Economic Roundup, August 24, 2018

Economic Environment

  • Equity markets

  • Global political-economic situation

  • US Fed policy

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

  • Indian equity markets, as expected, have not only been bullish this week but reached all time highs. What appears to be easing trade war tensions between US and China due to the start of low-level trade negotiations between the two countries contributed to the global cues taken by the Indian markets. Upbeat expectations of growth from the finance ministry and encouraging income tax (IT) collection numbers also pushed the markets higher. Foreign portfolio investors also appeared to be putting money back into the Indian financial markets because of better corporate earnings and an easing of the oil price. Growth prospects, better IT receipts, and lower oil price make for the prospect of improving macroeconomic conditions which have, therefore, buoyed the markets. The rupee is trading in a range-bound manner but closer to the INR 70 mark per USD and has not affected the financial markets significantly because government expectations of an acceptable trading range of the rupee is even weaker, around INR 72-74 per USD.

  • While trade and diplomatic tensions with Turkey continue, expectations of global growth are under pressure due to the escalating trade war between US and China. Even though low-level talks are happening between the trade policy delegations of the two countries, the White House is doubtful that much progress can be made because both sides are intransigent. US financial markets are hoping for a trade deal which is not yet on the horizon and, therefore, the trade tensions will continue to put pressure on US financial markets to some degree even though it may not affect India as much except if there is a crisis because of trade or debt in China which is unlikely to precipitate in the near future though there can be pressure on Chinese growth.

  • The US Federal Reserve, admirably exercising its statutory independence despite White House displeasure, is on the path of gradually raising interest rates once at its September meeting and, possibly again, at its December meeting by 25 basis points at each meeting as already built into market expectations. The gradual rate increases are not expected to pressure the US financial markets or growth. The S&P 500 index is close to an all-time high.

What to expect from the markets next week?

Indian markets could be range-bound or flat next week as the earnings season comes to a close toward the end of this month. Oil price may continue to move in a range-bound manner between USD 65-80/barrel, falling due to the trade war and global growth concerns but could rise somewhat due to the build up to the reimposition of sanctions on Iran by the US in November. Other commodity markets will move based on, among other factors, how the Chinese economy and the rest of the world economy is reacting to the trade war and concerns about global growth. There are as yet no worrisome triggers to drive the markets down by a large extent. However, the developing situation between US and Iran merits watching carefully because it has the potential to disrupt world oil supplies due to any actions by Iran in the Strait of Hormuz which could push oil prices higher.

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