REAR GLASSES – JULY 2021
Published on 1st July 2021
Globally, the newsmakers for the previous month were – stance of US Fed to raise the policy rates earlier than expected, tightening of the crude oil due to increasing demand from US, EU along with Asia as the 2nd wave passed over, approx. 130 countries signing for Minimum Global Tax in order to reduce the tax arbitrage & OPEC+ meeting to decide the ramp-up in the production by nearly 4 lakh bpd. PMI indicator throughout the developed economies indicating robust economic activities – for US slight contraction 62.1 during June down from 62.6 during May while for EU, it increased to 63.4 during June up from 63.1 in May. Apart from that, Chines Producer Price Inflation reached a 13 year high due to rising commodity prices – indicating import inflation for the economies dependent highly on the Chinese imports. Coming to India, Manufacturing PMI reduced to 48.1 in June from 50.8 in May – sharpest contraction since July 2020 because of subdued demand leading the firms to restrict purchasing during the month, curtailed international demand for Indian goods & business closure due to restrictions. Although pre-production and post-production inventories declined at units, pre-production inventories declined for the first time in the last ten months. While Services PMI reduced to 41.2 in June from 46.4 in May – Sharpest contraction since July 2020 on the back of subdued demand conditions resulted in a second consecutive month of reducing new business received by the services firm in addition to export orders for services falling for the consecutive sixteenth month.
Capital Markets: FPIs turned out to be net buyers for equities during June – infusing Rs. 17,215 crore while withdrawing Rs. 3,946 crore from the debt market – effectively infusing Rs. 13,269 crore into Indian markets. In contrast, during April & May FPIs pulled out Rs. 9,435 crore & Rs. 2,666 crore respectively. The robust inflows during June are attributable to excess global liquidity, optimism regarding ramp up in the business activities as the states ease restrictions, and elevated investor sentiment due to increasing pace of the vaccination (~21 crore doses administered by end of May to 34.7 doses administered by end of June). Benchmark Nifty 50 moved sideways during the month closing at ~15,721 as against ~15582 during May – showing an increase of ~0.89% during the month; concerns over delta variant and Q1FY22 earning season to drive the markets in the upcoming period. On the government bond side, the yield on 10 Year G-sec 6.051% as against 6.022% during the last month. Apart from that on the regulatory side, SEBI introduced a new class of investors – accredited investors easing the rules related to minimum investment amount into PMS/AIF funds and also related to investments made by the fund managers which we covered earlier in our daily newsletter (https://www.linkedin.com/posts/clovek-wealth-management-pvt-ltd_clovek-wealth-news-series-1-july-2021-activity-6816267697362391040-sUK7).
Crude Oil: Looking at the ramp-up in the economic activities especially in the US where the refineries have been running at 93% capacity utilization during the last week of June – suggesting an uptick in the oil demand. Also, WTI spreads for immediate deliveries are $3 dollar higher as compared to deliveries for four months ahead, the widest spread since 2018 – suggesting that the traders are willing to pay premiums in order to secure physical barrels. Along with the growing demand within USA, EU & Asian markets too picking up as these markets have recovered from the 2nd wave – suggesting ramp up in the demand for crude oil going forward. Further, tightening of the market would be dependent on how quickly the sanctions on Iran are lifted (increasing the supply of crude oil into the international market) & whether the global economy maintains its pace in the upcoming period or it gets impacted due to the delta variant. OPEC+ meeting which ran for three days due to loggerheads between UAE & Saudi Arabia turned inconclusive – signalling unclarity regarding the ramp-up in the production cycle which would add woes to the increasing crude oil prices. Coming to Iran, in one of the press statements, Iran’s oil minister said they have taken enough measures in place to ramp up the crude oil production given the US sanctions are lifted; however, as per the comments from experts the Iranian crude is far away from making into the International Markets anytime soon.
Gold & Exchange Rate: INR closed at Rs. 74.360 a dollar weakening from Rs. 72.511 a dollar a month ago – weakening by ~2.48% as compared to the closing of May. The dollar spot index (which tracks the movement of USD against a basket of currencies) too strengthened by ~2.3% during the same period on the back of hawkish stand from US Fed. Tightening of policy rates ahead of expectations makes US treasuries attractive which in turn drives the demand for USD leading to strengthening of greenback. Coming to the yellow commodity, rising yield and strengthening dollar improving risk-reward for dollar and treasury bonds led to falling prices of gold. Gold spots closed $1763.15 per ounce as against the closing of $1899.95 during May – showing a decrease of 7.2%, the sharpest fall since November 2016. Although the economic indicators from both US & EU show strong rebound; however, the delta variant may pose a concern as some of the economies such as Australia started imposing the restrictions – with the possibility for a slow-down in the activities, it remains to see whether delta variant creates any hurdles to the plans of US Fed to increase the fed rates earlier than expected time frame