With senior Italy officials openly hinting at secession from the common currency, European shares come under attack after a shock from Italian bonds. On a day when the Indian financial markets were shut, the European stocks came under attack after a surprisingly anti-Euro rhetoric from Italy. Italian bonds crashed pulling down Italian banking stocks. This had a major spill off effect, considering the size of Italian bond markets. Italy has one of the most robust bond markets in the world with most Italian banks having very deep and wide positions in these Italian sovereign bonds.
In a move that was long overdue, the IL&FS board was taken over by the government before announcing a rescue package. In a clear indication that the government had lost faith in the current IL&FS Board, a new board under the leadership of Uday Kotak was constituted. Vineet Nayyar, who was instrumental in turning around Satyam, and former SEBI chief G N Bajpai will also be part of the board. The primary focus will be to ring-fence the company from legal cases; organize asset sales and monetize deep assets before repaying the creditors. Execution could be a lot tougher than Satyam.
Oil prices in emerging markets are at 2008 peaks, says Bloomberg even as Brent crude touched $85/bbl. Bloomberg opines that analysts are still looking at oil in dollar terms. But to gauge the actual effect, one needs to look at crude in local currency terms. Most EM currencies lost over 70% versus the dollar since 2008 and hence in local money terms, oil may already be quoting at the equivalent of the 2008 peak of $147/bbl. That is not great news for the net importers like India because it only means that the hidden cost of higher oil prices could be much higher if the dollar impact is also considered.
Manufacturing gave some mixed signals. Core sector matters because it accounts for over 41% of the IIP. Core sector growth comes in lower at 4.2% for August and PMI-manufacturing for September at above 52. The core sector growth (consisting of 8 key infrastructure sectors) came in at 4.2% compared to 7.3% in July and 7.4% in June. The key drivers like coal, natural gas and electricity grew at a much slower rate in August. Crude oil and fertilizers saw negative growth of -3.7% and -5.3% respectively. PMI continues to hint at an expansion. The fall appears to be more due to the base effect.
The rupee continued to be under pressure and closed very near to its all-time low of 73/$. INR weakened 58 bps to 72.913/$ while 10-year bond yields fell to 7.99% on Monday. Both the markets were closed on Tuesday. The rupee continued to be under pressure and that is likely to continue with the Brent Crude touching a high of $85/bbl on Tuesday. That again raises the specter of higher trade deficit and higher CAD for the economy. Bond yields fell after the government announced a much lower borrowing program of just Rs.2.47 trillion and infused liquidity into markets through OMOs. Bond markets are now betting that the RBI may not respond to the Fed with a 25 bps rate hike as it also has to maintain the growth tempo in the economy. Also, hardening rates have not helped the rupee.
Anil Ambani of the ADAG group may again be in a problem ahead of his Jio stake sale. Ericsson of Sweden to sue Anil Ambani for failure to pay Rs.550 crore settlement money. As part of the NOC obtained from Ericsson for the Jio deal, RCOM had to pay compensation of Rs.550 crore to Ericsson by 30th September. However, RCOM had recently approached Ericsson with a request for a 60-day extension, which Ericsson refused. Since the court had ordered the payment, Ericsson has filed “Contempt of Court” against Anil Ambani for not honoring the agreement. A hearing is on 4th October.
