Pakistan Stock Exchange benchmark index posts 1.6%WoW increase

Market remained in green throughout the week ended on May 05, 2023 as buyback announcements from LUCK and HBL’s Sponsors boosted investor’s confidence.

The benchmark index gained 661 points during the week to close at 42,242, posting 1.6%WoW increase. Participation also witnessed an increase of 17.5%WoW as average daily trading volume rose to 244.5 million shares as compared to 208.0 million shares a week ago.

On the macro front, IMF reviews still hang in the balance and as the Fund will review the budget plans for upcoming year.

While political instability still persists, as deadlock remains on the election dates between PTI and the incumbent government.

Internationally, crude oil prices dropped during the week due to lower than anticipated demand from China and FED rate hike by 25bps. WTI/Brent declined by 8.0%/8.1%WoW to currently trade at US$70.6/74.7/bbl, respectively.

Foreign exchange reserves of Pakistan remained largely flat on a weekly basis to US$4.46 billion as of April 28, 2023.

PKR remained stable during the week to close at PkR283.59 to a US$, a gain of 0.1%WoW.

Other major news flows during the week included: 1) Trade deficit for first 10 months of FY 23 declined 39.62%YoY to US$23.71 billion, 2) Food pushes inflation was record at 36.4% in April, 3) FBR suffers shortfall of over PKR100 billion in April, 4) POL products sale in April declined 46%YoY to 1.17 tons, 5) April cement dispatches declined 16.55%YoY to 2.95 million tons, 6) Circular debt crossed PKR4 trillion mark.

Synthetic & Rayon, Woollen, and Leasing Companies were amongst the top performers, while Fertilizer, Property, and Refinery were amongst the worst performers.

Flow wise, major selling was recorded by Foreigners with a net sell of US$6.1 million. Individual absorbed most of the selling with a net buy of US$8.0 million.

Top performing scrips during the week were: PGLC, IBFL, PKGS, UPFL, and LUCK, while the laggards included: ENGRO, DAWH, PAKT, JVDC, and JDWS.

Going forwards, any positive development on the IMF front and political stability would further boost the investor’s confidence. However, market upside is expected to remain limited due to record high interest rates in the country and rampant inflation.

Analysts advise investors to take a cautious approach while building positions in the market and continue to advocate the stocks with dollar-denominated revenue streams (Technology and E&P sector), to hedge against the currency risks or companies with healthy forward dividend yields.

Gold prices on upward trajectory

Gold prices ticked higher on Tuesday after the dollar retreated as cautious investors awaited further US economic data due this week to gauge the Federal Reserve's next policy move.

Spot price rose 0.2% to US$1,993.64 per ounce by 0514 GMT, while US gold futures inched 0.1% higher to US$2,002.00.

The dollar index eased, making gold more attractive for buyers holding other currencies.

Gold is getting a boost from a weaker dollar, and focus will remain on the next set of US economic data and the Fed meeting to understand its stand on rate hikes for the rest of the year, said Ajay Kedia, director at Kedia Commodities in Mumbai.

Until then, prices may consolidate in the US$1,970 to US$2,020 range, Kedia added.

Dallas Fed's Monday report showed manufacturing activity in Texas contracted in April, highlighting the economic toll of the Fed's rate tightening cycle.

Markets are pricing in an 87.2% chance of a 25-basis-point hike by the Fed at its May 2-3 meeting. Higher interest rates tend to weigh on the bullion's appeal.

Investors now await the US consumer confidence report scheduled later in the day, ahead of the core personal consumption expenditures index, and GDP quarterly growth rate, due this week.

"These reports are more likely to see the US dollar weaken which will further strengthen gold prices in the short term," said Michael Langford, director at corporate advisory firm AirGuide.

Meanwhile, rising concerns that the US Treasury Department could hit its debt limit in the coming months are leading investors to shun certain Treasury bills as they seek out low-risk places to park cash.

In the physical market, gold consumption in the world's largest gold-consuming nation grew 12% year-on-year over January-March.

Largest strike brings Germany to a standstill

Airports, bus and train stations across Germany were at a standstill on Monday morning, causing disruption for millions at the start of the working week during one of the largest walkouts in decades as Europe's biggest economy reels from inflation.

The 24-hour strikes called by the Verdi trade union and railway and transport union EVG were the latest in months of industrial action which has hit major European economies as higher food and energy prices dent living standards.

Two of Germany's largest airports, Munich and Frankfurt, suspended flights, while long-distance rail services were cancelled by rail operator Deutsche Bahn. Striking workers wearing red high-visibility jackets blew horns and whistles through an empty Munich train station.

Employees are pressing for higher wages to blunt the effects of inflation which reached 9.3% in February.

Germany, which was heavily dependent on Russia for gas before the war in Ukraine, has been particularly hard hit by higher prices as it scrambled for new energy sources, with inflation rates exceeding the euro-area average in recent months.

Persistent cost pressures have pushed central banks to a series of interest rate increases, though policymakers have said it is too early to talk of a price-wage spiral.

Verdi union is negotiating on behalf of around 2.5 million employees in the public sector, including in public transport and at airports, while railway and transport union EVG negotiates for around 230,000 employees at railway operator Deutsche Bahn and bus companies.

In the hours running up to the strike, both sides dug in their heels, with union bosses warning that considerable pay hikes were a matter of survival for thousands of workers.

"Millions of passengers who depend on buses and trains are suffering from this excessive, exaggerated strike," a Deutsche Bahn spokesperson said on Monday.

Verdi is demanding a 10.5% wage increase, which would see pay rising by at least 500 euros (US$538) per month, while EVG is asking for a 12% raise or at least 650 euros per month.

Stranded passengers expressed both sympathy and unhappiness about the strike action.

"Yes, it’s justified but I for one never went on strike in my entire life and I have been working for more than 40 years. At the same time, in France they go on strike all the time about something," said passenger Lars Boehm.

EVG chairman Martin Burkert told the Augsburger Allgemeine newspaper on Monday that employers had not yet made a viable offer and warned that further strikes were possible, including over the Easter holiday period.

Deutsche Bahn on Sunday said the strike was completely excessive, groundless and unnecessary, and employers are warning that higher wages for transport workers would result in higher fares and taxes to make up the difference.

Monday's walkouts are part of waves of disruptive labour strikes in wealthy European countries in recent months including in France and Britain, where hundreds of thousands of transport, health and education workers are pressing for higher wages.

Protests against President Emmanuel Macron's pension reforms have sparked the worst street violence in years in France.

Commerzbank Chief Economist Joerg Kraemer said the economic impact of Monday's strike was limited so far but this could change if the strikes persisted over a longer time.

"The strike will strain people's nerves," he said. "But economically, the losses are likely to be limited to the transportation industry because factories will continue to operate and many employees will be working from home."

The head of the Bundesbank Joachim Nagel said last week Germany needed to avoid a price-wage spiral.

"To be clear, preventing inflation to become persistent via the labour market requires that employees accept sensible wage gains and that firms accept sensible profit margins," he said.

"Despite signs of second-round effects, we have not observed a destabilizing price-wage spiral in Germany so far."

Sri Lanka to receive first tranche of IMF bailout funds in two days

Sri Lanka will get the first $330 million tranche of the International Monetary Fund's bailout in the next two days, the global lender said on Tuesday, putting the onus on the cash-strapped nation to rein in its debt to sustainable levels.

Economic mismanagement coupled with the impact of the COVID-19 pandemic left Sri Lanka severely short of dollars for essential imports at the start of last year, tipping the island nation into its worst financial crisis in seven decades.

The IMF's Executive Board on Monday approved a nearly US$3 billion bailout for Sri Lanka with the endorsement expected to catalyze additional external support for the country to the tune of US$3.75 billion from the likes of the World Bank, the Asian Development Bank and other lenders.

The office of the country's president, Ranil Wickremesinghe, said the program will enable it to access up to US$7 billion in overall funding.

"Sri Lanka is no longer deemed bankrupt by the world," Wickremesinghe said in a video statement released by his office. "The loan facility serves as an assurance from the international community that Sri Lanka has the capacity to restructure its debt and resume normal transactions."

The IMF funding will, however, not immediately help millions of Sri Lankans, who are being squeezed by soaring costs of living, high income taxes of up to 36% and a 66% increase in power tariffs. The economy is expected to shrink by 3% this year after contracting 7.8% in 2022.

Half of the families in Sri Lanka have been forced to reduce the portions they feed their children, according to a survey by Save the Children released this month.

Shehan Semasinghe, Sri Lanka's state minister of finance, said the IMF bailout was absolutely essential for the country.

"But now we have to patiently focus on very difficult reforms going ahead. We have to continue to work together to rebuild Sri Lanka's economy and move it towards recovery," he said in a statement late on Monday.

The Colombo Stock Exchange All-Share index was down 0.6% as of 0629 GMT, while the Sri Lankan rupee strengthened 6.45% against the dollar.

Bonds were up by 0.73 cents to 1.50 cents across tenors, with the March 2029 bond leading the gains.

Peter Breuer, Senior Mission Chief for Sri Lanka, Asia and Pacific Department at IMF, said debt sustainability was one of the key criteria for the IMF to approve a bailout for any economy.

Going forward, Sri Lanka's disbursements from the bailout package would be tied to reviews that take place every six months, Breuer said, adding that the IMF has not set any growth target but has put in place an inflation band of 12-18% for the country to achieve by end of 2023.

Sri Lanka's retail prices have eased from last year's peaks but still hover over 50%.

Securing financing assurances from China and India and all its major bilateral creditors was key to Sri Lanka's efforts of unlocking the IMF bailout and putting its economy back on track.

The island nation aims to announce a debt-restructuring strategy in April and step up talks with commercial creditors ahead of an IMF review of the bailout package in six months, its central bank governor told Reuters earlier this month.

"We need to keep in mind that it's still going to be a difficult road no matter how much potential funds or support is being thrown at Sri Lanka," Katrina Ell, senior economist at Moody's Analytics, told Reuters.

"Ultimately, it comes down to them being able to successfully address some of the systemic problems in terms of economic management, fiscal management."