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THE WEEK GONE BY AND THE WEEK AHEAD .

5 July, 2013

Last week the markets attempted to claw back some lost ground after a large sell-off in risk assets owing to worries about QE tapering. However, that feeble attempt was stopped in its works thanks to a strong US payrolls number that set the stage for further USD gains and weakening EM risk appetite. 10 year US Treasuries sold off to 2.75%, the largest one day loss in the last two years. Brent Crude gained all the way to $108 and rupee lost a little bit though the large losses are expected to come in on Monday when the impact on Asian markets will be felt. All in all, risk environment remains very tentative and unclear and all we can say is that we are in for this volatility to continue until portfolios rebalance and some erstwhile fancied countries start to come out of the slumber of reduced corporate earnings and poor policy-making.

The key events of last week:

U.S. Manufacturing expanded in June as the PMI registered 50.9 percent, an increase of 1.9 percentage points when compared to May's reading of 49 percent. June's reading of 50.9 percent reflects the resumption of growth in the manufacturing sector 2013, following the only month of contraction for 28 for Dec 2012 the year in May. European stocks rose, after their first weekly gain since May 17, as euro-area factory output in June contracted less than estimated and Japanese manufacturers turned optimistic for the first time since September 2011. Unemployment across the 17 European Union countries that use the euro hit an all-time high in May, official data showed Monday. Eurostat, the EUs statistics office, said the eurozones unemployment rate rose 0.1 percentage point in May to 12.2 percent. Aprils unemployment rate was initially estimated to be 12.2 percent, but it was revised down to 12.1 percent thanks to new data. U.S. construction spending rose to its highest level in nearly four years in May as a sharp rebound in public outlays offset a decline in investment in private nonresidential projects, pointing to moderate economic growth. Construction spending increased 0.5 percent to an annual rate of $874.9 billion, the Commerce Department said on Monday. That followed a revised 0.1 percent gain in April. UK Markit Manufacturing PMI climbed to 52.5 in June, against expectation of 51.4 and the previous revised 51.5. This was the highest print since May. The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index edged up 0.6% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis, as exceptionally hot weather warmed up sales of seasonal goods. ICSC expects June industry sales will increase 3% to 3.5%. On a year-on-year basis, the reading rose 1.9%. 108, Madhava, Bandra Family Court Lane, BKC, Bandra (E), Mumbai 51 Page 1

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The Johnson Redbook Retail Sales Index was up 2.9% in the fourth week of June following a 2.8% gain the prior week. Month-to-date, June was up 2.8% compared to June of last year (relative to a target of a 3.3% gain). Month-over-month showed a 0.5% drop (compared to a flat target). June is a five-week month on the retail calendar ending on July 6th.

Interest rates are rising substantially, choking off demand for refinancing but only limiting demand for purchase mortgages. The refinancing index plunged 16.0 percent in the June 28 week and is at a two-year low. The purchase index, benefiting from what the Mortgage Bankers Association calls still strong home affordability, has been up and down is down 3.0 percent in the latest week. The average rate for conforming loans ($417,500 or less) soared 12 basis points in the week to 4.58 percent. Lay-off announcements, like other labor indicators, are not pointing to improvement for Friday's jobs report. Announcements totaled 39,372 in June, up from 36,398 in May and compared to 37,551 in June last year. The report notes that threats for future layoffs include sequestration cutbacks in government spending and possible effects tied to the implementation of health-care reform.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced on Wednesday that total May exports of $187.1 billion and imports of $232.1 billion resulted in a goods and services deficit of $45.0 billion, up from $40.1 billion in April, revised. May exports were $0.5 billion less than April exports of $187.6 billion. May imports were $4.4 billion more than April imports of Page 2

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$227.7 billion. A sharp week-to-week slowing in oil imports together with a rise in refinery inputs combined to lower commercial oil inventories by a very sharp 10.3 million barrels in the June 28 week to 383.8 million. The double-digit weekly draw is the steepest since December last year.

The European Central Bank (ECB) has sent a very strong signal to markets by saying it will keep rates low for an extended period of time, just weeks after its US counterpart raised the possibility of scaling back its extraordinary monetary easing before the year-end, said economists. Jobless claims decreased by 5,000 to 343,000 in the week ended June 29 from a revised 348,000 in the prior period that was higher than initially reported, the Labor Department said today in Washington. The Bloomberg survey median called for 345,000 claims. No states were estimated and there was nothing unusual in the data, a Labor Department spokesman said shortly before the figures were released. The data were made public one day early due to the Independence Day holiday.

And closer home.

India's manufacturing sector activity remained broadly flat in June as new orders declined for the first time in over four years and power cuts and fragile economic conditions weighed on the sector's performance, an HSBC survey said on Monday. The HSBC/Markit purchasing managers index for the manufacturing industry stood at 50.3 in June, slightly higher than 50.1 in May. However, output witnessed a decline for the second consecutive month. The HSBC Markit Services Purchasing Managers' Index fell to 51.7 in June from May's three-month high of 53.6, in a sign that Asia's third-largest economy is still struggling to climb out of a quagmire of low growth and high inflation. Dollar/rupee fell below Rs 60.50/$1 on fear that the Reserve Bank of India could aggressively defence the level and also as they anticipated the central bank to enter the market ahead of the trading close, dealers said. Indian stocks rose on Friday, while the euro and sterling nursed losses after the two most important central banks in Europe surprised by assuring investors they were in no hurry to wind down stimulus.

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India forex reserves at $284.65 bln on june 28 vs $287.85 bln in the week earlier.

Important upcoming International events to be tracked:

Date
9/7/2013 9/7/2013 9/7/2013 10/7/2013 10/7/2013 10/7/2013 10/7/2013 10/7/2013 11/7/2013 11/7/2013 11/7/2013 12/7/2013 12/7/2013 12/7/2013 12/7/2013

Time
00:30 IST 17:15 IST 18:25 IST 05:20 IST 05:30 IST 16:30 IST 19:30 IST 20:00 IST 05:30 IST 18:00 IST 19:15 IST 02:00 IST 02:00 IST 18:00 IST 19:25 IST

Country
US US US Japan Japan US US US US US US US US US US

Event
Consumer Credit ICSC-Goldman Store Sales Redbook CGPI (PPI) Bank of Japan Announcement MBA Purchase Applications Wholesale Trade EIA Petroleum Status Report Chain Store Sales Jobless Claims Bloomberg Consumer Comfort Index (Level) Money Supply Fed Balance Sheet Producer Price Index (PPI - M/M change) Consumer Sentiment

Important upcoming Domestic Events:

Date 8/7/2013 8/7/2013 10/7/2013 10/7/2013 12/7/2013 12/7/2013 12/7/2013 12/7/2013 12/7/2013 12/7/2013 11:00 IST 11:00 IST 17:00 IST 17:00 IST 17:00 IST 17:00 IST 15:30 IST Time Country India India India India India India India India India India Event Automobile sales data (y/y chg) OECD composite leading indicator for India Reserve Money (change on wk) Foreign merchandise trade Imports (YoY Chg) CPI Inflation - Rural (YoY Chg) IIP (YoY Chg) WMA (ways and means advance) - to central govt WMA (ways and means advance) - to state govts FX reserve (change on wk) Bank Deposit, credit, investment ratios (YoY Chg)

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TECHNICAL VIEW
After opening up around 59.5, rupee seemed to be range-bound during the last week which finally closed around 60.235 There are negative signals emanating from technical indicators viewpoint. All medium term (Daily) and short term (hourly) indicators are strongly bearish. We expect INR to continue to weaken, especially after the strong US payrolls report. However, equities markets do not look weak and are expected to support the currency markets too. Overall we see USD in a 60-61.50 range for now with slight weaker bias due to weak global risk appetite.

Source : Reuter Eikon

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