Turbulence in Indian Money Market – Call Rates Shoot Up

Monetary measures taken by Reserve Bank of India in the recent past in response to the huge credit growth and growing fears of inflation getting out of control, coupled with other seasonal factors like advance tax outflows, have led to a sever liquidity crunch in the Indian banking system. The cash squeeze led the call money rates to shoot up to as high as 20% this Friday.

This is much beyond the ceiling provided by the central bank’s repurchase window and something rarely since the monetary reforms began and the repurchase window was introduced as a mechanism to provide stability in the money market by providing a ‘corridor’ for overnight rates.

Bank credit has been growing at over 30% and the central bank is worried about the inflationary trends. As part of its continuing tightening policy, the RBI announced a two-phase hike in the Cash Reserve Ratio (CRR) earlier this month. CRR is the amount of cash (as a percentage of bank deposits) that banks are required to set aside and maintain with the central bank. The first phase kicked in on last Saturday (December 23) and the second phase will be effective from January 6.

Compared to an estimated surplus of about Rs 25,000-30,000 crore in the beginning of this month, there is a cash shortage of about Rs. 12-15000 crore now. The central bank injected an average of Rs. 12500 crore daily last week through its repurchase window, up from Rs. 4000 crore in the previous week. The repurchase window is expected to provide a ‘corridor’ for the overnight rates, with reverse repo rate and repo rate acting as the floor and the ceiling respectively. Reverse repo rate is the overnight rate at which the central bank sucks out excess liquidity by selling securities in the market and repo rate is the rate at which it injects liquidity into the system by buying securities.

The reason for the rates shooting up much beyond the repo rate of 7.25% is the decline in the bank’s holding of government bonds. With most of the banks’ holding being close to the minimum SLR requirement of 25%, they are not able to borrow from RBI under the repurchase window.

How long will the cash crunch last? It is expected to ease in the coming weeks, as coupon payments, government expenditure and special deposit scheme redemptions will bring back some cash into the system. These may bring the call rates closer to the repo rate of 7.25% - the informal ‘ceiling’ provided by the repurchase window. The days of easy money are, however, over. And, the banks should be ready for occasional bouts of volatility.

US jobs data beats forecasts,

Japan surprises on the negative side


The US economy beat forecasts by adding more jobs in November than expected, showing the economy's resilience as housing and manufacturing slump. According to the Labour Department report released on Friday, 132,000 jobs were added last month, a marked improvement from the 79,000 in October, and higher than market expectations of 110,000. The jobless rate rose to 4.5 percent from a five-year low of 4.4 percent.

The US economy expanded at a 2.2 percent annual rate in the third quarter - the slowest this year - largely owing to a slump in the housing sector and reports suggest that the weakness may be spreading beyond housing. Manufacturing, which accounts for about 12 percent of the economy, contracted for the first time in more than three years last month as inventories grew and orders slowed, according to the Institute for Supply Management report.

The jobs data is consistent with the soft-landing scenario and shows that the economic slowdown remains mild. The central bank has held its benchmark lending rate steady for a third straight month in October and is expected to maintain the stance at its forthcoming meeting next week. The Federal Reserve Chairman Ben S. Bernanke maintains that the economy will continue to expand and even pick up next year.

While the latest data release comes as a silver lining in the cloud of economic slowdown for the world’s largest economy, there were fresh clouds over the economic recovery of Japan. The world’s second largest economy has been emerging from a decade of stagnation, recession and deflation. According to the final numbers released by the Government, GDP in the July to September quarter was up 0.8% on a year ago, compared with the 2% estimated earlier. The main reason for the disappointing figures was a drop in domestic demand, which contracted by 0.2% from the previous three-month period.

The slower economic growth may prompt the Bank of Japan to delay interest rate increase which was expected to come as early as later this month. The Bank of Japan had raised interest rates from almost zero to 0.25% earlier this year in July, as the economy gained in strength and is expected to follow-up with more hikes in future.

Is OPEC ready for further cut?

Oil prices have risen in the recent weeks, amidst growing uncertainty and speculation on deeper production cuts from OPEC. The oil producers’ cartel which controls about 40 percent of the world's oil production is worried about a surplus of global crude-oil inventories and has been trying to stem the fall in prices after they fell from a peak of $78.40 a barrel in July to below $60 in October. According to latest estimates, the US has inventories of 340 million barrels, 14% more than average. Similarly, stocks held among the 30 OECD members stood at 2.76 billion barrels at September end, the highest level in almost eight years and 4.5 percent higher than a year ago.

The production cut of 1.2 million barrels a day agreed by the OPEC members in October has helped a rebound, although there were doubts about the actual cuts when the decision was announced. Crude prices have now come back to well above $60 a barrel.

And, now another cut is being contemplated by OPEC. OPEC President and Nigeria's oil minister Edmund Daukoru has been quoted as saying that he's “not comfortable” with current prices and is in favor of a further trimming in production. OPEC oil ministers are to meet next week in Nigeria. Will they deliver further cuts? While many members support deeper cuts, some believe that the current price levels are acceptable and can be maintained without further cuts.

Related post:

Of opaque flows, cuts and prices http://aktonmarkets.blogspot.com/2006/10/of-opaque-flows-cuts-and-prices-oil.html

RBI hikes cash reserve ratio to tame inflation

Reflecting the persistent worries on inflation amidst ferocious economic growth and surging forex inflows, the Reserve Bank of India has decided to raise the Cash Reserve Ratio (CRR) to 5.50 percent. CRR, a tool used by central banks to control liquidity in the system, refers to the amount of cash (as a percentage of bank deposits) that banks are required to set aside and maintain with the central bank.

Inflation, as measured by rise in wholesale price index, continues to stay near the higher end of the central bank’s target range of 5-5.50 per cent. The economy expanded 9.2 percent in the quarter ended September 30 and foreign investors have been pouring money into Indian stock markets, leading to an overwhelming liquidity surge. The current surplus liquidity in the banking system – reflected in the amounts absorbed by RBI in its daily reverse repo auctions (banks parking excess funds with RBI) – is estimated to be in the range of Rs 25,000-30,000 crore. This is on the back of a strong over 30% growth in bank lending.

“It is necessary to recognize the challenges emanating from capital flows and consequent impact on increasing liquidity”, the RBI statement notes. ``The overall impact on inflation expectations requires to be monitored and moderated.”

The CRR hike will be effected in two phases - from current 5 per cent to 5.25 per cent effective December 23 and to 5.50 per cent from January 6. The move will impound about Rs 13,500 crore of bank funds.

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Japan interest rates on hold - for now

Japan’s central bank has decided to keep interest rates frozen at 0.25%, as the policymakers take stock of the pace of recovery before taking the rates northward. The decision was widely expected by the market.

Bank of Japan ended its five-year policy of keeping base rates at zero in July this year, in a bid to stimulate growth. Japan's economy grew more strongly than expected in the third quarter, but consumer demand has remained sluggish.

The strong economic growth suggests that rate hike may come as early as next month. The next policy meeting of the central bank is scheduled for December 18-19 and the policy-makers will have more data to make a thorough assessment of economic and price situation. The economy grew at a 2 percent annual rate in the last quarter. The revised third-quarter GDP figures will be published on December 8 and the central bank's quarterly Tankan survey a week later. The most recent Tankan business survey last month showed strong business confidence.

US FOMC minutes hawkish again, inflation eases, Japan rates untouched

US Fed officials maintain a hawkish tone on inflation in the minutes of the last month’s meeting. The Federal Open Market Committee, which decides on interest rates on monetary policy actions, had decided to keep interest rates on hold at its October 24-25 meeting.

This marks a pause for the third time in a row. US interest rates have risen over the past two years as the world's largest economy has recovered and price growth has picked up. The US central bank has kept interest rates steady at 5.25% since August, and is expected to maintain its current stance when it meets next month.

According to the minutes released Wednesday, the Fed noted that reducing inflation to counter expectations of higher prices was its 'greatest concern' and worried that inflation might not recede as hoped and an inflationary psychology could set in, making its job tougher. It assessed that core inflation was still uncomfortably high and that a tight labour market could lead to wage pressures. However, Fed officials also observed that high profit margins may be able to absorb some part of the higherlabour costs. On the housing market, the minutes said that ongoing adjustment was likely to depress real activity in the near term, but thatthis effect was expected to wane gradually.

Meanwhile, consumer prices fell in October for the second month in a row, on the back of cheaper oil. The reading will offer some comfort to the policy-makers when they meet next month. The Labor Department said that prices fell by 0.5% in October, more than many analysts had forecast. The annual inflation rate was 1.3%.

The Bank of Japan (BoJ) voted to keep policy rates steady, as widely expected. Japanese GDP grew 2% annualised for the quarter ended September, twice thatexpected, but the data did not provide sufficient fuel for the BoJ to act this time around.

Japan's growth beats forecasts, rate hike may come sooner

Japan's economy has recorded strong growth for the July-September quarter, quelling any fears that the world's second largest economy could be slowing. Growth at an annualized rate of 2% during the period – supported by strong exports and greater investment by firms - is higher than expected. Exports rose 2.7% in the quarter, helped by the weak yen, while capital investment grew by 2.9%.

The strong growth has once again fueled the speculation on interest rate hikes. In July this year, Bank of Japan raised interest rates for the first time in six years to 0.25% riding on the longest post-war expansion. The timing of follow-up hikes has been a matter of speculation in the market. It left rates unchanged at 0.25% in October and has maintained that it would gradually adjust monetary policy based on economic and price conditions. The US Federal Reserve has kept interest rates at 5.25 percent since August. The European Central Bank's benchmark stands at 3.25 percent.

Bank of Japan Governor Toshihiko Fukui said last week the central bank needs to act "in advance" to prevent the lowest interest rates among major economies from triggering excessive capital investment. He said "we must not take a long time to adjust policy interest rates," and "waiting for inflation to build up" would cause sharp swings in the economy.

A large section of the market now believes that the central bank will raise interest rates early next year, although some see the possibility of the hike coming as early as in December. The Bank of Japan concludes a two-day policy meeting on November 16, when it is widely expected to leave rates at 0.25 percent.

RBI hikes repo rate, leaves other rates unchanged

Repo Rate – Increased to 7.25% from 7% Reverse Repo Rate – Unchanged at 6%
Bank Rate – Unchanged at 6.0 % Cash Reserve Ratio – Unchanged at 5 %

In a deft balancing act, the Reserve Bank of India increased the repo rate by 25bps to 7.25 percent, while leaving the reverse repo rate unchanged at 6 percent. Reverse repo rate and repo rate act as the floor and the ceiling providing a ‘corridor’ for the money market. Reverse repo rate is the overnight rate at which the central bank sucks out excess liquidity by selling securities in the market and repo rate is the rate at which it injects liquidity into the system by buying securities. Normally, a 100 bps spread is maintained between the two rates rates, but it has now been increased to 125 bbp. Bank Rate and CRR have also been left unchanged.

The announcement made in the mid-term review of the Annual Policy Statement for FY'07 came as a surprise for the market. Market was expecting a hike in reverse repo rate as well, in view of the pressure on inflation from a strong economic growth. Maintaining optimism about the economic growth, RBI has upped the GDP growth projection for 2006-07 to 8 percent from the earlier 7.5-8 percent. The central bank also maintains the year end (March 2007) inflation target at 5-5.50. Inflation reading for the week ended October 14 stood at 5.26%.

'Reddy' for another hike?

When the Reserve Bank of India reviews its monetary policy on October 31, will it raise the interest rates once again or will it wait and watch, giving the previous hikes more time to work? The central bank has raised the reverse repo rate three times this year by quarter percentage point each to 6 percent, to curb inflationary expectations stoked by strong economic growth.

The inflation has mostly remained within the RBI's comfort zone of 5-5.50 percent. But of late, it has started edging towards the higher end of the range. The latest data has shown the annual inflation measured by Wholesale Price Index at a four month high. The inflation for the week ended October 14 was at 5.26 percent - up from the previous week's figure of 5.16 percent, on account of higher prices for food, edible oils and textiles. Going ahead, the inflation numbers are expected to return higher readings because of low base effect and may inch up to 6%.

As the strong growth momentum keeps an upward pressure on inflation, RBI may have to do a bit more monetary tightening. Bond markets have been generally sanguine in the past couple of months. Yield on the 10 year benchmark government bond has fallen three quarters of a percentage point after touching an almost five-year high of 8.4 percent in July. This optimism may be misplaced. RBI may go in for a pre-emptive hike now rather than waiting for the next review when inflation may have gone beyond the March-end target of 5-5.50 percent. Even if RBI decides not to change the rates now, the tightening cycle is far from over.

Besides domestic growth considerations and inflationary expectations, RBI will also have to weigh the global scenario – US rates being on hold amid economic slowdown, strong growth and continued tightening bias in Euro-zone economies, sustained expansion in Japan and possible rate actions.

An update on ICBC IPO

After raising US$21.9 billion in the world's largest IPO, the Industrial & Commercial Bank of China (ICBC) has made its debut in China's first simultaneous listing on Shanghai and Hong Kong markets. While the Shanghai debut was a bit uninspiring with a modest gain of just 5 percent, the Hong Kong listing was along the expected lines marking a gain of 15%.

The IPO was oversubscribed 26 times. Four of China's banks have come out with initial public offers in the past one year and have seen strong demand particularly from overseas investors. China's surging economy, which is set to grow by more than 10% this year, has created strong demand for these banks’ shares. However, there are fears that banks have been overvalued, with questions raised over levels of bad debt.

Here's a list of the world's 10 largest IPOs till date (source: Reuters). It can be seen that 3 Chinese banks figure in the list.

Date Company Size (Billion USD)
Oct. 20, 2006 Industrial & Commercial Bank of China 21.9
Oct. 12, 1998 NTT Mobile Communications 18.4
Oct. 31, 1999 Enel 17.4
Nov. 17, 1996 Deutsche Telekom A.G. 13.0
May 24, 2006 Bank of China 11.2
Apr. 26, 2000 AT&T Wireless Services Inc. 10.6
July 14, 2006 Rosneft 10.4
Nov. 15, 1997 Telstra Corp Ltd. 10.0
Oct. 20, 2005 China Construction Bank 9.2
Nov. 18, 2005 EDF 9.0

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US rates on hold - what next?

The US Fed has decided to keep interest rates unchanged at 5.25%, but remains wary of inflationary risks to the economy. The decision to keep the rates on hold for the third consecutive month after a series of 17 successive hikes over past two years is on the expected lines. As before, Richmond Fed President Lacker was the lone dissenting member of FOMC favouring a quarter percentage point rise hike.

The Fed observed that economic growth has slowed over the course of the year, but going forward, the economy is expected to expand at a moderate pace. While recognizing that inflation pressures are likely to moderate over time, the FOMC continues to emphasise that “… some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

The Fed's current 'watch and wait' policy on rates follows signs that price pressures are easing and that the economy has slowed since the start of the year. There has been perceptible easing of price pressures owing to lower energy prices, contained inflation expectations, cumulative effects of past monetary policy actions and other factors restraining aggregate demand, though the Fed does not want to let the guard down. On the other hand, there has been a noticeable output drop in the second quarter and the once-buoyant housing market has cooled considerably. The challenge before the Fed Policymakers is to control inflation while ensuring that the slowdown in economic activity does not worsen into a prolonged downturn.

The Fed's decision to keep its policy options open has left the market guessing on the future course of interest rates. Although it is widely believed that Fed will keep interest rates steady in the near future, the market is divided on the likely Fed action in 2007. On the one hand, as the Fed continues to warn on inflation risks, rate hikes may be required in future. On the other hand, there is a section of the market that believes that continued economic slowdown and weakness in the housing market may force the Fed to reverse the cycle and start cutting the rates sometime in second half of 2007.

Bulls, Bulls Everywhere
DJ 12K, Hang Seng 18K, Sensex 13K, ………

Stock markets across the world are scaling new heights - from US to Europe to Asia. From Wall Street to Tokyo, from Frankfurt to Singapore, from Paris to Manila, from Zurich to Mumbai – there is a bull party going on at the bourses everywhere.

Dow Jones Industrial Average is near its all time high and closed above the 12000 milestone this week registering a weekly gain of 0.4 percent, despite concerns that profit growth has peaked. European stocks rose for fourth consecutive week, led by metals and commodities stocks, as metal prices gained and OPEC agreed to cut oil production.

Hong Kong's Hang Seng Index is at 6-year high and ended the week at 18,113.55 with a weekly gain of 0.7 percent riding on the euphoria generated by the ICBC IPO and strong growth in China Mobile subscriptions. Japan's Nikkei 225 Stock Average added 0.7 percent this week to close at 16,651.63 reflecting robust corporate earnings - marking the fourth consecutive week of gains. South Korea's Kospi added 1.2 percent this week, as the tensions from North Korea's nuclear test ease with diplomacy likely to take the centre-stage. Shares in Singapore and Indonesia are also at new all-time highs.

In India, the BSE Sensex, though generally showing signs of fatigue during the week as it approached the psychologically important 13000 level, ended up on Saturday at a special 75-minute trading session arranged to mark the festival of Diwali. The blue-chip 30-share index had closed at 12,928.18 on Oct. 16 and has been a little hesitant since then. The overall positive sentiment and expectations of strong corporate earnings in the coming weeks is likely to propel the markets beyond 13000.

Of opaque flows, cuts and prices

Oil prices have continued to fall, despite a decision by OPEC to cut production by 1.2 million barrels per day (bpd). The targeted production cut is 200,000 bpd more than what was expected. The oil cartel's decision to cut production shows their discomfort with the continued fall in crude oil prices and their anxiety to defend a floor price which is seen somewhere near $60 a barrel. Oil prices have fallen about 25 percent from the record mid-July level of $78.40 a barrel to below $60 now.

There are, however, doubts in the market whether OPEC members will be able to deliver the targeted reduction. The talk of a 1 million bpd cut has been doing rounds for about a month and was already factored in. So, when the OPEC ministers met in an emergency meeting in Doha, they decided to give a strong signal to the market by announcing a larger reduction target and hinting at the possibility of further cuts when they meet again in Nigeria in December.

OPEC members supply about a third of the world's crude and are concerned about high fuel stocks in consumer countries, particularly in the US, and a projected drop in demand for OPEC oil in 2007 as competitors bring in more supplies. The decision to cut the production is described by OPEC as aimed at restoring the ‘equilibrium’ between supply and demand, which has been distorted by ‘over-supply’ and huge inventory levels. The skepticism on the member countries’ ability to deliver the agreed reductions has come from the deep divisions seen within the cartel on how to implement the cuts. The targeted reduction comes at a cost for the member countries, particularly for those who have heavily invested their petrodollars into building up their oil sectors.

Market movements in the coming weeks will show whether OPEC will be able to define the current price level as the floor for the medium term. A large section of the market believes that there may not be any rise in the prices in near future and the current declining trend may continue, given the large existing inventories and the uncertainty surrounding the production cuts. According to a Bloomberg News survey conducted just before OPEC announced its decision, prices may fall next week on doubts the producer group will cut production enough to reduce excess supplies. 21 of 49 analysts, traders and brokers covered in the survey said prices will decline, 14 forecast an increase and 14 predicted little change.

Mount 13K – An Arduous Climb for Sensex

The Indian stock markets have reached a new all-time high, leaving behind the memories of the “May Mayhem”. A month-long bear grip during May-June this year had knocked down the key indices by about 30%. The crash had been triggered by concerns on higher interest rates following a trend of monetary tightening across the world led by US Federal Reserve, as also high oil prices. These concerns have since receded, as US Fed has ended a two-year streak of interest-rate hikes and oil prices have dropped over 20 percent from record highs. Overseas investors have flocked back to the world’s second fastest growing economy in a big way, as the economy promises sustained growth.

The benchmark sensitive index Sensex of Bombay stock Exchange ended at 12736 on Friday, convincingly surpassing the record close of 12,612 set on May 10. This marks a gain of 45 percent in 90 sessions since the index hit a low of 8800. On a weekly basis, the 30-share index recorded a gain of 2.9 percent, when the quarterly earnings season got off to a flying start with Infosys numbers. More fireworks are expected in coming weeks as more and more numbers pour in. Most of the frontline stocks are likely to report robust earnings growth.

India, the Asia's fourth largest economy, is expected to grow by over 8 percent for the fourth year in a row. The economy grew 8.9 percent in the quarter ended June 30. The Indian growth story is now being seen as much more sustainable than ever before. The growth in Indian economy is expected to be led by the themes of strong domestic demand, outsourcing and infrastructure.

The overseas investors are looking to benefit from the rapid growth and the great long-term story that they expect to unfold. They put a record amount of US$10.7 billion into the Indian market last year and this year's net purchases have been US$5.37 billion. Since June 14, they've bought local shares worth US$2.77 billion, surpassing the amount they sold during the slump. Domestic investors are also contributing to the market's gains in a significant way. Domestic funds remained buyers of stock during the slump, purchasing shares worth $1.12 billion from May 10 to June 14. Since the low in June their purchases have amounted to US$1.78 billion.

Incidentally, the bulls are calling the shots on bourses across the globe. From Dow Jones in US to FTSE, CAC, DAX in Europe and Nikkei, Hangseng, Sensex in Asia – it’s bright and sunny everywhere.

What makes Chinese banks hot?

The world's biggest initial public offering coming from the largest bank of the world’s fastest growing economy has seen huge demand from institutional investors from across the world. The Industrial and Commercial Bank of China (ICBC) plans to debut in Hong Kong and Shanghai on Oct. 27. This will be the first IPO to be simultaneously listed on both stock exchanges.

If priced near the top of the range (which is almost certain), the issue will garner US$22 billion, beating the record of $18.4 billion set in 1998 by a Japanese mobile-telecoms operator NTT Mobile Communications Network Inc. The sale will also place ICBC among the ten most highly valued banks in the world, with a market capitalisation close to $130 billion.

ICBC is the latest in a series of massive IPOs launched by Chinese banks during the past year. Bank of China, the country’s second largest lender, raised US$11.2 billion with an IPO that was the fourth-largest on record. China Construction Bank, the mainland's no. 3 bank, raised US$8 billion in October 2005.

What makes Chinese banks ‘hot’? It’s the strong growth recorded by these banks in the sizzling economy that is luring the institutional investors. There is a scramble among the financial powerhouses of the world like Goldman Sachs, Morgan Stanley and Citigroup to gain a foothold into the Chinese banking system. For them, these banks are a sort of a proxy for China itself: vast, diverse, growing fast, and with extraordinary scope for internal restructuring. Economist terms the ICBC IPO as a single transaction that could sum up the knowns and unknowns surrounding China's red-hot economy. According to an Economist article, “…ICBC, however valuable, also reflects the murkier side of life in the Chinese economy. Political considerations often come first, information is unreliable, and openness in the banking system is questionable, despite conditions tied to China's entry into the World Trade Organisation.”

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On the ECB Interest Rate Hike

The European Central Bank (ECB) has once again raised the benchmark lending rate by 25 bps to 3.25%, while leaving the door open for further tightening. This is the fifth quarter percentage point hike since December last year and was widely expected. Meanwhile, the Bank of England has kept rates unchanged at 4.75%.

The ECB move comes in the wake of the fastest economic expansion in the Euro-zone since 2000 and the need to maintain “strong vigilance'' on inflation. The ECB, which sets interest rates in the 12 Euro-zone economies, is trying to keep inflation under control and is also worried about a furious growth in household borrowings in some of the member economies.

Though energy prices pulled the consumer price index below 2% in September for the first time in 21 months, it is widely expected that it may rise back above 2% soon. ECB President Trichet assessed that inflation expectations were well anchored but at year end inflation could very well be substantially over and above 2%, even without a change in oil prices.

Analysts are almost unanimous in their expectation of one more hike before year end. Opinion is, however, divided on the outlook for next year. In a Bloomberg survey of economists, 11 of the 23 expected that rates will stay on hold through 2007, nine predicted increases to as high as 4 percentand three forecast a cut to 3 percent.

In US, the Federal Reserve left its funds rate unchanged for a second straight meeting on Sept. 20, after raising it 17 times since June 2004 to 5.25 percent. US accounts for about a fifth of Europe's exports and a slowdown there may affect European economies. An array of soft economic data in US has given rise to expectations that the Federal Reserve may cut rates next year.

Sensex weak ahead of earnings season

Friday was a day of range-bound movements on Indian bourses. The market finally ended almost flat after alternating between positive and negative territory. Positive cues from the US markets were ignored amid the cautious mood ahead of the quarterly earnings season.

The 30-share BSE Sensex lost 16.60 points to finish at 12,372.81. Nifty, the broader 50-share index of NSE, closed up 4.8 points at 3569.70. This marks the first weekly loss for Sensex and Nifty after 10 weeks of gains.

Elsewhere in Asia also, the stocks ended a little down on Friday. Japan's benchmark Nikkei 225 dipped 13.27 points to 16,436.06, while Hong Kong’s Hang Seng was down 4.28 points to 17,903.39. On a weekly basis, Nikkei has gained 1.9 percent this week after business confidence unexpectedly rose to a two-year high. Hang Seng is very close to the psychologically important level of 18,000 and may face some resistance going ahead.

In India, Sensex is within a kissing distance of its all-time high reached in May this year. A sharp fall had been witnessed in May in line with global trends and other emerging markets, triggered by the meltdown in the metals market and worries of rising US interest rates. Now the overall market sentiment is positive, as the economy continues to post robust growth.

With the earnings season for Q2 2006-07 kicking off next week, there is a certain amount of caution, as the expectations have been very high. The tone for the season will be set by the bellwether Infosys and other biggies in the IT pack. Besides IT, other key sectors whose results will be keenly watched are banking, automobile and FMCG. Any disappointments here will affect the sentiments and the market direction. Numbers from metals and sugar sectors will be watched for confirmation of the views on slackening momentum.

Asian stocks retreat

Asian stocks declined on Tuesday from a four-week high, tracking a sluggish performance of US markets yesterday amid weak economic data.

US stocks had ended weak on Monday, with Dow Jones Industrial Average retreating after flirting with the historic high achieved in January 2000. The weakness followed a weaker-than-expected US manufacturing data. The ISM manufacturing index dropped to 52.9 last month from 54.5 in August, signaling that a slowdown in housing may have spread to other areas of the economy. A prospect of a weakening of the world’s largest economy fuels concerns in Asian economies, as US happens to be the region’s largest export market.

Japan's Nikkei 225 index lost 0.1 percent today to close at 16,242.09, after touching a low of 16,148.89. The decline comes after four days of gains fueled by optimism about the economy shown in upbeat economic data and business sentiment survey.

In Hong Kong, on the other hand, share prices moved up, mainly driven by strong demand on large Chinese financials in view of strong gains in the Chinese currency. The blue-chip Hang Seng Index rose 63.48 points, or 0.4 percent, to 17,606.53.

Mirroring the decline in US markets and the general trend in Asia, Indian stocks also faced some selling pressure from funds and investors. The 30-share Sensex on Bombay Stock Exchange lost 88.03, or 0.7 percent, to 12,366.39. The broader 50-share Nifty Index on the National Stock Exchange declined 18.80, or 0.5 percent, to 3569.60.

The decline was led by IT heavyweights, with Infosys losing 1.6%, reflecting the concerns on US economy. US accounts for about 60 percent of the market for Indian software biggies. Another factor weighing on the market sentiment was the impending earnings season, when companies will report their quarterly earnings. Other major losers of the day were HDFC, HLL, Ranbaxy, Tata Power, Cipla, L&T, Maruti, OBC and Wipro.

US stocks are trading higher on Tuesady, as oil prices continue to decline. The blue-chip Dow Jones Index again crossed its highest-ever close of 11,722.98, set in January 2000, for a fourth straight session today.

Dow Jones at all-time high

The blue-chip Dow Jones industrial Average Index has surpassed the record close of 11,723 reached in January 2000, amid mixed economic news and lower oil prices. The earlier peak had been reached in 2000 at the height of the tech bubble.

While crude has fallen below $62 a barrel (over 2% decline), the widely tracked ISM Manufacturing Index, a key indicator of national industrial activity, showed a weaker-than-expected reading. The Manufacturing Index posting a reading of 52.9 still reflected steady overall growth. Meanwhile, a government report on construction showed a surprise rise in construction spending and a realtors’ report on home re-sales suggested that the slowdown in housing would be gradual. Lower oil prices and a cooling economy ease the inflation concerns and provide more flexibility to the Fed.

Sri Lanka Raises Interest Rates

The Sri Lanka Central Bank increased its interest rates by half a percentage point today to curb double-digit inflation - the highest in Asia and stem a decline in its currency. This is the third rate hike this year and has come two weeks ahead of a scheduled review. The bank had left the rate unchanged on September 15, and was due to review it on October 13.

The monetary board observed that inflation has not declined to a satisfactory rate as yet and an unusual increase in lending by commercial banks and substantially higher borrowings from the Central Bank are fuelling inflation. Sri Lanka's economy continues to expand at an 8 percent pace.

Asian Stocks Continue to Rise

Asian stocks continued the upward movement after a rebound in U.S. home sales bolstered confidence that consumer spending will be sustained in US. Data released yesterday showed an unexpected rise in new home sales for the month of August and helped ease concerns about a housing market slump. South Korea added nearly 0.85 per cent while Indonesia and Shanghai ended with gains of around 0.7 per cent each. Japan added close to 0.5 per cent and Singapore closed with gains of nearly 0.4 per cent. Malaysia and Hong Kong ended with modest gains. Thailand was the only loser, declining nearly 0.75 per cent.

India's sensex gained marginally on the expiry day of september futures, amidst relative volatility and mixed trends across sectoral indices. Strong gains in banking stocks was the highlight of the day for the Indian markets.

The 30-share BSE Sensex rose 13.83 points or 0.1 per cent to close at 12,380.74, moving between 12,340.17 and 12,431.79 intra day. The broader 50-share NSE index S&P CNX Nifty lost 7.55 points or 0.2 per cent to 3,571.75.

The major Sensex gainers were HDFC Bank (+4.81%), HDFC (+3.27%), ICICI Bank (+2.99%), SBI (+2.97%), Ranbaxy (+2.24%). Major Losers were L&T, TCS (-2.34%), Maruti (-1.92%), Reliance Communication (-1.88%) and Satyam (-1.64%).

Banking stocks rallied strongly for the third straight day, reflecting hopes of declining interest rates following indications from US that the Fed is done with its hiking spree as also a substantial decline in crude prices over last few weeks. There is a view gaining ground among bankers in India that chances of further rate hikes by RBI in near future are low. Oriental Bank was the star performer with about 7% gains; Union Bank, UTI Bank, Bank of India and Bank of Baroda all gained around 6.5 per cent each. Kotak Mahindra gained close to 6 per cent while Canara Bank added more than 5 per cent.

A good day for Asian stocks

Mumbai Sensex ended 45 pts (0.37%) higher on wednesday following a firm trend in Tokyo's Nikkei and Hong Kong's Hang Seng. Nikkei 225 gained 2.51% to finish at 15,947.87 - this is its biggest single day gain in two months. The Hang Seng index rose 1.23% to 17,521.51. US stocks posted handsome gains on Tuesday as investors cheered the strong consumer confidence report. Dow Jones closed at 11,669 (its highest level in more than six years) and Nasdaq Composite at 2,261.

In Mumbai, Wednesday was a day of sustained buying by funds in blue chip stocks, despite some volatility just ahead of the month's futures contract expiry. The September futures contracts are due for expiry this Thursday. Sensex had touched an intra-day high of 12,442.82, before selling began in afternoon trade taking it to an intra-day low of 12,339.98 and finally settled at 12,366.91.

The major gainers on Sensex were Reliance Energy (+3.88% after a long period of range-bound movements), Maruti (+1.79%), HDFC (+1.78%), Cipla (+1.75%) and ICICI Bank (+1.34%). Major losers were Hero Honda (-1.37%), Wipro (-1.16%), L&T (-1.08%), Tata Motors (-0.89%) and Satyam (-0.87%).