Finance Minister, Arun Jaitley, admitted that the government curbed spending to curtail fiscal deficit in the previous financial year. According to Arun Jaitley, government may have curbed spending to the tune of Rs.1 trillion to ensure that the revised fiscal deficit of 3.4% was met for fiscal year 2018-19. This was more because both the direct taxes and GST collections were short of target as per a report in Bloomberg. If the government had stuck to its original spending targets, the fiscal deficit may have ended up closer to 3.8% of GDP for FY 2018-19. That would have spooked foreign investors.
The pressure of volatility is finally beginning to show on the mutual fund inflows. Indian Mutual Funds took a double whammy in the month of April 2019. Net inflows into equity funds in the month of April 2019 dropped 61% to Rs.4,609 crore. This is the worst figure since September 2016 and marks a 31-month low. This is despite the SIP inflows of Rs.8200 crore, which implies negative block flows into equity funds. The fixed maturity plans (FMPs) saw net outflows of Rs.17,644 crore for the month of April 2019. FMPs remained the pain point after some AMCs postponed the FMP redemption.
Crude oil continued to remain weak but held above the $70/bbl mark. Despite the draw down in US oil reserves, the markets were most worried about the possible impact of the US-China trade war on oil demand and oil prices. As a result oil prices weakened despite sanctions on Iranian oil, troubles in Venezuela and the reserve draw down. While Brent is holding $70/bbl for now, a lot will depend on the China-US trade talks this week. There has been some realignment of equations in the oil cartels with Iran and Russia drawing closer together as a foil to the OPEC.
The problem of inverted US yield curve is back to haunt markets as the US yield curve takes on an inverted shape for the first time since March 2019. An inverted yield curve happens when the yields on the long end falls below the short end. Currently, the US 10-year benchmark yield has fallen below the 3-month yield indicating that there was little appetite for long term paper. In the past, inverted yield curves have been precursors to a recession in the economy. 10-year yields in the US fell sharply to 2.42% in the bond markets. A recession is the last thing the world economy needs now.
If the intention of Trump was to cut the trade deficit with China, there were early signs of success. The merchandise trade deficit with China for the month of March fell to $20.7 billion, a level was last seen in March 2014. With its recent soybean diplomacy, US exports of soybeans to China increased by 23%. Trump has still promised to hike tariffs from 10% to 25%. Short bets on Chinese Yuan and Korean Won have been increasing. According to a recent poll of traders and economists conducted by Reuters, there has been a consistent short build up in the Yuan and the Won ahead of the trade talks. Markets are betting that if the 25% tariffs kick in on Chinese imports then the impact could be sharp on these currencies. To keep exports competitive, even China may not be exactly averse to a weaker Yuan.
India and China may hold the key to saving the Iran deal. In fact, key EU nations; Germany and France along with UK, are keen to save the Iran deal and have called upon the US for a more rational approach to imposing sanctions on Iran despite Iran’s recent decision to enrich uranium. Iran has called upon China, Russia and EU to stand by Iran on the sanctions issue. However, the EU will be largely depending on the support of China and India as they are the two largest buyers of crude from Iran. China’s stand will be crucial. India’s refiners are heavily dependent on Iran crude imports.
