Monday morning, markets opened the week on a cautious note on monsoon worries. The rains stopped their progress to north after covering the southern states, leaving most of central and northern parts reeling under severe heat. The worries did not last very long either as the markets recovered on fresh buying. Led by ICICI Bank, the indices surged ahead later in the day to close strongly.

Tuesday was almost a repeat of Monday with the indices opening weak only to recover and close strongly late in the afternoon. ICICI Bank continued its rally and was joined by Bharti Tele.

Markets maintained a steady up trend for most of Wednesday as the indices continued their march towards the all time highs posted in March of this year. After a gap of a few months, the Sensex managed to close above 6900 levels and the Nifty above 2120.

Indices turned weak on Thursday after profit booking in frontline stocks prevented the markets from building up on early gains.

Friday was the day of Reliance Industries as rumours of a settlement between the brothers over the weekend helped the stock to surge almost 2 per cent. This helped the markets to recover from early losses and close the week above important levels of 6900 and 2120 for the Sensex and Nifty respectively.

After under performing, the frontline indices for the first three days of the week, mid-caps declined substantially on Thursday and Friday. The CNX Mid-cap 200 index lost 3 per cent in two days and closed marginally above the 3000 mark.

US markets, economy and oil

US markets moved largely in a sideways direction with a positive bias during the week. Gains were limited on the broader indices while mild volatility was seen on tech heavy NASDAQ. While the economic data flow remained mostly positive, surging crude prices acted as a dampener during the early part of the week. However, the gain in crude helped oil stocks to maintain an up trend for most of the week.

Both wholesale and consumer prices in the US dropped, easing concerns about inflation. Retail sales growth also slowed down though the new home constructions maintained a steady pace. The stock markets were helped by the data which may encourage the US Fed to halt the series of hikes in short term interest rates.

US consumer confidence index for the month of June rose sharply even on the face of rising fuel prices. Most analysts were expecting a moderate improvement from the May figure.

US current account deficit for the first quarter hit a record $195 billion on rising imports. Many consider the deficit, which is 6.4 per cent of the GDP on an annualised basis, unsustainable and the US government has been exerting pressure on Asian countries, especially China, to revalue their currencies.

Many in the US government believe that the Chinese and Japanese currencies are undervalued, giving those countries an unfair trade advantage.

Crude futures finally touched a new all time high on the last day of the week at $58.60 a barrel on the NYMEX. The commodity surged after reports that major western countries have decided to close their embassies and consulates in Nigeria after terrorist threats. Nigeria is one of the largest crude producing countries and an influential member of OPEC.

December futures on the NYMEX touched $60 to a barrel mark, the highest ever for any crude futures contract. The latest rally in crude has been fuelled by high demand from the US and Asian countries like China and India.

Demand for crude in the second half of this calendar year is projected to rise to over 86 million barrels per day. As the average production in the first quarter was only a shade over 83 million barrels, there is considerable scepticism over the oil producing countries' ability to meet this demand.

Most oil producing countries have exhausted their existing production capacities. Production growth in Russia is much slower than last year after the government's move against one of the largest private oil companies. Saudi Arabia is the only major producer which has spare capacities.

The fact that western refiners have not increased capacities significantly for a long time has worsened the situation. Most western refiners are not equipped to process the heavy crude from Middle East and are dependent on light sweet crude. So any potential supply disruptions for light crude have a disproportionate impact on overall crude prices including those for heavier varieties.

OPEC decided during the week to raise production quotas by 500,000 barrels per day. This may not have much of an impact on supplies as member countries are already producing much more than their allowed quotas. The higher quotas would merely regularise the excess production of many member countries.

In fact many OPEC ministers publicly stated their inability to bring down oil prices in the absence of sufficient refining capacity in western countries. They further stated that they are producing as much as buyers can absorb.

Domestic economic and regulatory action

Inflation for the week ended 04 June declined to 4.22 per cent from 5.2 per cent reported for the previous week. The decline was mainly on account of lower prices of fruits and vegetables and the higher base effect.

The drop in inflation looks very dramatic as the government continues to delay the oil price revision. Adjusted for fuel prices, the rate should be over 5 per cent. For the umpteenth time, the union cabinet postponed the decision this week as well. An announcement is expected today though the hike will be very marginal to manage the political pressures.

The monsoon's progress halted during the week even as the northern part of the country is experiencing severe heat wave conditions. The rains are expected to progress to the central parts of the country by next week. The ministry of agriculture said the delay in arrival of rains may have some adverse impact on output of rice and oil seeds.

Government came out with long term strategies to increase the country's two-way international trade to $500 billion by the year 2010 from the current $200 billion. To give more focus to sector specific policies, a Board of Trade has been set up which had its first meeting during the week. The Board has representation from major companies and advisory committees for various sectors.

Government allowed FII's and NRI's to invest in media stocks within the overall limit of 26 per cent foreign investment limit for such companies. The much awaited decision led to a sharp surge in most media stocks on Thursday though part of the gains was lost on Friday.

Opposition to the disinvestment programme within the government came out during the week with one of the senior ministers writing a letter to the finance minister opposing disinvestment in profit making companies. The left parties renewed their efforts to scuttle the programme by meeting the prime minister during the week. The government meanwhile, seems to be going ahead with the appointment of advisors for the stake sale in BHEL.

Industry update

• After almost two years of declining interest rates for retail borrowers, two of the largest home loan providers increased interest rates on home loans by 0.5 per cent of 50 basis points this week. ICICI Bank and HDFC, which together control a major share of all mortgages, cited margin pressures behind the move. Other banks, especially the PSU players, seem disinclined to follow suit at least for now.
  
• It is interesting to note that rates have been hiked only for home loans. The segment has been one of the fastest growing of all retail finance products on the back of booming property prices. Though it is yet to reach bubble proportions, the real estate investment frenzy has been the prime driver of growth for these two financial sector majors. ICICI and HDFC have succeeded in maintaining their dominance as others, including large PSU banks and smaller private banks, have struggled to match their aggression.
  
• When it comes to other retail finance products like consumer loans and auto loans the competition is far more robust. Though ICICI said it may review rates for consumer loans shortly, it is unlikely that the bank will be able to do so in the face of increasing competition. Foreign banks are getting more and more aggressive in this space. Many domestic non-banking finance companies are also getting more aggressive.
  
• One foreign bank which has aggressive plans for the retail finance space is DBS of Singapore. The largest Singapore bank announced the acquisition of 37.5 per cent stake in Cholamandalam Finance this week. Deutsche Bank also has major plans to expand its retail finance business. GE Capital has already announced its plans to start operations in the retail space this year and may also acquire domestic banks. Domestic brokerage IndiaBulls has floated a subsidiary to offer innovative consumer loans to lower -nd customers who are currently being serviced by neighbourhood money lenders.
  
• The world's largest and most influential air show got underway in Paris this week. This year's show has attracted a lot of attention as it is being held on the backdrop of an acrimonious dispute between the US and Europe over subsidies to the airline industry. Boeing of US has been desperately trying to overtake Airbus, controlled by a consortium of European countries, in new orders for aircraft after a gap of four years.
  
• Boeing and Airbus are betting on different strategies in their quest for industry domination. Airbus believes that the future belongs to the hub and spoke model where airlines would connect large airports with high capacity aircraft and then ferry them to regional locations. Boeing on the other hand believes that travellers would prefer non-stop travel between cities. Their product strategies also reflect this, with Airbus betting on the super jumbo A380 and Boeing on the fuel efficient medium capacity 787 series.
  
• Surprising everyone, Indian carriers turned out to be the biggest buyers of aircraft placing multi-billion dollar orders. The ordering spree was started by Jet Airways with an order for 20 long range aircrafts split between Boeing and Airbus and 10 short range aircrafts from Boeing.
  
• Jet was followed by one month old Kingfisher which is going for an all Airbus fleet. The UB group promoted airline placed an order for 15 long range aircraft, including 5 A380 and 5 A350. Paramount Air, which will launch an all business class airline, ordered 6 short range jets from Brazilian manufacturer Embraer. Sahara signed a lease agreement for long range Boeing 777 aircrafts to start its European and US services.
  
• But it was an order from the yet to be launched low cost airline IndiGo which really dominated the headlines. In what is perceived to be a very bold move, the airline ordered 100 short range aircrafts from Airbus to be delivered over the next seven years. The deal, worth over $6 billion, is the single largest order ever received by Airbus for this family of aircraft.
  
• With all these aircrafts coming in, it is increasingly becoming certain that the domestic aviation industry is headed for excess capacity in the medium term. Starting this year end, on an average, at least five new aircrafts will enter service every month for the next few years. Last year, passenger growth was in the region of 25 per cent. It would be difficult to sustain this growth rate unless the average fares come down further and reduce the gap with high end train fare.
  
• With oil prices expected to average $50 to a barrel in the short to medium term, cost pressures on domestic airlines will not ease to any meaningful extent. Therefore most of these airlines, especially the new ones, would go through a lot of pain over the next few years. This may be followed by a period of industry consolidation before passenger growth catches up with capacity.

Corporate moves

• After more than six months of high drama and posturing, the Reliance family feud finally seems to be getting resolved. The widow of the late founder of the group today issued a statement dividing management responsibilities to the two brothers. It should be noted that no clear decision on ownership division has been arrived at as yet. However, division of management responsibilities is a clear first and very important step towards full and final settlement.
  
• As per the terms of the settlement, Reliance Industries and IPCL would be managed by the elder brother Mukesh Ambani. Younger brother Anil would be managing Reliance Infocomm, Reliance Energy and Reliance Capital. Anil Ambani has resigned as the vice-chairman and managing director of Reliance Industries, whose board is meeting today.
  
• Reliance Industries would guarantee supplies of natural gas to the planned UP power project of Reliance Energy. In future, the holdings of Reliance Industries in Reliance Energy, Reliance Capital and Reliance Infocomm may be de-merged and the control of this entity will be with Anil. Mukesh would control the core businesses of Reliance Industries along with IPCL.
  
• Tata Chemicals has lost out to a consortium of Egyptian and Kuwaiti companies in its bid to acquire Egyptian Fertiliser Company. The consortium bid $462 per share which is almost 30 per cent higher than the bid by Tata Chemicals. The Indian company said it is not planning a higher bid as the price has become too high.
  

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance