Oil prices touched the highest level since 2015 with Brent crude quoting well above the $67/bbl mark. It appears like the geopolitical situation in Libya, Kurdistan and Iran will likely drive the oil price trend in the current year. Last week we had seen reduced supply of oil due to a blast in a key Libyan pipeline. Interestingly, supply is not able to currently keep pace as most oil producers appear to be enjoying the dividends of higher oil prices. Russia and OPEC have already completed 1 full year of supply cuts of 1.8 million barrels per day and this is likely to extent through the end of the current calendar year.
Factory output, better known as PMI Manufacturing, came in at 54.7 for the month of December 2017 hinting at one of the best growth phases for factory production. The surge was largely driven by a sharp rise in prices of raw materials in the aftermath of the implementation of GST. It may be recollected that a number of over 50 indicates an expansion while a number of less than 50 indicates contraction. Apart from the price of raw materials, the output and the job creation also grew at the fastest pace in the last 5 years. Of course one will have to await the PMI Services number to get a clearer picture.
The government finalized the norms for the issuance of electoral bonds. These bonds will be interest free and in the nature of promissory notes. They can be encashed by political parties through a designated bank account. Electoral bonds will be available for sale through the SBI window in various denominations and will be kept open in intervals. The idea of electoral bonds was mooted by the Modi government last year to pave the way for more transparent funding of elections in India. Effective this year, all political donations of over Rs.2000 can only be made by cheque or electoral bonds.
For a long time it had been an area of conflict of interest and now SEBI has clearly asked financial players to clearly choose whether they want to be a distributor of products or a financial advisor. Currently, the distinction is a grey area with most distributors also doubling up as financial advisors. That would mean that individuals who have registered as financial advisors cannot distribute products. Existing financial services that are distributors cannot be financial advisors either directly or through their group companies. It could actually open up a huge opportunity for thirty party advisory services.
As the world’s second biggest economy embarks on a new year, China will have to deal with debt, poverty and pollution. This could be its three big battles for the coming few years. Year 2017 was China’s first year of strength since 2010 and was the year that finally saw the Chinese economy showing signs of a turnaround. Risks to China will manifest as risk to the global economy since China is one of the largest importer of commodities and most consumer goods. That is why buoyant growth and demand coming from China is extremely important to most of the economies. Apart from poverty and pollution which China is struggling with, the other big challenge is debt. Chinese people are one of the most indebted and most of the funding comes from shadow banks, which is a bigger worry.
Even as the rate cycle appears to be headed up globally, the Indian government appears to be keen on reducing most of the administered rates lower. This has been a demand for quite some time as the high rates plus the tax benefits were distorting the yield curve. In that sense it is a step in the right direction. The government has just cut the rates on PPF by 20 basis points to 7.6% while the 8% RBI bond is now likely to be replaced by a 7.75% bond. Ironically, during the last few months, the bond yields on the 10-year benchmark are up by over 100 basis points.
