There was good news on the trade deficit front but exports appear to be in a spot of bother. Trade deficit for June narrowed but exports fell sharply on a year-on-year basis. The trade deficit for June 2019 came in at $15.28 billion compared to $15.8 billion in May 2019 and $16.6 billion in June 2018. However, the real worry is the sharp fall in exports which fell by 9.71% to $25 billion in June. Weak exports were an outcome of the global trade war and higher tariff barriers imposed. Imports were also down by 9% in June but that was more due to lower oil prices and could change with oil prices.
As the NBFCs struggle for liquidity, the one sector that has really felt the heat of the situation is the Indian realty sector. With most NBFCs getting into an asset liability mismatch problem and banks becoming wary of lending to realty sector, the big sufferers could be the real estate developers. Some of the schemes like the 10:90 schemes were funded only by NBFCs after banks had been dissuaded by RBI. This was a major selling point for realtors and with NBFCs out of the lending market, it could pose problems. The impact is already visible in the current funding sources of NBFCs.
For a long time IT and pharma represented the defensive bets in the Indian market and now they may be back in the reckoning in Indian indices. The Nifty rally on Monday was led by two unlikely sectors; IT and pharma, which had a tumultuous period for the last 4 years. IT stocks got a boost after the better than expected guidance given by Infosys while pharma stocks got a boost from a couple of upgrades by brokers on Sun Pharma. But the real thrust appears to be coming from defensive buying in a highly uncertain market. More so, after the series of upgrades on Sun Pharma by Morgan Stanley!
Oil in the Brent market faced stiff resistance above the $67/bbl mark and crude oil prices retreated after crossing the level during the day. After touching a high of $67.47/bbl, Brent crude gave up more than $1 as the impact of Tropical storm Barry started to wane. The easing tensions in the Middle East also put off any fears of geopolitical risk. But above all, the real thrust to lower oil prices came from the sharp slowdown in Chinese GDP growth in the June quarter to a 27-year low of just 6.2%. Weak Chinese growth is expected to weaken global demand and take oil demand lower along with it.
There was not so encouraging new for global growth equations as China Q2 GDP slowed to a 27-year low of 6.2% on trade war woes. In fact, factories in China have been shedding jobs at the fastest pace since 2008. As a response, the Chinese government is expected to give a series of monetary and fiscal boosters to the economy so that growth is revived. Meanwhile, the trade war is pinching exports and also China’s role as a manufacturing hub and PIMCO expects China to trigger a full blown currency war. PIMCO, which manages debt AUM in excess of $2 trillion, has affirmed that with China pushed to the wall by the US and growth slowing, it may not have much of a choice other than devaluing the Yuan. This could trigger a series of currency falls. Normally, all nations end up losing in a currency war.
A host of economists, bankers and industry leaders are now veering around to the view that India’s low inflation may not always be good. Industry leaders are worried that the weak inflation in the Indian context could be reflective of weak consumption demand and a likely worsening of the economic outlook. Moderate inflation has normally been in sync with GDP growth. Normally, the fight between growth and low inflation has been a bone of contention between governments and central banks. The problem in India could be that low inflation may be an outcome of weak growth prospects.
