Not this 2019, but now SKYMET projects that even the next couple of years could see weak monsoons. Predicting the vagaries of monsoon has never been an easy task and private sector, SKYMET, has gone ahead and forecast a weak monsoon for the next 2-3 years. According to SKYMET, this weak trend is indicated by falling LPA (long period average); down 50mm. SKYMET’s latest report predicts that, like in 2001, India could get into a cycle of weak monsoons from here on. This is not great news as it would impact the overall Kharif output as also have a negative impact on food inflation in coming years.
After a brief lull, crude oil was back to rallying in the Brent market. In fact, crude oil gained to above $67/bbl on rising Iran tensions in the Middle East. The restoration of US oil production after Tropical Storm Barry and weak China growth were supposed to depress oil prices. But that impact was only temporary. Oil again bounced above the $67/bbl mark as the tensions in the Middle East continued after Iran refused to abide by any export sanctions. The OPEC production limits also provided a base for oil prices in the market since the 1.7 million bpd cut will now go on till March 2020.
Even as the US bond yields have just held above the 2% mark, Indian bond yields fell sharply on the back of RBI rate cut expectations. Yields on the 10-year benchmark bonds fell sharply to as low as 6.31% on very strong rate cut expectations from the RBI in its August policy. The FEDWATCH tool is hinting at a 100% probability of rate cut by the Fed on July 31st. The strong FPI demand for bonds and the proposed $10 billion sovereign bond issue have raised bond prices and depressed yields sharply in last one month. The yield spread has now come down from 5% to close to 4.2%.
Recent market history may favour a rally in mid caps and small caps according to a study done by Kotak Mutual fund and reported by Moneycontrol. According to the report, in the last 2 occasions when the mid caps and small caps had fallen in a heap, they had rallied sharply in the immediate next year. This was visible first in 2008 and again in 2011. From that empirical perspective, there is a high probability that mid caps and small caps could outperform in 2019 after the sharp correction in the year 2018, as per the report. That poises mid caps and small caps to outperform the large caps this year.
With strong US data comes a strong dollar. Strong US retail sales data boosted outlook for the overall economy as retail sales in the US increased by 0.4% for the month of June compared to market expectations of 0.1%. There was a sharp increase in the purchase of motor vehicles and other goods and the spurt in consumer demand is likely to compensate for the weak investments and the tepid business climate. This led to the dollar strengthening and the pound weakening in the global currency markets The US dollar showed some strength on the back of strong retail sales even as the Pound weakened to a 27-month low of 1.24. The UK Pound has been under severe pressure due to the uncertainty over BREXIT and the next prime ministerial face of UK. The UK Pound also weakened against INR to 85/GBP.
Indian hedge funds could face the risk of higher taxation post the Budget 2019, especially after the imposition of additional surcharge on high income groups. The increase in the peak tax rate from 35.9% to 42.7% is likely to deliver a big hit to the small hedge funds operating out of India. With an AUM of around $6 billion, these Category 3 Alternative Funds represent a very small portion of the total FPI investments into India. However, analysts are now worried that such a steep hike in tax could force hedge funds to look at other markets and that trend is already visible in the last few days.
