Global Markets

• US treasuries gained for the third straight month as the FOMC minutes suggested that it fears that the next change to the rate will be to raise it and that it is banking on slowdown to temper inflation even as losses/writedowns related to subprime securities exceeded $510 bn at financial firms. Traders increased bets the Fed won't raise rates through year-end, while data continued to signal slack growth. The USD rose 5.6% in August vs. the EUR while 10-year U.S. treasuries returned 1.4%, the most since January.
• European Consumer Confidence dropped as all major economies’ data including Germany, France, Spain, Switzerland showed that the economy was on the brink of a recession. However, as crude oil prices dropped inflation eased for Aug but according to analysts, it remains too high for the ECB to soften its rhetoric. This indicates that ECB is in no hurry to cut interest rates even as expansion slows.
• Hurricane Gustav strengthened to a “dangerous” Category 4 storm. Oil prices gained on reports that Gustav may become a Category 5 storm while it has already shut. About 77% of Gulf oil output and 37% of natural-gas production and operations of Valero Energy Corp., Exxon Mobil Corp. BP Plc, Exxon Mobil and Royal Dutch Shell Plc. Fields in the Gulf produce 25% of U.S. oil production, and 14 percent of natural gas production. Wait and watch as to how much damage it causes and how soon will the industry be able to recover.

Indian Equity Markets

• The Indian equity markets stayed rangebound, with the Sensex ending the week with a small gain over the last week on account of fall in inflation coupled with lower GDP growth for Q1FY09 for the first time since 2004, leading to speculation that on account of slowdown, the RBI may not aggressive raise rates.
• The derivatives rollovers were higher that that of last month. Marketwide rollover of positions from Aug 2008 series to Sept 2008 series stood at 83% while that of Nifty was at 75%, compared to 79% and 65% respectively last month. While Tata Steel announced good results mainly contributed by Corus through which it was able to gain from the global steel price rally, while Infosys announced the takeover of UK-based Axon in order to boost its SAP consulting. Also, ONGC gained on news of takeover of UK-based Imperial Gas.
• India’s GDP grew 7.9% YoY (8.8% YoY 2007) as the trebling of inflation and higher interest rates have slowed down consumer spending and industrial activity. Analysts have revised their growth estimates to around 7.5% for FY09 as corporate profitability is likely to be affected by slowdown in consumer demand and higher interest rates. Though inflation control remains a priority, the govt has waived off agri loans and raised salaries of govt employees in order to spur consumer demand, while development of SEZs could help industrial growth.

Outlook: Likely to remain rangebound, mainly tracking the oil price movement, global cues and macro economic fundamental data.

Indian Fixed Income Markets

• The benchmark 10-year bond rallied strongly as slide in oil prices raised expectations of inflation moderating as sentiment also improved on account of bond redemptions amounting to Rs.150bn. To a certain extent, the rally was also driven by increased buying by banks to fulfil SLR requirement. Further, lower inflation and slower than expected GDP growth.
• The RBI has scheduled Rs.4000Cr T-bill auctions under MSS in addition to the the Rs.3500Cr normal T-Bill issuances. This accompanied by RBI’s 25bps CRR hike which is expected to come into effect w.e.f Aug 30, 2008 is likely to further tighten liquidity in the banking system.
• WPI based inflation grew at 12.40% YoY growth as on Aug 16, 2008. Analysts suggest that inflation is not close to its peak yet and is likely to remain in double digits for some time to come and could top 14%. Further monetary tightening cannot be ruled out till inflation starts moderating and comes close to the 7% RBI target.

Outlook: High inflation and liquidity tightening through MSS auctions and CRR hike are likely to keep the market sentiment cautious.

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