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'Regional FTAs needed'

With the WTO collapsing, regional free trade agreements amongst ASEAN countries is the way forward, says Dr Bhaskar Dasgupta.

india Updated: Oct 07, 2003 13:02 IST

The India Babble
The Sensex closed up about 20 points on Monday. Ranbaxy got a boost from the news that the US FDA has granted tentative approval for the US manufacture and marketing of the cholesterol-lowering drug Zocor. Derivatives volumes have been hitting highs, mostly driven by the foreign institutional investors. It seems like it’s mostly arbitrage operations instead of hedging. That’s not bad at all. Arbitrage should smooth out the market plus provide depth/liquidity to the cash as well as the derivatives market. The economic news was good, the economy grew by 5.7 per cent during April-June, and the manufacturing sector nearly doubled, compared to the corresponding quarter last year, to 6.4 per cent. Unfortunately, profit taking on Tuesday meant that the Sensex plunged 65 points to close at 4151. Nalco and BHEL reported good profits. Wednesday saw the market turn smartly upwards, moving up to 4453 intra day, a three year high, when the market digested the good news on the economic front, and anticipation that it would look even better for the next quarter. However, it closed nearly flat, hardly couple of points up. The week ended on Friday with the Sensex powering ahead by 98 points, closing at 4452, mainly helped by foreign institutional investor interest and economic growth optimism.

A word of warning to the wise, the balance of payments went into deficit on the current account of $1.2bn for the quarter ending June 30. This was due to a rise in imports for the first time since seven quarters. The current account mainly deals with trade and services and since this has been rapidly growing in the past few years, this move into deficit is slightly worrying. The rupee strengthened on Wednesday and moved up by 27 paise to 45.5657 to the dollar mainly due to the redemption of SBI's Resurgent India Bonds. Another fact is the sheer amount of remittances by NRI's. The second quarter of this year saw the highest amount of remittances in 10 years, namely $4.1 billion. One of the most amazing things to me was reading in the Economic Times that exporters have started invoicing in Indian rupees, this is unbelievably impressive and rather good. The fact that they can call the shots is really notable and of course, only very good and strong exporters can do this.

India and the ASEAN countries are expected to sign a framework agreement for a free trade pact during Prime Minister AB Vajpayees visit to Bali and sign a bilateral agreement with Thailand. The framework agreement will lay out the negotiations groundwork to get to a free trade agreement and just an agreement on the framework itself is a very big step indeed. With the WTO collapsing like a pricked balloon, regional free trade agreements is now the way forward.

The fiscal deficit shows no sign of reducing at all and this is another warning that the government has to look at this pretty soon, before it blows up into a full scale crisis. To show the current state of affairs, the fiscal deficit is INR 52k crores which is 34 per cent of the total budget of INR 153k crores. Guess what the target is for the next year? 5.6 per cent. Now that is fuzzy math for you. Just how the government thinks it will work this amount out, I have no idea. The government has now decided to repay INR 32,000 crores to the National Small Savings Fund which is further going to increase the deficit. The debt to GDP ratio is now at 76 per cent. Putting it in another way, 76 paisa of each rupee that the country generates is debt.

The Babble in the Ivory Towers
Anna Krivelyova of Boston College and Cesare Robotti, Federal Reserve Bank of Atlanta have published a fascinating paper on the impact of geomagnetic storms on world and country-specific stock market returns. This reminds me of the papers which show the impact of moon phases, Van Allen belt grids (don’t ask!) and the rest of heavenly body movements or manifestations on stock markets. Oh! Let’s not forget comets either. Anyway, the authors take up the link between the world stock index and for most of the international indices. They find that the previous week’s unusually high levels of geomagnetic activity have a negative, statistically and economically significant impact on today’s stock returns.

There have been several theories and studies, which have confirmed that these geomagnetic storms induce depression, anxiety, altered moods and other psychological disorders. The theory being, if people are more pessimistic during the geomagnetic storms, then they would be more inclined to sell stocks, attributing their moods to negative economic prospects. Plus this should be global in nature or so it proves according to their study. They also find that small capitalisation stocks are affected far more than large capitalisation stocks, since the large cap stocks are mostly owned by institutional investors, hence this effect should be lower for the institutions. Interesting or what? Looks like every trader should have a browser open to NASA’s geomagnetic storm website! I can just see the reaction on the floor if I did that.

Details of this paper and past columns are available on http://beady.blogspot.com

The World Babble
The Nikkei ended at a one month low at 10229 as the exporters got hit by worries over the strengthening yen. Honda, Toyota and high tech firms saw their share prices dip. On the other hand, the US market closed higher, the Dow closing 67 points up at 9380 and NASDAQ up 32 points at 1824. This was driven more by positive data on the semiconductor segment of the market. The US dollar took a hit from speculation that the US Treasury Secretary will take a harder line on Japan. Economic news was middling, with growth in US personal incomes and spending slowing but still looking reasonably healthy. The tax cuts seem to be feeding into the economy and pushing consumer spending. The Nikkei was again weak, ending at 10219 following continued fears over the Yen. The BoJ intervened in the markets and this perked up the dollar by about one Yen to around 111 Yen to the dollar. The Footsie closed 51 points down on Tuesday and this across the board decline was reflected in the Dow (105 down) and NASDAQ (37 down), weighed down by bad numbers from Sun Microsystems and news that consumer confidence had fallen to a six month low.

Wednesday saw the Nikkei coming up with a better earnings outlook and good business confidence, ending the day 1.39 per cent up at 10361. The Dow pushed up rapidly to gain 194 points on the back of 3M and CCC but treaded water on Thursday finishing barely 0.2 per cent up. Thursday's economic data on jobless claims and factory orders weren’t really anything spectacular, but Friday's September jobs report and non-manufacturing data will really put things into perspective. So it proved! The US employers actually hired in September, the first time in eight months. The non-farm payroll literally increased by 57,000, compared to an expected 30,000 jobs loss. The Dow perked up by 85 points and ended up at 9752 and the NASDAQ at 1880. Bond prices dived as funds moved to the equity market. The 30-year US Treasury bond dropped by more than two full points to yield 5.10 per cent. The dollar perked up as well, following news that the non-manufacturing SMI data was less bad than predicted.

The rumblings about Josef Ackermann, the head of Deutsche Bank, for corporate governance issues is going on. The irony is that he is doing excellently for Deutsche Bank; it’s his role as a board member of Mannesmann, the German mobile phone firm which was taken over by Vodaphone that raisedthe rumblings. He authorised huge (comparatively for Germany) bonus payments to the outgoing management and this is creating waves in Germany. The fact that a senior member of the German business world is under investigation for economic crimes is so amazing that it’s getting discussed up and down the Kaiserstrasse!

KLM and Air France have decided to merge. They had to adopt a highly convoluted structure to get around the insane patchwork of landing rights/slots, international treaties and state ownership of airlines issues. One wonders why the airline industry is treated so differently when roadways, railways and general transportation is not handled similarly. Grow up guys, where's the Open Skies Treaty? Talking about France, the EU has decided to sue France over the state aid to Bull, the French IT company, which went down the toilet anyway. Readers may recall that France now wants to give another large dollop of state aid to Alstom. Perfect industrial strategy, I guess.

The UK economy grew twice as fast as previously estimated, which will allow the chancellor some breathing space, but point to higher interest rates coming up in the future. We talked about breeding for Britain last week to handle the pension crisis. It's a good thing that the UK has a significant proportion of its pensions in private provisioning and defined contributions. Take a look at Italy, where the unions are now going to strike over their over generous pensions. One wonders at the unions foresight, this is a spectacular own goal, which the unions will regret. More importantly, the entire country and Europe will suffer in 30 years time, when the time comes to pony up the cash for these pampered workers who are living in cloud cuckoo land.

The mutual fund scandal in the USA rumbles on, Prudential Securities is the latest company which is responding to the investigation by dismissing several brokers and managers. Remember the last time? The investment banks, under fire from Elliott Spritzer, tried to fight, but this time the hands are up way way before even the investigation has landed in the high echelons of the affected firms. Nice one!

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Oct 06, 2003 20:11 IST