Global Markets

• US Treasury yields slumped with the 10-year falling ~50bps- the biggest weekly gain since the stock market crash of 1987 on account of slowing growth, fall in consumer prices leading to deflation fears and global risk aversion. Yields have been falling since US Treasury’s change of plans regarding Troubled Assets Relief Program, causing the 3-month T Bill rates to fall close to zero at 0.01%.
• The US Fed predicts growth next year of between -0.2% and 1.1%, compared with the range of 2% to 2.8% it had forecast in June, while the Jobless rate could be around 7.5%. Analysts predict Fed to cut rates to zero over coming months as leading indicators, consumer prices, factory output fell and jobless claims rose more than expected.
• ECB also signaled further aggressive easing on account of what it called “the worst financial crisis since World War II” after Europe also fell into a recession.
• World stocks fell on prolonged global recession worries and on doubts about the survival of Citigroup Inc. Forecasts the US economy could shrink by 0.2% through 2009 and that US automakers- General Motors Corp, Ford Motor Co and Chrysler LLC are at risk of bankruptcy if a last-minute bail-out plan fails, sent the world stock indices to muti-year lows.
• Crude oil prices fell almost 15% for the week to below $50 a barrel on demand slowdown concerns after negative news on economic growth, retail sales and industrial production continued to remain weak and auto industry struggled. OPEC will hold a meeting on Nov. 29 in Cairo and is likely to announce further production cuts as major refiners of the world including emerging economies like China, India are likely to slash processing rates.

Indian Equity Markets

• Fears of a prolonged global recession, slowdown in the domestic economy and selling by foreign funds pulled the key benchmark indices lower in the week, implying the Sensex is down ~56% YTD. This was despite last week’s RBI’s additional measures to help exporters and improve credit availability for SMEs, realty and corporates and fall in inflation.
• FIIs were net sellers on account of caution and higher risk aversion in global markets. MFs were also net sellers as Midcap/Smallcap indices underperformed.
• BSE TecK was down 5% on account of fears of loss of revenues, while Bankexunderperformed with a fall of 10% during the week as global financials were battered on future of Citigroup. BSE Realty was worst performer due to concerns of execution, credit availability and demand. BSE Metals declined on the back of slower demand and Auto stocks fell as domestic demand slowdown expected and as global automakers’ shares struggled.

Outlook: Global slowdown concerns, liquidity and investor sentiment to drive market direction. In terms of corporate profits, the Q3FY09 and Q4FY09 earnings are expected to remain subdued. Having said that most of the negatives have been priced into by the market. India expected to emerge stronger post crisis as developed economies struggle.

Indian Fixed Income Markets

• 10-year bonds rallied as yields dropped ~50bps on reasonably comfortable liquidity, fall in inflation and expectations of further downward movement in interest rates.
• INR tumbled to below Rs.50 a dollar as a rout in global equities added to speculation investors will increase sales of riskier emerging- market assets amid a deepening global economic slump. Analysts reckon that even though the RBI has been trying to support INR through interventions, the underlying demand for dollars is very strong and the supply is limited. This coupled with higher degree of risk aversion likely keep the INR under pressure.
• RBI auctioned 7.56% GOI 2014 and 7.94% GOI 2021 for Rs.90bn at cut-off yields of 7.16% and 7.42% respectively. It also bought back 7.55% MSS 2010 and 5.87% MSS 2010 for Rs.90bn to provide liquidity.
• WPI Inflation declined further to 8.90% in the week ended 7 Nov 2008 from 8.98% in the previous week.

Outlook: Market sentiment upbeat due to RBI’s measures on liquidity, credit and fall in inflation.

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