Mon, 24th October 2016

Anirudh Sethi Report


Archives of “Analysis” Category

Cyrus Mistry removed as chairman of Tata group

India’s powerful salt-to-steel conglomerate, the Tata Group, said Monday it had replaced its chairman, Cyrus Mistry, amid growing investor concern about the uninspiring financial performance since he took over less than four years ago.

In a brief statement that sent shockwaves through India’s business circles, the normally staid conglomerate said the board was temporarily reinstating former chairman Ratan Tata, to serve as interim chairman

The company also said it has already established a search committee to identify a long-term successor for Mr Mistry, a process it said would be completed within the next four months.

OPEC not yet discussing output cut exemptions – UAE Minister

Oil prices tick higher but remain near the lows of the day

Everyone wants an exemption.

Oil is down 57-cents today to $50.28. That’s largely because Iraq doesn’t want to join in any kind of production cut. They hope to boost production from ISIL-controlled regions after they are retaken.

The problems is that everyone wants an exemption.

OPEC and Russia are committed to stable oil prices

So says OPEC Sec Gen Barkindo

  • There are signs the rebalancing of fundamentals are under way
  • Demand is at healthy levels but overhang remains a major concern
  • Decision in Algiers helped to calm volatility in oil markets
  • It is essential that OPEC and non-OPEC countries address overcapacity
  • Russia is crucial in addressing energy challenges

Speaking in Vienna ahead of further talks due 28/29th this week.

Russia’s Novak now piping up during the love in.

  • Cooperation between Russia and OPEC is intensifying
  • OPEC has always taken steps in helping the market to balance
  • Output freeze or cut is the right decision
  • Short-term output cut would reduce market vol

October 2016 Eurozone Markit manufacturing PMI flash 53.3 vs 52.6 exp

October 2016 Eurozone Markit manufacturing, services and composite PMI flash report 24 October 2016

  • Prior 52.6
  • New orders 53.6 vs 53.4 prior
  • Services 53.5 vs 52.4 exp. Prior 52.2
  • New orders 53.2 vs 52.5 prior
  • Composite 53.7 vs 52.8 exp. Prior 52.6
  • New orders 53.3 vs 52.8 prior

All’s well in the land of the Eurozone. What’s most notable from the report was that prices charged rose for the first time since Aug 2015 and prices paid saw the steepest gain for 15 months. That’s the sort of thing the ECB will be taking note of, although Markit note that most of the rises came on the back of commodity price rises led by oil. However, they noted that wages were on the up too.

Markit’s Chris Williamson was upbeat about the report;

Power sector debt worth Rs 1.34 trillion at high risk: Crisil

Nearly Rs 1.34 lakh crore worth of debt on operational and under-construction power projects is at risk, says ratings agency Crisil.

As per Crisil estimates, around 17,000 MW of operational power projects with a debt of Rs 70,000 crore and additional 24,000 MW under-construction projects with a debt exposure of around Rs 64,000 crore are at high risk.

“These operational projects are those, which are facing the consequences of aggressive bidding for coal supplies or facing huge cost overruns, and those with gas-supply issues,” Crisil Senior Director Sudip Sural said.

He said over the period, the credit growth to the sector will moderate to 5 per cent over the next three years as compared to an average of 18 per cent witnessed in the last five years.

“This is primarily because the discoms debt which has been the key components of this exposure, is going to go out of the banking system over a period of time and move to the fold of the state government because of the UDAY scheme,” Sural said.

Offshore yuan at a 6 year low today

The offshore yaun, CNH, is not subject to trading restrictions like the onshore (CNY) is.

The USD/CNY is limited to a plus or minus 2% range of its daily reference rate  The PBOC stands ready to buy or sell CNY at the extremes of the daily band
USD/CNH, though … its free of this band
Today the USD/CNH has fallen to a six year low, as markets expect continued yuan devaluations from the People’s Bank of China 

Next Week Movement will Depend on These Events

There were two developments before the weekend that will likely spur a response in the week ahead. 
First, while most were looking out for DBRS credit review of Portugal, Fitch surprised by cutting Italy’s credit outlook to negative from stable.  At the heart of the decision was concern about the repeated delays and back loading of fiscal consolidation.  The disappointing growth, the non-performing loan burden, and the political climate pose downside risks.
Italian bonds which had been underperforming Spain bonds had begun holding their own.  Last week, the benchmark 10-year bond yield fell 2.5% in Italy but rose slightly in Spain.   The divergence was sufficient to change the month-over-month back into Italy’s favor (+18.5 bp vs. Spain’s +19.7 bp).  Fitch noted that even if Renzi does not resign if the referendum fails, the government may be weaker, and parliamentary elections are scheduled for May 2018, and Euro-skeptic political forces are on the rise (5-Star Movement won Rome and Turin in elections earlier this year). 
The surprise action by Fitch, coupled with EU demands that Renzi alters the draft budget may weigh on Italian bonds.  Italian bank shares rallied for three consecutive weeks, including a  sharp 7.3% advance last week.  They may also be vulnerable if yields continue to rise.   Recall that DBRS put Italy on credit review with negative implications in August.   DBRS is the only one of the top four rating agencies that put Italy in the “A” band.  A cut would increase the haircut the ECB imposes on Italian bonds used as collateral for loans. The underperformance of Italian bonds relative to Spanish bond may resume if Spain is able to avoid a new election before the end of the year.