are diversifying their funding base as the fall in Crude oil prices will result in tighter liquidity in the months to come. Though investing in Euro's could be relatively expensive than issuing in US Dollars if the intention is to swap back into US Dollars, but it does open up a vast base of investors who are craving for higher yields.

In India, equity markets traded lower for the second consecutive week and it is now down 6.04% from its peak of 30,024.74 traded on March 4. Corporate earnings have been tepid and there is not much enthusiasm about Q1 results that will start trickling in from the second week of April. Inflation at the wholesale level fell for the 4th consecutive month dipping 2.06%(y-on-y) in Feb, led by a 14.72% fall in fuel prices. Though the food component jumped higher by 7.74% reflecting the poor kharif season, which will only get worse after unseasonal rains that have destroyed a large part of the winter harvest in recent days.

Foreign Institutional Investor (NYSE:FII) inflows were quite modest at $127.64 & $194.5 million respectively in the equity and bond markets. The Indian Rupee continued to be the bright spot amongst crumbling emerging market currencies posting gains for the week as exporters sold US Dollars to capitalize on the high forward premiums. As per data from India's Department of Industrial Policy and Promotion(DIPP), FDI into India for January was at $4.48 billion which is the highest level in nearly 2 & 1/2 years. In 2015 we could see record FDI inflows into the country with the recently relaxed norms in insurance, railways, etc will provide a solid boost. For the current fiscal year upto January FDI inflows are at $25.52 billion which is 36% higher than for the same period in the previous fiscal year.

The economy is not showing any signs of pick up from the massive slowdown we have seen for nearly 3 years and this is reflected in the loan growth figures released by RBI, increasing by 10.4% for the week ended March 6, which is well below bank deposits growth of 11.62% for the same week.

The FOMC statement after the end of the two day monetary policy meeting resulted in some large moves in markets. The key word "patient" in beginning to normalize the stance of monetary policy was taken out, but the statement was quite dovish overall with the economic growth assessment downgraded. Economic growth outlook was revised lower to "moderated somewhat" from "expanding at a solid pace." The impact of the strong dollar has resulted in the wordings "export growth has weakened." The future course of Federal Funds rate was directly linked to the dual mandates that the fed has with the new statement "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range." It is quite possible that the FOMC added some more dovish word to ensure that US treasury yields don't spike further and the US Dollar does not get much stronger to avoid a violent reaction in markets to dropping the word "patience". An example of this could be "Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting" This specific statement could be the next thing that will be difficult to shake off, does this mean that at each meeting the Fed will state their intent of not hiking rates at the next meeting? They surely cannot say that they will hike rates at the next meeting. In the press conference Fed Chair Yellen refused to give specifics about what kind of unemployment or inflation data will get the Fed to raise rates. This means that the path of Fed Funds rate moves is dependent on unemployment data & on inflation.

In the FOMC members projections the GDP forecast for 2015 was revised lower to 2.3-2.7% from 2.6-3.0%. The FOMC members significantly revised their inflation expectations lower by cutting the PCE Inflation forecast for 2015 to 0.6 -0.8% from 1-1.6% in December. If one can relate this forecast to the forward guidance for Fed Funds rate which is dependent on unemployment and inflation, the closest that the FOMC members come to the 2% target for inflation is in 2017. Does this mean that we could see the Fed Funds rate at zero till them? Possibly yes if these expectations are actually realized.

Outlook for US equities could be negative going forward if the U.S. Economy is softening domestic earnings will be under pressure and the strong dollar will impact overseas earnings at a time when most overseas markets are also showing deflationary conditions and economic slowdown

US economic data was again under par this week. Industrial Production for February was up 0.1% which was well below market consensus at 0.3%. The Manufacturing sector contracted 0.2% declining for the third consecutive month, the positive growth in Industrial Production was due to strong growth posted by the utilities sector & Capacity Utilization dipped lower to 78.9%. Housing starts were down 17% in January to an annual rate of 0.897 million, but this could be due to severe weather in the north east and was similar to the dip of 17.9% posted in February last year. US jobless claims increased to 291k and the 4-week average has proved to be sticky around 300k, possibility indicating that the improvement in labor market has plateaued out, but the good part is that it is not getting worse and heading back towards 400k atleast for now! Two important regional business indicators Philly Fed Business outlook & & NY Fed's monthly survey of manufactures in NY state, Empire State Manufacturing Index were weaker than expected.

The Euro gave up all FOMC gains the next day as tensions between Greece and Eurozone boiled over after Greek PM Alexis Tsipras in defiance of the "Troika" passed the "anti poverty bill" and promised to restart the Greek Broadcasting Company which was shut down under the bailout terms. Towards the latter part of the week the Greek government had a more conciliatory tone which helped the Euro to post some gains. It is quite possible that we have seen a short term bottom in the Euro and the meeting between Greek PM Tsipras & German Chancellor Merkel on the 23rd could finally bring some respite. It could be quite possible that the Euro could have traded a short term bottom at the lows of 1.0460 & 1.0456 traded on March 13 & 16 respectively. A Grexit could create a short term dip, but could bolster the Euro as there is low probability of contagion given the fact that Spain, Ireland & Portugal are showing strong signs of recovery & the hardships that the Greeks will face if they exit the Euro could refrain the others from seeking the same path. In the coming weeks we could see the Euro trade above 1.10, if US economic data disappoints.

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.