In the outgoing week the benchmark witnessed an increment 0.93 per cent with an average weekly volume of 75 million shares. The spike on Tuesday was originated by the release of inflation numbers for the month of September where YTD inflation stood at 11.47 per cent. With inflation sliding down to lower levels, SBP has enough room to cut the discount rate. Looking at the prevailing situation where current inflation is lower by 200bps in contrast with discount rate, investors seem quite optimistic about a high rate cut.
Furthermore the Ministry of Finance curtailed the national saving rates in the range of 96bps to 50bps, indicating the same tendency. Market yield on various tenors in the open market dipped by 32bps to 41bps over the preceding month level. We believe 50bps can be considered as a floor while over and above would be a cherry on top, said Bilal Asif at HMFS, adding that rate cut in a fast and furious pace would have long term repercussions on our economy, hence we need to consider a number of variables including inflation to analyse the bigger picture. The change in base year and the indexation factor of CPI were the major factors behind the lower inflation number. Previously the base year was changed in 2001 where our economic fundamentals were way different in contrast with current economic fundamentals. On a broader scale, Aggregate demand was fairly subdued and foreign direct investment (FDI) is expected to flow towards us and inflation was fairly suppressed in 2001. In 2011, we are passing through a high inflation phase, FDI is shrinking and debt repayments are expected to commence shortly.
Taking a glimpse over the top tier performers of the week, NBP & ABL along with FFC were among the major winners. Price hike by cement makers benefited the DGKC. Price hike by Engro by Rs202/bag fueled the bullish sentiment as Fatima and FFC witnessed price improvement. On the oil front, ODGC lead the sector with a gain of 2.88%, while PSO followed with a 2.77% gain. We believe the upcoming week performance would be dependent on the MPS statement along with the quarterly results season, he added.
Money Market: Ease-off in inflation expectation ensured by rebasing and tinkering with the inflation index methodology to gauge inflation received further impetus as rates on NSS were drastically slashed to the tune of 78-96 bps. The last trading day of the week observed precipitous dip in secondary yields as the benchmark 6M KIBOR fell by 11bps to 13.25% since the beginning of the week. Money supply shrunk despite rise in NDA as NFA continue to contract putting further pressure of feeble Rupee. Furthermore Government borrowing from commercial banks has swelled by 176bn since the commencement of FY11. After calibrated intervention by SBP in the exchange market on the advice of finance ministry, PKR depreciation against greenback was curtailed to 1.78%. Discount rate cut appears imminent in the 8th October MPS, strengthening the case for an inverted curve ahead, said Salman Vidhani at HMFS.
