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In the last week, major currencies closed almost on a flat note. The US Dollar Index (DX) traded with a negative bias in the last week but closed flat. The Indian Rupee (INR) depreciated marginally by 0.3% to close at 46.94 and the Euro fell slightly by 0.1%. Mildly bullish sentiments in the last week coupled with the European banks stress test results kept sharp gains in the currencies under check. Economic data out of the US in the last week continued to come on the negative side.
In the initial part of the week, equity markets traded on a mixed note awaiting the European banks stress test results. However, the results of the tests came in against expectations as 92% banks passed the tests. On the back of this, sentiment turned bullish by the end of the week as the stress tests data showed that the European banking scenario is not as bleak as expected.
The INR depreciated to a level of 47.41 in the last week as a weak start on the equities front in the beginning of the week restricted gains in the currency. Week-on-week too, the currency weakened as sentiments remained largely mixed. FII inflows in India in the month of July totaled Rs.10,126cr. In the month of June, FIIs bought equities worth Rs.10,508cr and year-to-date inflows stand at Rs.41,203cr.
·The demand for the US financial assets also declined in May. Global demand for the financial assets totaled $35.4 billion in May as against the previous figures of $81.5 billion in April.
·In the last week Ben Bernanke in his testimony before the Senate Banking Committee said that US has very little probability of being affected by deflation. However, he also added the Federal Reserve has possible tools to prevent it. Moreover, the Fed chairman also said that the employment scenario remains a major concern for the US.
·Unemployment claims in the US increased by 37,000 to 464,000 in the last week.
·Existing home sales increased by 5.37 million in June as against forecasts of 5.18 million.
·Current account deficit in the Euro area widened in the month of May. The European central bank said that deficit increased by 5.8 billion Euros in May from 5.6 billion in April. Markets had expected the deficit to narrow down to 3 billion Euros.
·The Euro zone manufacturing PMI increased to 56.5 in July from 55.6 in June. Markets had expected the index to decline to 55.2. The Services PMI also increased to 56.0 in July as against 55.5 in the earlier month.
Fundamental Outlook
The Reserve Bank of India (RBI) is expected to give its monetary policy review on 27th July, 2010. The central bank is expected to tighten monetary policy by raising interest rates by another 25 basis points. RBI has lifted rates three times since March by 25 basis points each. In this week we expect the INR to appreciate as higher risk appetite coupled with continuing inflows in the country will help support gains in the currency. Weakness in the DX is also positive for the INR. We expect the INR to trade in the range of 46.75 - 47.60 in this week with an appreciation bias.
Global Vegetable Oil Supply and Distribution at a Glance:
Current Scenario of Global Major Vegetable Oil Supply and Distribution: World production of vegetable oil for 2010-11 is projected at 146.64 million tonnes. Indonesia accounts for 19.30% of world vegetable oil production. While Malaysia 14.26%, China 12.55%, EU 11.40% , USA 6.58%, Argentina 6.15%and India accounts for 4.85% only. World vegetable imports for 2010-11 are projected at 58.36 million tonnes. China accounts for 18.30% and India accounts for 17.60% of world vegetable oil import. China, EU and India consumes about 50% of total world domestic consumption of vegetable oils.
Current Scenario of Global Soybean Oil Supply and Distribution: World production of soybean oil for 2010-11 is projected at 39.964 million tonnes. China accounts for 23% of world soybean oil production. While USA 21%, Argentina 19%, Brazil 16%, EU 6% and India accounts for 3% only. World soybean oil imports for 2010-11 are projected at 8.852 million tonnes. China accounts for 24% of world soybean oil import and India accounts for 14% only.
World Palm Oil Imports Scenario: World Palm oil imports for 2010-11 are projected at 37.377 million tonnes. India accounts for 22% of world palm oil import, while China 19%, EU 14% and Pakistan accounts for 6% only.
India's Current Scenario of Edible Oil Production: Domestic vegetable oil production was 63.7 lakh tones in 2009-10 and it is projected at 70.9 lakh tones for the year 2010-11, which is not sufficient to meet domestic requirement. India needs to import more than 50% vegetable oil to meet their demand. Soybean, mustard and cotton seed oil are major contributor in total production, which accounts for about 60% of total domestic production.
Weekly Market Commentary of Refined Soy Oil: NCDEX August soybean oil prices rallied in the last week and breached its contract high of Rs 460/10 kg on account of firm global market and finally it managed close at Rs 467/10 kg with a gain of about 3% as compared to previous week's close of Rs 454/10 kg. Refined soy oil futures at Chicago Board of Trade (CBOT) surged due to hot and dry weather, which may impact on yield. Weakness in the US dollar also added bullish tone. Domestic edible oil demand improved slightly on account of rainy season. Edible oil import declined in the month of June also favored the bulls in short term. As per Solvent Extractors Association (SEA) data, the import of vegetable oils has slumped by 6% on a month on month basis in June 2010 to 7.32 lakh tonnes. The overall import of vegetable oils during November 2009 to June 2010 is reported at 55.81 lakh tonnes as compared to 58.23 lakh tones during the same period last year, down by 4%. Crude palm oil futures at Bursa Malaysia Derivative Exchange sparked in tandem with huge gains in soy oil futures at CBOT and better export figures of Palm Oil in the Malaysia during the period of July 1-15 as compared to previous month during the same period. As per SGS (Cargo Surveyor, Malaysia) Malaysia's palm oil exports during the period of July 1-15 was at 668,573 metric tonnes, up 11 % as compared to previous month during the same period. As per latest WASDE monthly Oilseed supply & demand report, Rapeseed production is sharply reduced for Canada due to lower harvested area, this also favored to bulls.
The USDA's weekly export sales report released on July 15, 2010, revealed that the net export sales for soybean oil sales were 13,000 tonnes for the current marketing year and 40,000 tonnes for next year for a total of 53,000 tonnes. Sales need to average 9,000 tonnes each week to reach the USDA forecast.
Fundamentals and Technical Outlook: In the coming week, prices are expected to move slightly higher on firm global market sentiments as we are major importer of edible oils. The cost of importing will increase, thereby raising the domestic prices. However, in the long term, huge stock of imported edible oil and existing better carry over stock of oilseeds this year as compared to last year will weigh on the prices. Also, poor export demand of domestic soy meal are in favour of bears.
NCDEX August contract shall find a strong support at 455/450 levels and resistance at 475/480 levels for the coming week.
Technical Indicators: On the daily charts, prices closed above its 10 Day EMA and its 20 Day EMA and MACD-Histogram is in positive territory, which indicates bullish market sentiments. 14-Day RSI is at 82.38, which is in overbought zone.
Global supply scarcity and hoarding at the domestic market to keep Black Pepper prices firm.
Black Pepper, the ancient spice of India witnessed a surge of 8.56 percent in this week due to global scarcity and hoardings by the farmers in the domestic market.. Global Black Pepper production is expected to be lower at 2.79 lakh tonnes in 2009-10 as compared to 2.81 lakh tonnes in 2008-09. Pepper production in Vietnam -90000 tonnes in 2010 as compared to 135000 tonnes in 2009. Vietnam exported around 61000 tonnes till May 2010. Thus it may not be having enough stocks to sell. Pepper production in Indonesia is expected to be 22-25 thousand tonnes compared to 30-32 thousand tonnes in 2009- 2010. Not much of the carry over stocks are present with the nation. Exports from Indonesia stood at 50,640 tonnes of pepper as compared to 52410 tonnes in 2008. In first four months it exported around 5,937mt of pepper to U.S. being the most important source of pepper.
According to Spices Board, Black Pepper production in India is projected at 45,000 tonnes as compared to 48,000 tonnes in 2008-09. However, Black pepper production is expected to be lower than 45,000 tonnes in this year according to market source. Pepper exports from India fell by 22 percent to 19,750 tonnes in April-March 2009/10 from the year-earlier period as exports to main consuming countries such as the U.S. and Europe declined.
Demand from the overseas buyers especially from U.S.A. improved in the months of April to May 2010 providing support to the prices. Import of Black Pepper in U.S. from January to April 2010 stood at 19,568 tonnes as compared to 18,567 tonnes in the same period previous year. Indonesia maintained its position as the most important supplier to U.S. The reason behind being the major supplier is the lower quotes offered by them (Indonesia).
Currently according to the above statistics much of the stocks are not left with Vietnam and Indonesia. This will be friendly for the domestic price trend. Arrivals at the spot market have declined in this week to 30 tonnes as compared to 45-50 tonnes in the last fortnight. Farmers in the domestic market have earned good profits from the sale of Cardamom and Coffee so they are not in hurry to sell their produce at lower levels.
Price Trend of Black Pepper
Prices at the spot markets surged by 4.83 percent due to reduced arrivals and better offtakes by the local stockists. Internationally price of Black pepper of Indian origin surged from $3550/ tonne to $3950/tonne whereas Vietnam pepper prices were quoting around $3750/tonne. Prices at the futures traced the domestic fundamentals and surged by Rs.1,400/qtl.
Outlook
Black Pepper prices will remain firm in the coming days due to lower global availability of pepper with the major producers such as Vietnam and India. Further demand from the overseas will creep to India as Vietnam will hoard the stocks of pepper and will not readily sell its commodity till the fresh arrivals in next year. Brazil fresh crop is expected in September and they too don't have much pepper stocks. In the medium to long term domestic prices will take cues from the pepper production in Brazil and demand from the overseas buyers.
Technically, prices will find strong support at 17200 levels and thereafter 16640 levels. Resistance may be seen at 18300 levels and thereafter at 18500 levels. Any correction at the downside is good opportunity to buy.
The Euro gained a whopping 2.3% in the last week and held near its three-week high on Friday. This is the second successive rise in the currency against the US Dollar Index (DX). The Euro held near $1.24 as investors shed short positions and after high demand for Spanish government bond auction on Thursday which eased concerns about Spain's debt-servicing abilities. Risk appetite re-emerged in the financial markets after the Spanish bond sale and led to demand for higher-yielding and riskier investment assets. Spain sold 3 billion Euros ($3.7 billion) of 10-year debt on 17th June at an average yield of 4.86 percent, less than the 5.04 percent that the bonds traded at before the sale.
Demand for the bonds was 1.89 times the amount on offer. It also sold 479.2 million Euros of 30-year debt at 5.908 percent and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on 18th March. Positive sentiments also emerged after European leaders agreed to publish details of stress tests which will show the financial health of big banks next month. This helped to restore confidence in the Euro Zone and led to some support to the currency which has declined 13.5% against the DX on a year-to-date basis.
Debt concerns in the Euro Zone have eased but have not vanished. Markets are currently taking support from expected hopes of improvement in the Euro Zone scenario. Strength in the currency is mainly backed by these and may not be sustainable in the coming weeks. Greece's credit rating has been downgraded to "junk" status and this in itself indicates that the economic scenario is still bleak. Ongoing austerity measures in the European countries are not likely to reduce budget deficits immediately. Moreover, the impact of the $1 trillion rescue package to the European countries is still to be seen. Long-term negative impact of the European debt crisis is feared in the US, China and other European nations. Hence, the positive trend in the Euro may not continue for long as the fundamentals still remain weak.
Euro Zone economic data in the last week
• Industrial production in the Euro Zone increased by 0.8% in April. Industrial output increased for eleventh consecutive month in April.
• The German ZEW economic sentiment declined much more than expected in June. The economic sentiment index declined to 28.7 as against the previous figures of 45.8 in the earlier month.
• Consumer prices remained unchanged to 1.6% in the last month.
• Spain was successful in selling its 10-year bonds to the tune of 3 billion Euros ($3.71 billion) at a lower yield.
• The European Union has decided to publish results of the stress tests conducted on the region's lenders. This will lead to more transparency.
• Moody's Investors Service lowers Greece's credit rating to "junk" status.
• French government announced yesterday that it would raise the retirement age and increase income taxes on the rich to help rein in its budget deficit.
Fundamental Outlook
The debt crisis in the Euro Zone is not expected to have an immediate solution. But concerns over the debt crisis has eased and led to recovery in demand for the currency which lost sharply since the beginning of 2010. Short-term strength in the Euro is expected to remain on the back of expectations that the situation in the ailing European nations will improve. But, we expect worries on the Euro Zone front to re-emerge sooner rather than later. In the coming week, we expect the Euro to trade with a positive bias in the range of 1.2190 - 1.2600.
Global financial markets faced a dilemma in the last week amid a host of mixed news on the economic front. This led to a mixed trend in the Indian Rupee last week which closed on a flat note at 46.83. During mid-week, the Rupee received some support on account of easing concerns over the global economy as economic data from China came on the positive side. Also, economic data from India was supportive as the Industrial Production figures came in at 17.6%, the sharpest rise since December 2009. This helped to lift sentiments in the domestic markets but the positive momentum built over the last few days came to a halt as the equities closed the week in the negative territory.
What helped to provide trigger to the global equity markets mid-week was the positive economic data from China. The country's industrial output rose 16.5 percent from a year earlier, but this was less than the previous figures of 17.8%. Retail sales rose by 18.7 percent as against a previous gain of 18.5 percent. China's foreign trade and exports continued to surge in May. Data indicated that foreign trade jumped by 48.4 percent whereas exports increased by 48.5 percent.
Economic data only from China was satisfactory as the US and UK data came slightly on the bearish side. US ISM manufacturing index fell to 59.7 in May from a previous figure of 60.4 in April. The UK housing market is slowing down again, as the latest monthly survey shows that prices fell by 0.4% in May, after a 0.1% drop in April, taking the average UK house price down. UK manufacturing unexpectedly weakened in April for the first time in three months as car production dropped and factory output fell 0.4 percent from March. Retail sales inthe US unexpectedly dropped in May by 1.2% in May from a previous increase of 0.6% in April.
Fears over the sovereign debt crisis in the Euro Zone continue and the coming week could witness re-emergence of fears. Global economy continues to remain vulnerable to downside risks. The Japanese Prime Minister in his statement last week said that he fears a Greece-like crisis in Japan. The country needs to deal with its swelling national debt as the country has the largest public debt among industrialized nations at 218.6% of its gross domestic product in 2009.
This indicates that worries over the economic front have not eased and the coming week is expected to witness selling pressure. We expect this to lead to a rise in risk aversion in the financial markets which will reduce demand for higher-yielding and riskier investment assets, thereby reducing demand for equities and commodities. On the back of this, the Indian Rupee could depreciate as weak global economic news could lead to weakness in the currency.
Fundamental Outlook
The European debt crisis will continue to have an impact on the global equity markets. A package of $1 trillion to the ailing European has not helped to contain losses. We expect fears over the European sovereign debt issues to continue to haunt financial markets in the next week. On the back of this, domestic markets may witness concern over capital outflows from the country in the short-term. Hence, we expect the Rupee to trade with a depreciation bias in the coming week with support seen at 46.30/45.55 and resistance at 47.75/48.85.
The Euro slipped 2.3% in the last week marking a weekly low of 1.1953. Continuing economic concerns in the Euro Zone led to the decline in currency. Sovereign debt worries in the Euro Zone haunt financial market sentiments. Despite some positive news on support to the ailing European countries in the form of a $1 trillion rescue package the Euro continues to trade southwards. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautious.
In the month of May, the Euro did receive some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.
The European Debt Crisis………
Concerns of a sovereign debt crisis started developing in early 2010 as countries like Greece, Ireland, Spain and Portugal faced huge budget deficits. This led to fears over rising government deficits and debt levels across the globe. The recent events in Greece have aggravated the situation in the financial markets and the Euro Zone countries and the International Monetary Fund (IMF) agreed to €110 billion loan for Greece.
But this loan has come along with a package of harsh austerity measures which Greece has had to adopt. On the back of these ongoing economic issues, the European policymakers and the IMF agreed upon a comprehensive rescue packageworth $1 trillion which is aimed at ensuring financial stability across Europe.
The month of May has been eventful as the financial markets kept a check on the happenings and developments on the Euro Zone front. Greece has witnessed major protest by citizens against the austerity measures. Protest by way of strike led to a global sell-off in equities as the general nationwide strike in Greece turned violent. Such poor has been the capability of the Euro Zone to handle its debt crisis that the global financial markets witnessed a downside pressure and markets shivered on expectations that this will lead to another round of recession.
EU Emergency Measures
In order to prevent the situation from getting bad to worse, the European Union (EU) and the IMF have carved out an emergency rescue package of up to €750 billion ($1 trillion) in order to control the Greece's crisis from spreading. The European package has been the biggest government rescue since the G-20 leaders moved to stabilize markets after the collapse of Lehman Brothers in September 2008. But despite the announcement of this rescue package, the Euro has slumped to a more than a four-year low of 1.2109.
Following are the three components of the EU-IMF rescue package:
The first part includes a €60 billion ($70 billion) stabilization fund. This fund will be provided to the Euro Zone members who are struggling to finance its debts because of high interest rates demand by the financial markets. The second part of the emergency fund includes government-backed loans worth €440 billion ($570 billion). These loans will be issued via a Special Purpose Vehicle (SPV). The final part of the emergency fund consists of €250 billion ($284 billion) with additional contribution from the IMF.
Systemic risk continue as $1 trillion package fails to support Euro
Debt crisis in the Euro Zone is expected to be as serious as the credit crunch in the US. Hence, even after a $1 trillion rescue package to the ailing European countries systemic risk is not corrected. Despite the announcement of this rescue package, the Euro continued to decline and slumped to a four-year low. Austerity measures in the Euro Zone have become rigorous as Spain has unveiled the biggest cuts in the last 30 years and Portugal has also announced to reduce wages and raise taxes.
Spain's unemployment rate rose above 20% for the first time in more than a decade. The jobless rate rose to 20.1% in the first quarter from 18.8% in the previous three months. A 5% cut in public salaries was also announced by the Spanish Prime Minister this month. Retail sales volumes in the 16-nation euro zone were flat in March. German manufacturing purchasing managers index fell to 58.3 in May from 61.5 in April, a three-month low, and the services PMI also dropped to a three-month low of 53.7 vs. 55.2 in April.
Despite this huge rescue package of $1 trillion, what triggered a downside in European equities was the short-selling ban imposed by Germany in May. Germany's market regulator banned investors from naked short sales for 10 banks and insurers, as well as naked credit- default swaps on euro-area government bonds starting May 19. The decisions to ban short selling on these instruments led to concerns amongst investors that the crisis may get severe in the future.
Spain fights to survive
Spain is the fourth-largest economy in the Euro Zone and poor economic prospects in the country could lead to a major financial disaster. High level of household and corporate debt has left the country in an uncompetitive state. Size of Spain's economy is four times bigger than Greece and more debt worries in Spain could derail economic recovery in the Euro Zone.
Poor economic scenario in the European countries has created havoc as the political abilities of the countries have also come under scanner. Spain is especially finding it difficult to keep a grip on power as the country is caught between citizens opposing austerity measures on one hand and on the other hand investors demand budget cuts and more flexible labor markets.
The Spanish government does not have a parliamentary majority and this leads to delay in the timing for every measure in this testing time. The Popular Party in Spain has voted against spending cuts last week. But the situation in Portugal is different as the main rival parties have recently agreed on an austerity package. The Spanish government's move is being judged at every level as it promises to slash the public deficit from 11.2% of gross domestic product in 2009 to the EU guideline of 3% by 2013.
Fundamental Outlook
Public finances pose the biggest threat to the Euro Zone and the ECB said in its latest Financial Stability Report that predictions of further potential write-downs remain. Banks in the Euro Zone suffer considerable loan losses in 2010 and 2011 and this could amount to a further €195bn (£165bn) in write-downs. May has turned out to be the worst month for the European currency and equity markets in the year 2010. These concerns are expected to remain and lead to downside in the Euro. We expect the Euro to weaken in the coming week and trade in the range of 1.1690 and 1.2490.
Major economic data releases in June which will help to set the trend in the markets are Federal Reserve Chairman Ben Bernanke's speech, ECB Press Conference, US, Retail Sales, Consumer Confidence and FOMC Statement which will help to set the tone in the global financial markets.
Sovereign debt worries in the Euro Zone continued to haunt financial market sentiments. Despite some positive news on support to the ailing European countries the Euro slumped 2.4% in the last week. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautioned. During the week the Euro received some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.
The Euro is headed for the sixth monthly loss against the dollar. Concerns that the European measures to lower fiscal deficits and contain the region's sovereign debt crisis may undermine global recovery and have led to reduced appeal of the Euro. A major factor that is weighing on the Euro is the lack of coordination between its members and markets are also losing confidence in the Euro Zone leaders. On a year-to-date basis, the Euro has slumped 8% on concern that rising government budget deficits will lead to defaults and an eventual break up of the Euro region. On the back of these worries in the Euro Zone, the US Dollar Index has gained sharply as risk aversion has led to increased demand for the low-yielding dollar.
Spain loses AAA Rating on debt burden
The latest negative development that could lead to further losses in the Euro is that Spain has lost its AAA credit rating at Fitch as Europe continues to battle with its debt crisis. The European policymakers have crafted a $1 trillion rescue package for the region's weakest economies but this has not been successful in lifting sentiments. Fitch Ratings has downgraded Spain's AAA rating to AA+ and has assigned the country a stable outlook.
This downgrade in rating has come at a time when Spain is trying to cut the euro region's third-largest budget deficit as the economy is witnessing a collapse of a debt-fueled construction boom. The unemployment scenario in Spain is very discouraging as it is running at 20% and the country's once booming housing market is also suffering a slump.
Economic situation in the Euro Zone remains bleak as debt affected countries have adopted austerity measures. But the country faces challenges in implementing austerity measures. Spain has also agreed to deeper spending cuts that would help to slash the deficit to 6% of Gross Domestic Product in 2011 from 11.2% in the last year. But a cut in public wages and pensions in Spain has failed to convince markets that the country can put finances back in order with the current high borrowing costs. These ongoing worries in the Euro Zone could continue to put downside pressure on the Euro. Even if global policymakers step up efforts in order to save the crisis from spreading further, we expect risk aversion in the financial markets to remain as investors remain cautious.
Continuing worries in the Euro Zone and recent downgrade of ratings in Spain is expected to have a negative impact on the Euro. The currency will also take cues from the economic data announcements in the coming week. The most important being the European Central Bank President Trichet's speech on Monday. Financial markets await to hear the ECB President's view on the current scenario and measures that the central bank will take in order to prevent further worsening of the situation. We expect the Euro to trade with a negative bias in the coming week as ongoing economic worries will affect investor sentiment and the appeal of the currency is reduced further on account of downgrade of credit ratings of Spain.
