Economic Roundup, June 29, 2018

Economic Environment

  • Trade war

  • Oil price and rupee

  • General emerging market weakness

How are the Indian and global economic environments affecting the financial markets?

  • As the world is gearing up for the actual imposition of tariffs and retaliatory tariffs by US, China, EU, Canada and Mexico and now India, talk of more tariffs by US on China and of an all out trade war with the US by China has escalated trade tensions globally. While EU and China are warning that a trade war can possibly lead to a global recession, the financial markets are reacting to such prospects by falling sharply though there is no immediate threat to the US economy but there are slowdown concerns for China. US markets are in correction territory and China’s stocks have entered bear market by falling more than 20% from the high, but Indian markets are trading in a range-bound manner because the more immediate and tangible concern for India is not the broader sentiment in the rest of the global markets about trade (US-China trade war could, in fact, benefit India because China is lowering tariffs on Indian exports to China to cut out some of its imports from US and alternatively source them from Asian countries) but the oil price and its effects on Indian inflation, current account deficit, and the rupee.
  • The United States has asked India to stop buying Iranian oil by November or face sanctions. This has been the US warning to essentially the rest of the world over Iran. Compounding the situation, OPEC has not met market expectations about raising oil production to alleviate the tightness in the oil market. Because of supply distruptions in Venezuela, Libya, and Angola and American threat of sanctions on Iran and prospective US sanctions on buyers of Iranian oil the oil price has risen toward the latter part of this week. Oil price is expected to remain elevated and this has become a cause of concern for the Indian financial markets. It has weakened the rupee because Indian current account deficit would stay high if oil price remains high with another contributing factor to rupee weakening being the strengthening of the US dollar. Though the weaker rupee may be good for exporters, it raises the cost of Indian imports and puts upward pressure on inflation and interest rates.
  • Rising US interest rates have induced a general emerging market weakness because foreign institutional investors (FIIs) are withdrawing dollars to repatriate them back to the US. This is threatening to raise interest rates in India to put a floor under the weakening rupee.

What to expect from the markets next week?

The equity and commodity (including oil) markets are expected to remain stable and trade in a range-bound manner though it will be December before we will know how oil producers will react to global oil demand and the tight oil market because at least 1 million bpd and at best 2.8 million bpd production increase is necessary to balance supply and demand to support global growth. The Indian markets and the rupee can be expected to fall if the oil price breaches USD 80/barrel and remains there.

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