The markets will put the June volatility behind and look to trend higher in July. June was rocked by the Fed presenting a road map for withdrawing its asset purchase program and by worries of shadow banking crisis in China.
Equities and bond prices fell on a month on month basis while currencies exhibited volatility with the Japanese Yen gaining against the USD while emerging currencies fell. India equities fell along with government bonds and the Indian Rupee (INR). The INR touched record lows of Rs 60.73 to the USD in June.
June was a month of correction for the markets that had run up quite sharply over the last one year. US equity indices were at record highs while the Sensex and Nifty were close to record highs in May 2013. The Japanese Yen was down over 25% and the Nikkei was up by 50% on a year on year basis. Indian government bond yields were trading at multi year lows in May.
The markets took the Fed withdrawing stimulus as an excuse to take profits. China too saw a sharp liquidity squeeze and this put more pressure on markets that were in a correction mode.
The correction phase in the markets looks to be over and markets will resume the trend it saw over the last one year. Globally equities should look up as data from the US suggest that the Fed will gradually taper off its bond purchases and not abruptly as the market feared. US first quarter 2013 GDP growth came in at 1.8% against first estimates of 2.4% and second quarter GDP growth is estimated at 2%. US GDP growth coming in at below Fed’s forecast of 2.3% to 2.6% will prompt a gradual withdrawal of asset purchases.
Japan’s economic data for May is positive with industrial production at two year highs, retail sales looking up and consumer prices staying flat rather than falling. Germany’s retail sales looked up in May while its economy is expected to show a higher growth in the second quarter of 2013 compared to the first quarter.
China’s economy is undergoing stress on various factors of loan growth through non banking channels, speculative real estate and slowdown in exports that grew by just 1% in May. China’s central bank infused liquidity into the system to ease liquidity pressures leading to relief for the markets. Chinese government is likely to focus on stability rather than growth for its economy and this is positive for markets in the long run.
India’s current account deficit for the fourth quarter of 2012-13 printed at 3.6% of GDP against a record high of 6.7% of GDP seen in the third quarter. The government and the RBI have taken steps to curb imports of gold and this is likely to bring down the trade deficit in the coming months. Indian government doubled gas prices to encourage exploration and production of gas. India’s revenues will increase from royalties and taxes if there is increased exploration and production activity.
The first quarter fy 14 results of Indian companies will be released in July. Expectations are not high given the weak economy. Markets will embrace positive results but will not react too negatively to weak results.
Table 1. Market Movement June 2013