US Economy: US‟ real GDP slipped 5% on-year in the first quarter of 2020. Also, unemployment is seen falling to 9.3% by the end of this year and 6.5% by the end of 2021. Because of the dire projection, the US Fed vowed to keep benchmark rates unchanged at near zero over the next two years, while continuing its bond-buying programme, at least at its current pace, to support credit markets.
Eurozone: The euro zone economy is likely to contract 10.2% in 2020, followed by a rebound of 6% in 2021. Meanwhile, the European Central Bank (ECB) has provided 1.31 trillion euros ($1.46 trillion) in long term, ultra-cheap credit to banks as part of its emergency support aimed at cushioning the impact of the pandemic on businesses and workers.
UK: According to the IMF, the pandemic will hit UK‟s economy much harder than much of the rest of the world, with the country’s GDP projected to spiral 10.2% this year. To addressee the woes cause by Covid-19, the Bank of England’s (BoE) policy panel voted 8-1 to increase its quantitative easing programme by 100 billion pounds ($125 billion), while holding the benchmark interest rate at a record-low 0.1%.
Japan: The Bank of Japan (BoJ) voted 8-1 to retain the interest rate at -0.1% on current accounts that financial institutions maintain at the central bank. The BoJ governor warned of protracted battle with pandemic, and also signalled the bank’s readiness to top up monetary support. Meanwhile, the country’s GDP was revised down to 2.2% contraction on-year in the first quarter of 2020.
China: China has abandoned setting a target for GDP growth for the first time in decades, citing „great uncertainty‟ caused by the pandemic. The People’s Bank of China injected 120 billion yuan ($16.80 billion) via seven-day reverse repos at 2.20% on May 27, 2020.
Index Performance: Indian equity indices recorded impressive performances in June 2020, buoyed by upbeat domestic and global cues. The benchmarks S&P BSE Sensex and Nifty 50 index had surged ~8% in June 2020.
Inflation: Retail inflation, based on Consumer Price Index (CPI), for May 2020, was not released by the National Statistical Office owing to the lockdown restrictions announced by the government to prevent the spread of Covid-19. Consumer food inflation, though, rose 9.28% on-year in May.
Concerns about the relentless spike in the new Covid-19 cases back home and a second wave of the pandemic globally. Escalating geopolitical tensions between India and China, profit-booking post the rally, and selling by domestic institutional investors kept the market under pressure as well.
Market rose sharply owing to optimism following the gradual reopening of the domestic economy, and after the Drugs Controller General of India approved the manufacture of Covid-19 drugs. De-escalation of geopolitical tensions, gains in index heavyweights, and buying of domestic equities by foreign institutional investors also augured well for the indices.
Headwinds: Selling exacerbated after the US Fed projected the US economy to contract 6.5% this year, and pegged the unemployment rate at 9.3%. Persistent worries about the global economic recovery and downbeat growth projections by the IMF, the OECD and the World Bank also impacted the local indices.
Tailwinds: Upbeat global cues, including the US Fed’s corporate bond buying programme, US President Donald Trump’s decision to keep the trade deal with China intact, encouraging US monthly jobs and Chinese economic data, and hopes of additional stimulus measures by various countries, also supported the local indices.
Nevertheless, all S&P BSE sectoral indices ended in the green in June. The S&P BSE Realty (top sectoral gainer), S&P Finance, and S&P Bankex indices jumped 12.04%, 11.92% and 10.23%, respectively. Buying interest was seen in the auto and consumer durable stocks; S&P BSE Auto and S&P BSE consumer durable indices climbed 8.38% and 7.23%. S&P Fast moving consumer goods, and S&P BSE Healthcare indices saw marginal gains of 3.31% and 3.94%, respectively.
Outlook & Triggers
Global equities rejoiced the re-opening of economies which was well reflected in positive returns posted by most of the countries in the month of June. Indian Equity Markets (Nifty 50 Index) too joined the bandwagon and delivered 7.7% returns. However, global and domestic markets remain watchful of the second wave of COVID-19 led infections.
Several economic data releases from the US among other factors buoyed global market sentiments. As per data released, US private payrolls rose by 2.37Mn in June while a gauge of manufacturing activity rebounded to its highest levels in 14 months. The US also confirmed that the phase 1 trade deal signed with China was still in effect. Liquidity support is likely to remain intact as Fed meeting minutes state that the monetary policy stance will continue to remain highly accommodative. (source: CRISIL)
Despite an increase in COVID-19 cases, Indian equities delivered positive returns. S&P Global affirmed India‟s rating at BBB- /A3 and maintained a stable outlook. Strong fundamentals like healthy forex reserves (USD 505.6 bn as of June 19), stellar currency, current account surplus, etc. help attract foreign investments. India also stands to benefit from the potential shift in base of companies from China resulting from the ongoing US-China and India-China tensions as India too has a demographic advantage. . (source: CRISIL)
High Frequency data points indicate improvement in mobility trends and essential services like groceries and pharmacies are now close to pre-lockdown levels. The May Composite PMI too improved marginally from April. Current Account Balance turned into surplus in Q4 FY20. May trade deficit numbers too declined significantly.
Sectors like Energy and Finance outperformed while Telecom and FMCG underperformed. (Source: NSE)*The sector(s)/stock(s) mentioned in this communication do not constitute any recommendation of the same and ICICI Prudential Mutual Fund may or may not have any future position in these sector(s). PMI – Purchasing Manager’s Index
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