Weekly Review: Financial Markets fail to absorb interest rate cut

A revision of the monetary policy by the State Bank of Pakistan on Saturday, October 8 attracted investors towards the stock market, but the KSE-100 index, used as a benchmark index, did not show any significant increase.

SBP, citing low inflation numbers, adopted an aggressive expansionary policy, slashing the discount rate by 1.5% (150 bps) to bring it down to 12%. It is vital to note here that the low inflation numbers come in the aftermath of changing the base year from 2000 to 2008.

While an interest rate cut was expected, analysts were anticipating a decrease of 50 bps to 100 bps. Citing this change, volumes soared to 183 million shares in the first trading session after the announcement on Monday, October 10 and the KSE-100 index experienced a 238 point increase.

However, this surge was brief and the investors reverted to profit taking on Tuesday, October 11. Volumes dropped to 141 million and there was a correction of 37 odd points in the index.

Volumes declined considerably on Wednesday and were concentrated in a few select stocks. Trading was largely range-bound and selling in blue-chip companies kept the KSE-100 index under pressure. The benchmark index closed at 12059 after an increase of just 4 points.

Government’s decision to ban petroleum product export to Afghanistan stimulated a selling spree in the market at inflated levels, causing the index to shed 92 points. Volumes decreased to 91 million on the news of the ban, indicating how badly the investor confidence was shattered.

On the last day of the week, the benchmark index rose marginally by 21 points to close below 12000 points. Volumes remained on the lower side and fertiliser sector proved to be the only attraction across the board.

Mixed sentiments were observed across the market after macroeconomic indicators revealed that the economy was not in good health. Trade deficit widened to $5.1 billion for the first quarter of Fiscal Year 2012 and remittances declined 32% in September alone.

Foreign investors were net sellers in the week, divesting $2.8 million from October 10 to October 14.

Mr. Ali Nadeem, an equity trader at First Pakistan Securities Ltd., was of the view that the interest rate cut helped attract investment in the market, with a yearning towards the fertiliser and cement sector.

He asserted that DG Cement will experience an increase in earnings because of being highly leveraged and an increase in urea prices by Fauji Fertiliser Company (FFC) was the primary reason of investment in the scrip. Banking Sector did not attract investment largely because of reduced margins in the aftermath of the new monetary policy.

Ali further added that depreciation in rupee and macroeconomic indicators played a major role in countering the impact of interest rate cut.

Posted by Hammad Malik on Oct 16 2011. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry