Global Markets View - Dec 15, 2021
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* U.S. stock benchmarks ended lower Tuesday (S&P500 down 0.8%, Nasdaq down 1.4%) and VIX ended near 22, after data showed another jump in wholesale inflation ahead of a Fed policy statement on Wednesday that is expected to see a faster reduction in its bond buying program.
* Tech stocks lead declined while Financials saw an uptick. 2-yr Treasury yields topped 0.65% while the 10-yr was flat at 1.44%. Dollar strengthened with the Dollar Index rising to 96.6. Gold declined 1% to $1,772 due to the rising yields and strengthening dollar. Brent crude declined 1.4% to $73.4 as the IEA said that the oil market has returned to a surplus.
* The US producer-price index rose 0.8% in November, above the 0.5% advance forecast. That brought wholesale price increase in the past year to 9.6%, from a 12-month pace of 8.8% in the prior month, marking the highest level in about four decades.
* Market sentiment soured on concern that a jump in both producer and consumer prices will put pressure on the Fed to act more aggressively. While officials have given no signals they would rush to tighten policy, a policy mistake by the Fed due to a hasty shift is seen as the biggest downside risk for equites in 2022.
* Markets also want to see the Fed’s view on the fast-spreading omicron variant. UK saw its first death due to omicron. And facing rising infections, California became the latest state in the US to reimpose indoor mask mandates. However, given than omicron is seen to be milder than earlier variants, a hawkish stance from the Fed cannot be completely ruled out.
* In India too, WPI inflation shot up to 14.2% in November 2021 on a YoY basis, following a 12.5% rise in October. This was the highest ever inflation recorded in over three decades. Sequentially as well, WPI witnessed one of the steepest rises in over nine years. The Consumer Price Index (CPI), on the other hand, rose to 4.9% in November compared to 4.5% in October.
* Though CPI has been under check due to producers not being able to pass on the complete hike in RM costs, this is unlikely to continue. These record high WPI numbers are likely to have a trickle-down effect on CPI in the coming months. In its policy meet, the RBI did not raise any alarms about inflation outlook, but it is likely to get more and more difficult for the RBI to ignore the rise in WPI.
* In India, the Bankex index is down 12% from its recent highs versus 8-9% for the Nifty - continuing the trend of overall underperformance that has been persistent over the past two years. However, the macro setup remains positive through 2022 and beyond - ideal for positive surprises on bank earnings growth and valuation re-rating. And in this space, Private Banks stand out.
* Private sector banks have gradually taken away market share from Public sector banks over the last several years. As of Sep 2021, Private banks had a share of 31% in Bank deposits and 37% in Bank loans. In the last 5 years, Private banks have gained ~10% share in both deposits and advances.
* Private sector banks now have a bigger market share in Current deposits than Public sector banks. As of September-2021, Private banks had 42% of the total Current deposits with Scheduled Commercial Banks. This is 150bps higher than the share of PSU banks. The gap in market share for current deposits had been gradually narrowing – from over 20ppt in 2015 to just over 5ppt in 2018 to less than 1ppt in 2020 before being higher than PSU banks this year.
Source: ABSLAMC Research