Easy money may be back in fashion all over again. The European Central Bank (ECB) deepened rate cuts and re-introduced Quantitative Easing (QE) measures. In a bid to boost growth, the ECB promised stimulus buying of bonds as long as the slowdown lasted. In fact, the ECB even cut its deposit rates by another 10 basis points to (-0.50%) and backed it up with bond purchases worth Euro 20 billion per month from November onwards. This move by the ECB is likely to put further pressure on the Fed to get more dovish on rates. Trump has already suggested to the Fed to push rates into negative territory.
Inflation has come in higher but well within the RBI comfort zone. Retail Inflation (CPI) for August 2019 came in higher at 3.21%. Higher inflation was in line with street expectations and even managed to touch a 10-month high level of 3.21%. The push to inflation came from the food basket with vegetables and pulses becoming dearer. This is slightly higher than 3.15% reported in July. Rural inflation was sharply lower than urban inflation and could be a hint of rural slowdown in demand. RBI comfort level is up to 4% and so the rate cut expectation in the October policy still continues.
IIP Growth for July was better than June but lower on a YOY basis. IIP growth comes in at 4.3% for the month of July 2019. On a YOY basis, the index of industrial production (IIP) was down from 6.2% to 4.3%, largely driven by weakness in manufacturing. Over the last one year, manufacturing (the largest component of IIP) fell from 7% to 4.2% driven by a slowdown in demand. While the growth in the mining sector was higher in July 2019, the electricity generation sector showed signs of weakness. The weak manufacturing growth is likely to be the one factor that could trigger another repo rate cut.
Brent Crude cracks close to the $60/bbl mark as Iran story plays out. The US hint at easing of sanctions on Iran pushed down oil prices sharply. In the last 24 hours, Brent Crude has lost over 5%. Markets are expecting that the easing of Iranian sanctions would be instrumental in increasing the supply of oil in the market and push prices lower. Meanwhile, Nigeria and Iraq have agreed to cut oil supply to support oil prices to profitable levels. The oil prices over the next few days are likely to be pulled both ways. The new Saudi Energy Minister is a known oil hawk and is keen on oil prices closer to $85/bbl.
The positive cues from the US and China could not help the stock markets to sustain its uptrend and turned into negative territory. The weekly options expiry also put pressure on the markets. Banks and financials did hold up but autos weakened during the day and kept the pressure on the markets. The A/D was also extremely unfavourable at 15:35. Nifty closed below the psychological 11,000 mark. Meanwhile, there is good news on the domestic investment front as mutual funds added 5 lakh folios in August 2019 to touch 8.53 crore folios in total. The addition of mutual fund folios in August was half of the additions in July. The good news was that nearly 4.12 lakh folios out of these total folios represented equity and ELSS folios which indicate that retail interest is active despite market volatility.
Drought and floods could cut sugar output by 20% this season according to the Indian Sugar Manufacturers Association (ISMA). The ISMA has warned that the mix of drought and heavy rain conditions across India could cut the overall sugar output by nearly 20%. This would be the lowest sugar output in the last 3 years and should help bring prices higher to more remunerative levels. In the last 2 years, the government has been forced to subsidize the export of sugar to reduce the domestic glut and support prices. That may not be required this year due to lower sugar supply.
