According to the National Stock Exchange, U.S. ETNs had $6.9 billion in assets at the end of September. ETFs were literally 100 times more prevalent, with $697 billion in assets. That included $62 billion just in long commodity ETFs.

That’s just crazy. And it highlights investors’ irrational fear of the ETN product structure.

I remember when ETNs first came to market in 2006: Investors couldn’t get enough of them. Barclays Capital launched the iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP) and it quickly gathered assets.

The reason was simple: ETNs offered two huge advantages over commodity ETFs.

First, they promised perfect tracking. If you bought an ETN, you would receive the full return of the benchmark, minus the fund’s expenses. Period. That’s handy, since commodity ETFs have been more prone to tracking error than most equity funds.

But the real advantage of commodity ETNs was (and remains) their tax treatment. The prospectus said (and still says) that ETNs can be treated basically like zero-dividend stocks for tax purposes. If you hold a commodity ETN for longer than a year, you only pay 15 percent long-term capital gains taxes when you sell. What’s more, you don’t have to pay any taxes until you sell.

By comparison, futures-based commodity ETFs like the PowerShares DB Commodity ETF (NYSEArca: DBC) are treated like futures by the IRS. That means that gains are marked-to-market each year, and investors must pay taxes on those gains at a blended 60 percent/40 percent long-term/short-term capital gains tax rate. For a high-earning investor, that puts the blended tax rate at 23 percent, payable every year.

That’s a huge difference. An ETN investor pays a 15 percent tax rate, deferrable until the ETN is sold; the ETF investor pays a 23 percent tax rate, due annually.

Risk Factor

Why don’t we see more assets flow into ETNs? The only possible reason (short of simple ignorance) is the credit risk.

The N in ETN stands for note, and that’s what they are: unsecured debt notes. Like any other uninsured promise-to-pay, their entire value depends on the credit of the issuing bank. If you buy a Deutsche Bank ETN and Deutsche Bank goes bankrupt, you lose all your money.

It’s not a theoretical fear. The very few people who held the three Lehman Brothers ETNs to the bitter end lost their money when the firm went bankrupt. It’s obvious, looking at the numbers, that the credit crisis stopped the growth of ETNs in their tracks.

But let’s be honest: For an investor who is paying attention, the likelihood of losing money in an ETN is vanishingly small. Most ETNs offer daily redemptions at net asset value, meaning that (even ignoring the quoted market) an investor of size (50,000 shares in the case of iPath) can sell out of the product within 48 hours and get the full net asset value of the note from the issuer.

So ask yourself: How likely is it that Barclays Capital or Deutsche Bank, or whomever is underwriting a particular ETN, will go bankrupt with less than 48 hours’ warning? Or to put a margin of safety on it, how likely is it that they will go bankrupt in the next week?

The answer right now is: not very.

For taxable investors who pay attention to the market, read the newspaper, monitor stock quotes, etc., the likelihood of being caught out on an ETN is tiny. Meanwhile, the risk of overpaying the IRS if you buy and hold a commodity ETF is 100 percent.

ETNs don’t make sense for all investors. In nontaxable accounts, I actually prefer ETFs. If you want a truly fire-and-forget investment, where you can walk away for a year or two, ETFs are the way to go. But for taxable investors who pay close attention to their accounts, there’s a lot to be said for the ETN structure.

(One caveat here: There is a risk that the CFTC’s plan to enact new regulations in the commodities market will force some ETNs to shut down. If that happens, investors would get their money back, but they could be hit with short-term capital gains if they’ve held a note for less than a year. It’s tough to gauge how large a risk this is, but it’s legitimate.)

At least that’s what a new Barclays Global Investors study reveals. The research team led by Deborah Fuhr found that total U.S. assets in the ETF market hit an all-time high of $582 billion at the end of the second quarter, its highest mark since December 2007.

Interestingly, however, the number of U.S. ETFs, pegged at 706 from some 22 providers on three exchanges, is smaller than its European counterparts, which account for 753 ETFs for assets estimated at $183 billion.

According to Barclays, U.S. ETF assets have risen by more than 17 percent on the year – which is more than the 10 percent rise seen in the MSCI U.S. Index in dollar terms in the same period – but it’s particularly notable when compared to the modest 1.1 percent rise in the number of new ETF launches.

While assets bloomed significantly, average daily trading volume in U.S. dollars dropped 26 percent on the year to an estimated $57 billion.

Globally, total ETF assets ballooned to $857.5 billion by the end of the quarter, exceeding for the first time since 2007 its highest mark of $796.7 billion reached that year.

Topping the list with most assets under management worldwide was the SPDR S&P 500 (NYSEArca: SPY), with a total of roughly $69.38 billion.

The ETF, which turned 16 years old this year, has grown to be the largest ETF globally and the most liquid equity security traded in the world.

The findings by Fuhr are essentially in line with other end-of-August data compiled by the National Stock Exchange and SSgA. (See full story here.)

But what really sticks out is that despite some nice growth numbers in the U.S., the rest of the world keeps pumping up the volume on its ETF activity even more.

In the latest BGI research, Fuhr’s numbers show that:

• Globally, ETF assets jumped some 25.3 percent by the end of August. That’s more than 3 percentage points better than the U.S. this year.
• Europe (34.7 percent), Asia ex-Japan (39.1 percent) and Latin America (35.4 percent) all are handily surpassing the U.S. asset growth rate in 2009.
• Japan is the lone laggard at -6.9 percent ETF asset losses for the year.

At the same time, Fuhr’s data indicate that average expense ratios between ETFs in Europe and the U.S. aren’t all that different, broadly speaking.

On the low side, European ETF providers charge around 0.19 percent for currency funds and 0.16 percent for a typical bond portfolio. For regional exposure similar to what we’d think about in the U.S. as domestic index-tracking ETFs, investors in Europe average paying expense ratios of between 0.23 percent (for euro zone stocks) and 0.35 percent (across a wider assortment of European companies).

For U.S. stock exposure, European ETF investors are paying ERs of around 0.38 percent. But, to own commodity funds (0.45 percent), alternative-types of ETFs (0.65 percent) and emerging markets stocks (0.63 percent), it gets a little more expensive. (To gain U.S. sector exposure, Europe’s providers charge around 0.72 percent for their ETFs.)

That’s not too much more than ETF expense ratio rates in the U.S. But the big difference comes when comparing how much a mutual fund investor must pay on the two continents.

In Europe, an actively managed stock mutual fund focused on domestic stocks will run you an average of 1.75 percent. And an actively managed international equity mutual fund typically assesses ERs of around 1.73 percent.  Over here, investors are charged an average 1.41 percent for domestic-focused, actively managed mutual funds while the ER for international funds is 1.56 percent.

As my colleague Murray Coleman points out in a blog for our sister European site, it’s likely many of the new converts to ETFs overseas are diversifying away from all-stock portfolios.

Yet, with such an expense differential between mutual funds and ETFs still existing in developed markets like Europe, it’s no wonder that experts foresee higher growth rates for ETF assets in other parts of the world.

Although a lot of work still needs to be done on ERs domestically, BGI’s latest report shows that U.S. fund investors are still relatively fortunate – at least compared to what they’re getting docked to own mutual funds in other countries.

Cinthia Murphy is associate editor at IndexUniverse.com. She welcomes comments and suggestions for future blogs at: cmurphy@indexuniverse.com.

Well, let's see how the "average" ETF investor did in the month of June. We don't have numbers on how asset flows changed during the last 30 days yet, although our friends at the National Stock Exchange are sure to get us that soon. But what we do know is the bets investors, as a mass of men and women leading lives of quiet desperation, made at the beginning of the month.

As a refresher, here were the assets of leading ETFs at the end of May (in billions of dollars):

There are a few interesting things on this list. The first is simply the size of the investments outside core U.S. equity holdings. A total of $35 billion is a lot of gold, and the combined $61 billion in EEM/EFA is also a staggering number. So how'd investors fare against the stodgy old S&P 500 in May?

Before we get into that, it's worth pointing out an interesting divergence just inside the S&P 500. For the month of June, SPY was down 63 basis points. Its largest competitor, the iShares IVV, was down only 50 basis points. The reason, one suspects, is that the dividend date for SPY was June 19, and as a matter of policy, SPY holds its dividends in cash and won't pay those dividends out until the end of July. IVV, on the other hand, marked dividends on June 23 and paid them on the June 29, and reinvested them as a matter of policy during the interim period.

And of course, these distinctions pale in comparison to the performance differences experienced by investors in the non-U.S. equity markets.

Investors in U.S. dollar-denominated ETFs based on the MSCI benchmarks got killed in June, a story helped by a greenback that was surprisingly strong (up over half a percent) in June. Investors in EEM, a fund that pulled in over $1 billion in new assets in the prior month, faced a gut-check of an 8% loss before the bounce back last week.

But if we're looking for the real goat in the ETF Top 5, it was the GLD investor. Down over 5%, gold just hasn't been able to find the footing to launch the $1,000+ run so many inflation hawks are calling for. Not to say it will never happen, but over half a billion in new May money got it wrong headed into June.

But let's not pick on gold. Let's look at the hottest of the hot ETFs.

In May, that award didn't go to some 3x leveraged trading vehicle, but to the iShares MSCI Brazil Index Fund (NYSE Arca: EWZ), exploding at the seams with over $1.5 billion in new assets in the month leading up to June 1. How'd all that hot money do?

A bit worse than all the other emerging markets money in the Top 5.

The point of this isn't to poke fun. Year-to-date, EWZ is kicking the pants off the S&P 500 (up over 53%). In fact, every single one of these funds is beating the loyal spider. But it does make the point that timing is everything in investing. Being in EWZ today doesn't necessarily make you the smartest guy in the room, any more than my boring old S&P 500 position, today, makes me a goat.

If you bought into EWZ back in January and you've been along for the ride, now that was quite the call. And for this one-month period, the big money in the S&P was the "winner," if you can call it that. Next month?

If I knew that …

You can access the full report here. The data is from the National Stock Exchange.

There’s a lot of interesting information in the latest report, including a complete table showing assets and inflows by ETF provider. Of all the data points covered, however, one in particular caught my eye.

So far this year, the Direxion Financial Bear 3x ETF (NYSE: FAZ) has attracted the second-greatest inflow of any ETF on the market, at $4.6 billion. Only the SPDR Equity Gold (NYSE: GLD) has done better, pulling in $11.8 billion.

Despite the massive inflows, FAZ ended May with just $1.6 billion in assets. Such a gap suggests that investors in the fund have experienced terrible returns.

And they have. Since FAZ launched in November 2008, the security has lost 93% of its value, falling from $71.41 per share last November 6 all the way down to $4.83 per share on Wednesday.

The numbers look more extreme if you measure from the ETF’s peak-to-trough. Using end-of-day closing prices, FAZ rallied in the 10 days after its launch from $71.41 to $165.48 per share. The fund peaked intraday above $200 per share, according to Yahoo Finance. Using those measures, the fund is off either 97% or 98% from its high point.

Such a view makes the success of the fund in attracting assets all that more intriguing. Investors keep pouring money into the fund despite the massive losses.

Or, perhaps I should say, traders are flocking to FAZ. Despite having just $1.6 billion in assets at the end of May, $43 billion worth of FAZ shares traded hands in May. That’s $2.2 billion per day, meaning the fund turned over its entire portfolio every single trading day of the month.

What to draw from all this? The suggestion is that people are using this fund correctly, as a trading tool and not as a long-term investment. Let’s hope so. With the fund down 97%, a longer-term investment strategy just doesn’t seem to be working out.

As a trading tool, the fund is delivering on its promises, providing 3X the inverse daily return of the Russell 1000 Financial Index. But you wouldn’t want to own it for the long haul.

BTW: In case you’re wondering, FAZ’s mirror fund—the Direxion Financial Bear 3x ETF (NYSE: FAS)—is trading down 80% over the same time period.

If you’re wondering how a 3X bull and 3X bear ETF can both be down sharply over the same stretch, I encourage you to watch our recent webinar on how leveraged and short ETFs work.

Investors pulled nearly $6 billion out of exchange-traded funds in February, the first time ETF fund flows have been negative in nearly a year.

The new data, compiled by the National Stock Exchange and published on Wednesday, reversed the strong trend seen in January 2009 and December 2008. That's when investors poured more than $80 billion into ETFs.

The bulk of the outflows can be laid at the feet of a single fund, the S&P 500 SPDRs (NYSE Arca: SPY), which saw $13.6 billion in net outflows.

That's not unusual, either. Stripping out SPY and another heavily traded fund used by institutional investors, the PowerShares QQQ (Nasdaq: QQQQ), ETFs as a whole have generated 78 straight months of net inflows. 

"Those two are so heavily traded by institutions for so many temporary different reasons -- to replenish cash reserves, tax purposes and as an intermediate way to switch around positions within the same asset classes -- that they're really like outlying funds separate from the other ETFs," said Michael Traynor, the NSX's chief strategy officer.

In February, the QQQ's had net outflow of $724 million. 

"There's no telling what institutions are doing from one month's worth of data. This happens so frequently, however, reading too much into the trading volatility of SPY and QQQQ probably won't lead to many sound conclusions," said Traynor. 

That gigantic move overwhelmed the positive flows into funds like the SPDR Equity Gold ETF (NYSE Arca: GLD), which led all ETFs with $5.6 billion in inflows; GLD closed the month with $31.5 billion in assets. The Market Vectors - Gold Miners (NYSE Arca: GDX was second, with $1.1 billion in inflows, followed by the U.S. Oil Fund (NYSE Arca: USO) at $924 million. Other funds to make the top 10 on inflows were the iShares Barclays TIPS ETF (NYSE Arca: TIP) at $840 million and three leveraged funds: the ProShares Ultra S&P 500 (NYSE Arca: SSO), ProShares Ultra DJ Financials (NYSE Arca: UYG) and the Direxion Financials Bull 3x (NYSE Arca: FAS). The trend of inflows into leveraged bull market ETFs suggest a number of investors positioning themselves for a bottom in these beaten-down markets.

ETFs suffering outflows were led by large established ETFS like the aforementioned SPDRs and the iShares MSCI EAFE ETF (NYSE Arca: EFA). Investors also pulled money out of a handful of inverse ETFs designed to go up when the market goes down.

Net cash flow into exchange-traded funds in November blew away October levels, with more than $26.3 billion coming into ETFs, according to data from the National Stock Exchange.

In October, during the worst of the investor panic, net cash flow into ETFs was only $7.3 billion. There were 271 ETFs and 26 exchange-traded notes with net outflows in October, and 179 ETFs and 16 ETNs with outflows in November.

It wasn't just the usual suspects to whom the assets were flowing. While the iShares, SPDRs, Vanguard and ProShares had their usual big flows, most notable was the arrival of Direxion Funds as a serious competitor, which took in $511 million in net new cash in November.

Though ProShares itself did not slow down while its new competitor made its face known to the ETF world. ProShares took in $4.6 billion in net flows in November, leapfrogging Vanguard into third place among all ETF sponsors and trailing only Barclays Global Investors' iShares and State Street Global Advisors' SPDRs.

ETFs as a whole also continued their ascendance as part of overall U.S. equities trading. ETFs had been nearing the 40% threshold of all U.S. equities trading for months, and in November, ETFs finally broke through that barrier, representing nearly 43% of all U.S. equities trading.

In recent months, ETFs had risen from 30% to the 35% marks, and last month, to approximately 38% of the equities market in the U.S. (See story here.)

There was even some bright news for exchange-traded notes, which had been in negative cash flow territory over the past two months due to their unsecured credit structure and investors abandoning the approach.

ETNs had net cash flow of $18 million in November, with PowerShares Deutsche Bank ETNs leading the way, with $55 million in net inflows.

The story was not as good for PowerShares on the ETF side, where it had its second consecutive month as the only Top 10 ETF family with outflows, shedding $309 million. (Merrill Lynch's HOLDRs also had outflows in the month). That drop by PowerShares was exclusively caused by the PowerShares QQQ (NasdaqGM: QQQQ), though, which had outflows of $310 million for the month.

In terms of year-to-date net cash flow for ETFs, iShares and PowerShares are the only families among the top five ETF companies that are down from 2007 levels.

The iShares ETFs had year-to-date net cash flows of $36.7 billion through November, down close to $10 billion from 2007. Meanwhile, SSgA SPDRs were up from $22 billion in 2007 to $48.9 billion this year. ProShares has soared from close to $7.5 billion last year to close to $16.9 billion year-to-date through November.

The complete breakdown of the NSX' monthly ETF/ETN data can be found here.

The picture was relatively bright for the performance of the ten-largest exchange-traded funds in November. After the two-month market rout of September and October, even among volatile conditions, seven of the 10 largest ETFs had positive performance in November, according to Morningstar data through Nov. 26. At end of day Friday, the S&P had posted its best week since 1974, so the numbers should improve even a little more once the last day of the month is added, at least for the majority of equit yportfolios among the Top Ten.

Leading the way among equity ETFs was the iShares MSCI Emerging Markets Index (NYSE Arca: EEM), up 12.70% for the month.The Thanksgiving week was also kind to EEM, when the ETF surged 10.24%, through Wednesday the 26th. 

The best performer overall was the SPDR Gold Shares (NYSE Arca: GLD) up 14% for the month as market volatility continued to favor the long-time safe haven asset class.

EEM and GLD were the only ones among theTop Ten ETFs with double-digit performance for the month—at least, double-digit positive performance.

Amid the continued financial stock meltdown, the Financial Select Sector SPDR (NYSE Arca: XLF) was down 11.11% for the month. The situation did improve in the last week of November, however, as Citigroup's agreeing to a bailout plan by the government allowed XLF to gain 18.17% through the first three days of the week.

The only other funds among the Top Ten innegative performance territory for the month were the PowerShares QQQ (NASDAQ: QQQQ) and the iShares Russell 2000 Growth Index, down 0.66% and 1.02%, respectively. IWO, along with XLF, had large one-week gains in the Thanksgiving week. IWO surged 13.08%, only surpassed by XLF's gain of 18.17%.

Even with a healthy helping of positive performance in November, the Top Ten were still showing woeful year-to-date performance.

Here are the year-to-date numbers, through Nov. 26, as well as the rest of the performance picture for the Top Ten ETFs, which controlled more than $200 billion of the industry's $488 billion at the end of October, according to the National Stock Exchange:

Source: National Stock Exchange

PowerShares announced late Friday that it plans to slash expense ratios on its 11 exchange-traded funds that use Research Affiliates' fundamental indexing approach.

The ETFs now have expense ratios capped at 0.60%, according to a PowerShares spokesman. Those fees will be reduced to a uniform 0.39% on Nov. 1.

The moves come after similar moves by a range of ETF providers this year, including the Vanguard Group and XShares Advisors with its consolidated line-up of HealthShares funds. The price cuts also come as total assets in ETFs continue to grow -- in September, those levels reached $587.8 billion, up from last September's $562.6 billion, according to data from the National Stock Exchange. (See story here.)

But consolidation is showing up in the industry. With that comes pressure on smaller providers. A general rule-of-thumb used by industry veterans is that ETFs need at least $100 million in assets to break even. Some put it higher -- closer to $200 million -- when all marketing and operational costs are included. (See related story in July's ETFR "Survival of the Fittest?" here.) 

PowerShares, as an industry titan, certainly has the resources to wait-out asset growth for funds that aren't instant hits. Many of the fundamental index-based ETFs receiving cost-cutting moves next month could be seen as falling within such a classification. 

In fact, only one of the fundamental index-based funds due price reductions in November have assets greater than $100 million. That's the PowerShares FTSE RAFI U.S. 1000 Portfolio (NYSE: PRF). It's a diversified fund that focuses on larger-cap stocks, unlike most of the other sector-based ETFs included in the group. 

Even with its broad appeal, PRF's non-traditional strategy has contrasted lately with its market-cap sized indexing competitors. For example, the iShares Russell 1000 Index (NYSEArca: IWB) had lost 39.1% in the past 12-months through Friday. That beat PRF's total return of -42.5%, according to Morningstar. 

The PowerShares' fundamental weighted ETFs are based on work done by Rob Arnott, founder and chairman of Research Affiliates. The funds track indexes that use four fundamental measures to rank a company's size: book value, cash flow, sales and dividends. They're operated in conjunction with the FTSE Group.

The RAFI index methodology weights stocks according to RAFI's fundamental scores given to each name.

"The PowerShares fundamentals weighted ETFs are an important alternative to cap weighted portfolios seeking to provide investors higher returns with lower volatility over time," said Bruce Bond, chief executive of PowerShares, in a statement.

PowerShares is one of the industry's biggest players with 140 different funds and $12.21 billion in assets under management.

Here's a list of RAFI funds and their asset levels through Friday:

Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. The Reserve Bank of India on Thursday lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000. The central bank reduced its cash reserve ratio to 6.5 percent from 7.5 percent, a move which will add 400 billion rupees ($8.2 billion) to the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee from near a record low. Until the reduction in the cash reserve ratio which started just over a week ago now the Reserve Bank had increased its repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006. The central bank's next monetary policy statement is due to be released in Mumbai on Oct. 24.

India thus joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch, this is viewed to be a less riskier route at this point than intrioducing interest rate-cuts, and it is hoped it may also prove to be a more effective way of getting liquidity quickly through to the corporate sector.

India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent hit on Oct. 10.

Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries fell 17 basis points to 6.06 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The yield on bonds rises, as the value of the underlying bond falls.

Oil and Commodities Continue To Fall

Oil prices recovered some ground Friday, rallying above $71 a barrel on speculation that OPEC could slash output in an effort to stop crude's downward spiral. But pump prices kept falling and appeared poised to drop below $3 a gallon nationally — a level not seen in eight months. Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel. Despite Friday's modest rally, oil is still down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.




Commodity prices fell during a volatile week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - engulfed gold , which ended yesterday at a one-month low of $775 a troy ounce,



Steel prices as also falling rapidly, as industrial and construction demand drops sharply. Tata Steel Ltd., India's biggest steelmaker, has announced itwon't raise prices for six months or cut output if the government imposes an import tax and scraps levies on exports of the metal.

Companies are seeking 15 percent import duty and scraping of the export levy as demand weakens, Minister Ram Vilas Paswan told reporters after meeting executives in New Delhi today. They also want excise tax to be lowered to 8 percent from 14.4 percent.

Slowing demand from manufacturers and builders is driving down steel prices and forcing producers including ArcelorMittal, and Corus, the U.K. unit of Tata, to consider output cuts. Global steel production and consumption may slump 5 percent in 2009, Research & Consulting Group AG said Oct 9.

Foreign Exchange Reserves


India's foreign exchange reserves fell $9.94 billion during the week ending October 10, 2008 to $274 billion mainly because the Reserve Bank of India continued to sell dollars to try to contain the steep depreciation of the rupee.Forex reserves fell by another $9.93 billion (to $274 billion) during the tumultous week ended October 10, 2008 following the $7.8 billion fall of the previous week. .

India — the fourth largest holder of foreign exchange reserves in Asia after China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since hitting a peak of $316.17 billion during the week ending May 23 this year, reserves have dropped by $42.17 billion. , forcing policymakers to unveil measures such as higher investment limit for foreign institutional investors (FIIs) in corporate debt and allowing banks to offer higher rates on NRI deposits to boost inflows. The situation now stands in stark contrast to the same period a year ago, when reserves rose by $57 billion.


The revaluation of the foreign currency assets also contributed to the steepest-ever weekly fall. In the previous week foreign exchange reserves had declined by $7.8 billion, which was also a weekly record. Overall, reserves have fallen by nearly $18 billion in a fortnight.


In rupee terms, India's foreign exchange reserves, however, rose by Rs 2,258 crore during the week ending October 10 to Rs 13,33,424 crore. In the financial year, the increase is to the tune of Rs 95,459 crore. India's merchandise exports, which were estimated at $250 billion in 2007-08 are, for the time being, well covered.

In recent months, foreign institutional investors (FIIs), which are facing financial pressures at home , have been selling in the Indian markets and repatriating money. In calendar 2008 so far, FIIs have been net sellers of $10.83 billion in the equity market. FII sales have put pressure on the rupee, which has dropped 22.96 per cent against the dollar since January. This has prompted RBI to intervene heavily in the forex markets.





Stocks Fall

Indian stocks fell, with the benchmark Sensitive Index declining to its lowest in more than two years on speculation that overseas funds faced with redemptions are selling the nation's equities. Reliance Industries Ltd. tumbled 6.2 percent to its lowest since March 16, 2007. Infosys Technologies Ltd., the software developer that gets more than half its revenue from the U.S., fell 4.8 percent to its lowest in three years.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 606.14, or 5.7 percent, to 9,975.35, its lowest since June 20, 2006. The benchmark posted its fourth weekly decline, falling 5.3 percent. All 30 stocks in the index dropped. The S&P CNX Nifty Index on the National Stock Exchange dropped 194.95, or 6 percent, to 3,074.35. The BSE 200 Index lost 5.1 percent to 1,201.95.

India's MCSI Core Stock Index was down 4.45% on the day on Friday, after falling 26.7% so far this month, and 63.44% so far this year. But India is far from alone here, since the MSCI Emerging Markets Index plunged by 28 percent this month, with Russia's Micex Index alone falling 42 percent.





Overseas investors sold a net 8.41 billion rupees ($172 million) of Indian equities on Oct. 15, increasing the outflow this year from stocks to a record $11.1 billion, according to India's stock market regulator.


The Rupee


India's rupee fell to a six-year low as the benchmark equity index slid below 10,000 for the first time since June 2006, stoking concern capital outflows will quicken. The currency completed a 10th weekly loss. The rupee in part dropped on concern measures taken by global central banks and governments won't be enough to stave off the credit crisis.

The currency fell back0.8 percent this week to 48.8825 a dollar at the 5 p.m. close in Mumbai. That is the lowest since June 2002. The currency's 10-week losing streak is the longest since December 2005. The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out almost two-thirds of the record $17.2 billion they invested in Indian equities in 2007.



Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at Global Economy Matters and is a featured analyst at Emerginvest. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.

Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. The Reserve Bank of India on Thursday lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000. The central bank reduced its cash reserve ratio to 6.5 percent from 7.5 percent, a move which will add 400 billion rupees ($8.2 billion) to the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee from near a record low. Until the reduction in the cash reserve ratio which started just over a week ago now the Reserve Bank had increased its repurchase rate by 3 percentage points to 9 percent since 2004 and the cash reserve ratio by 4 percentage points since December 2006. The central bank's next monetary policy statement is due to be released in Mumbai on Oct. 24.

India thus joined Brazil and Russia in injecting funds into commercial banks to tackle the global credit crunch, this is viewed to be a less riskier route at this point than intrioducing interest rate-cuts, and it is hoped it may also prove to be a more effective way of getting liquidity quickly through to the corporate sector.

India has injected one trillion rupees ($21 billion) through reserve requirement cuts since Oct. 11 as call money rates surged and mutual funds sought government help to meet the highest redemptions by investors this year. The central bank's moves to inject liquidity helped push down India's call rates to 7 percent today from an 18-month high of 16 percent hit on Oct. 10.

Finance Minister Palaniappan Chidambaram also increased interest rates on deposits by non-resident Indians and doubled the overseas investment limit in corporate bonds to $6 billion to shore up the rupee from near a record low.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries fell 17 basis points to 6.06 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The yield on bonds rises, as the value of the underlying bond falls.

Oil and Commodities Continue To Fall

Oil prices recovered some ground Friday, rallying above $71 a barrel on speculation that OPEC could slash output in an effort to stop crude's downward spiral. But pump prices kept falling and appeared poised to drop below $3 a gallon nationally — a level not seen in eight months. Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel. Despite Friday's modest rally, oil is still down $75 — or 51 percent — since catapulting to a record high of $147.27 on July 11.




Commodity prices fell during a volatile week, with the Reuters/Jeffries CRB Index of 19 raw materials from coffee to silver, dropping 3.6 per cent amid concerns that the global economy was heading into recession. The abrupt falls in commodities - the RJ-CRB index hit its lowest level in four years - engulfed gold , which ended yesterday at a one-month low of $775 a troy ounce,



Steel prices as also falling rapidly, as industrial and construction demand drops sharply. Tata Steel Ltd., India's biggest steelmaker, has announced itwon't raise prices for six months or cut output if the government imposes an import tax and scraps levies on exports of the metal.

Companies are seeking 15 percent import duty and scraping of the export levy as demand weakens, Minister Ram Vilas Paswan told reporters after meeting executives in New Delhi today. They also want excise tax to be lowered to 8 percent from 14.4 percent.

Slowing demand from manufacturers and builders is driving down steel prices and forcing producers including ArcelorMittal, and Corus, the U.K. unit of Tata, to consider output cuts. Global steel production and consumption may slump 5 percent in 2009, Research & Consulting Group AG said Oct 9.

Foreign Exchange Reserves


India's foreign exchange reserves fell $9.94 billion during the week ending October 10, 2008 to $274 billion mainly because the Reserve Bank of India continued to sell dollars to try to contain the steep depreciation of the rupee.Forex reserves fell by another $9.93 billion (to $274 billion) during the tumultous week ended October 10, 2008 following the $7.8 billion fall of the previous week. .

India — the fourth largest holder of foreign exchange reserves in Asia after China, Japan and Taiwan — has seen reserves sliding since the start of this fiscal year. Since hitting a peak of $316.17 billion during the week ending May 23 this year, reserves have dropped by $42.17 billion. , forcing policymakers to unveil measures such as higher investment limit for foreign institutional investors (FIIs) in corporate debt and allowing banks to offer higher rates on NRI deposits to boost inflows. The situation now stands in stark contrast to the same period a year ago, when reserves rose by $57 billion.


The revaluation of the foreign currency assets also contributed to the steepest-ever weekly fall. In the previous week foreign exchange reserves had declined by $7.8 billion, which was also a weekly record. Overall, reserves have fallen by nearly $18 billion in a fortnight.


In rupee terms, India's foreign exchange reserves, however, rose by Rs 2,258 crore during the week ending October 10 to Rs 13,33,424 crore. In the financial year, the increase is to the tune of Rs 95,459 crore. India's merchandise exports, which were estimated at $250 billion in 2007-08 are, for the time being, well covered.

In recent months, foreign institutional investors (FIIs), which are facing financial pressures at home , have been selling in the Indian markets and repatriating money. In calendar 2008 so far, FIIs have been net sellers of $10.83 billion in the equity market. FII sales have put pressure on the rupee, which has dropped 22.96 per cent against the dollar since January. This has prompted RBI to intervene heavily in the forex markets.





Stocks Fall

Indian stocks fell, with the benchmark Sensitive Index declining to its lowest in more than two years on speculation that overseas funds faced with redemptions are selling the nation's equities. Reliance Industries Ltd. tumbled 6.2 percent to its lowest since March 16, 2007. Infosys Technologies Ltd., the software developer that gets more than half its revenue from the U.S., fell 4.8 percent to its lowest in three years.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 606.14, or 5.7 percent, to 9,975.35, its lowest since June 20, 2006. The benchmark posted its fourth weekly decline, falling 5.3 percent. All 30 stocks in the index dropped. The S&P CNX Nifty Index on the National Stock Exchange dropped 194.95, or 6 percent, to 3,074.35. The BSE 200 Index lost 5.1 percent to 1,201.95.

India's MCSI Core Stock Index was down 4.45% on the day on Friday, after falling 26.7% so far this month, and 63.44% so far this year. But India is far from alone here, since the MSCI Emerging Markets Index plunged by 28 percent this month, with Russia's Micex Index alone falling 42 percent.





Overseas investors sold a net 8.41 billion rupees ($172 million) of Indian equities on Oct. 15, increasing the outflow this year from stocks to a record $11.1 billion, according to India's stock market regulator.


The Rupee


India's rupee fell to a six-year low as the benchmark equity index slid below 10,000 for the first time since June 2006, stoking concern capital outflows will quicken. The currency completed a 10th weekly loss. The rupee in part dropped on concern measures taken by global central banks and governments won't be enough to stave off the credit crisis.

The currency fell back0.8 percent this week to 48.8825 a dollar at the 5 p.m. close in Mumbai. That is the lowest since June 2002. The currency's 10-week losing streak is the longest since December 2005. The rupee has fallen 19.4 percent this year, the most since a balance-of-payments crisis in 1991 forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out almost two-thirds of the record $17.2 billion they invested in Indian equities in 2007.



Disclosure Statement: Edward Hugh is a macroeconomist who maintains a premier set of blogs at Global Economy Matters and is a featured analyst at Emerginvest. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.

The NASDAQ Stock Market reported Thursday that new trading records were set for exchange-traded funds during the wild market ride of September.

The exchange said its average daily volume of U.S.-listed ETFs hit the 785 million share mark. That set a new record, says NASDAQ. What's more, the volume of U.S. ETFs traded on NASDAQ also reached a record level for the month—16.5 billion shares traded.

Interestingly enough, the National Stock Exchange monthly data for August and September showed the total percentage of U.S. equities trading represented by ETFs as higher each month, 31% and 35% respectively (see story here).

Michael Traynor, chief strategy officer for the NSX, noted that if early October trading volumes (above 40%) stayed on pace throughout the month, ETFs will likely set yet another record by month-end, in terms of percentage of total U.S. equities market share.

In its monthly data report for September, NYSE Euronext did not break out ETF trading volumes specifically, but did note that NYSE Arca had listed 49 new exchange-traded products, bringing the total number of exchange-traded products listed on all NYSE Euronext platforms to 754.

NYSE handled 7.3 billion shares, an all-time record for U.S. equities, on the wild day of Sept. 18. However, NASDAQ noted in its September trading report that on 12 of 21 trading days in the month, it captured a greater share of NYSE-listed stocks than the NYSE itself captured—24.2% to 22.2 for the month.

Investors remained wary of emerging-market debt as evidence mounted that most of the major major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession. This realisation has triggered a major exit from commodities, which are a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. But at the same time, we might ask ourselves, at theis moment in time if they don't invest in India and Brazil, then where are they going to invest? The problem is that in the present global environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. Of course, the situation is also confused since people are no longer clear what constitutes "risky" and what doesn't - the German government, for example, yesterday found itself forced to offer a blanket guarantee of all domestic bank deposits to head off any risk of flight from German bank accounts.

One result of all this nervousness is that the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks also fell substantially last week, experiencing their the biggest weekly decline in seven years, led by the banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since, given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the back of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary (rather than inflationary) headwinds as capacity levels exceed demand across the whole global economy and commodity prices tumble, as Claus Vistesen explains in this excellent and timely post.

The Indian central bank had been busy tightening, and had raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent during the period between December 2006 and July 2008 in an ongoing battle to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24, but we can be pretty sure that the "bias" will now have shifted towards loosening liquidity conditions rather than tightening them, as the priorities have changed, and the big priority now is to avoid any systemic bank problems, to keep the cost of borrowing for Indian companies down, and to prevent consumer credit slowing too dramatically.

The Indian banking system has been under increasing strain in recent days, and one symptom of this is that the rate at which Indian banks lend to each other reached an 18-month high of 17.5 percent on Oct. 1. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.


Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices has a double-edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development. Really this is a situation which will sort the "men" from the "boys", since those emerging economies which are really going to emerge will be in a position to switch the driving force of growth from commodity and agricultural dependence to industrialisation and domestic investment and consumer demand. It is my firm belief that India is now decidedly inside the group which is in the process of making this transition.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally - and thus it is only natural to assume that Indian industry was also adversly affected - with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.

And the situation seems to have deteriorated further in August, since the headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) registered a 25-month low of 50.4, down from 51.1 in August.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.

India's Industrial Output Weakens Too

India's industrial output growth bounced back again in July (the last month for which we have official data), reaching a five-month year on year expansion rate high of 7.1%. This follows a noted slowdown where output only rose by 5.4 percent gain in June, and 4.1% in May, according to data from the Central Statistical Organisation.


But if we come to look at the manufacturing PMI we will see that India's manufacturing output has also slowed somewhat, and expanded at its slowest pace in 14 months in September according to the ABN AMRO Bank purchasing managers' index. The PMI reading - which is based on a survey of 500 companies operating in India - fell to a seasonally adjusted 57.3 in September from 57.9 in August. This reading was the lowest since July 2007. Still 57.3 still suggests Indian industry continues to grow quite vigoursly, although the report did highlight the fact that the drop in the index was mainly the result of a decline in growth of new orders, and implied a deterioration in demand conditions, both locally as well as in export markets.


Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit rocketed to $10.7 billion in the three months from April to June, up from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India's case the 35 percent drop in oil prices we have seen since July has been partially offset by the decline in the rupee to a five-year low.

India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier. Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India and Brazil Critical Weathervanes

What I have been arguing in this post is not that everything about India's economy is perfect - far from it, but neither is it the "perfect storm" disaster which current knee jerk reactions among international investors would seem to suggest. The problems which are hitting the Indian economy at the moment, from the rapid rise in inflation to the sudden withdrawal of sentiment have a common origin: the dynamics of the global economy, and it is to these we must now look if we are to be able to sort the wood from the trees about what happens next. Basically, when the dust settles, I think it will be apparent that there are few economies left sufficiently well standing (not Russia certainly, and probably not China, given the export dependence on the developed economies) and with sufficient energy to bounce back. Many may be sceptical that Brazil and India are going to lead the coming charge (this recession cannot, after all, last forever), but I ask you, if it isn't Brazil and India, who is it going to be?

JP Morgan Global Manufacturing PMI Methodology


The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

September was a disaster for the stock market in general, but not necessarily ETFs.

Exchange-traded funds continued to grow in prominence as part of the overall U.S. equities market in September, reaching 35% of all trading, up from the previous record-level of 31%, just reached in August, according to National Stock Exchange data. The biggest part of that trading story has been State Street Global Advisors' SPDRs family of ETFs, which for the month of September represented approximately 50% of all ETF trading volume, with close to $1.4 trillion of the nearly $2.8 trillion in ETF trading volume. Year-to-date, the SPDRs also represent approximately 50% of ETF trading volume ($8.8 trillion), with Barclays Global Investors' iShares family a distant-second at $3.75 trillion.

But in a month of massive market turmoil, the news was not all good for ETFs. The iShares lost ground versus the SPDRs in terms of overall industry market share, and recent industry darling ProShares, which has received mounds of press for its rapid rise to above $20 billion in assets, saw major outflows in September, outflows at a level far surpassing any other ETF provider.

SPDR portfolios, such as its S&P 500 ETF (AMEX: SPY), saw much of the short-term market trading action, and its gold portfolio (NYSE: GLD), has been amassing considerable assets as the equities markets freefall. However, SSgA has not only led the race in terms of trading volumes, but has also gained considerable ground on Barclays Global Investors in terms of overall assets year-to-date. The SSgA ETF family had close to $169.6 billion in assets at the end of September, up from $144 billion in August, whereas BGI fell from $295 billion in August to $280 billion.

On a year-over-year basis, there has been an approximate $30 billion asset flip-flop between the two top ETF providers. In September 2007, BGI had $312 billion and SSGA $133 billion. And in terms of year-to-date cash flow, SSGA has net cash flow of $38.5 billion, while BGI stands at $22.7 billion. In terms of the worst asset story in September, ProShares was far and away the ETF industry loser in this respect, down $2.4 billion in cash flow. No ETF provider even came close to that level of net outflows for the month. The second-largest outflows were experienced by WisdomTree, which had net outflows of $119 million.

SPDRs has been buoyed by trading on the SPY, which in September had close to $20 billion in net cash flow. That is twice its year-to-date net cash flows of near $10 billion. Investors piling into gold also helped the SPDRs: GLD had net inflows of close to $3 billion in September.

Barclays suffered mostly in its broad international ETF portfolio. In fact, among the top ten largest ETF portfolios, only the iShares MSCI EAFE (NYSE: EFA) had net outflows in September, dropping $285 million. For the year-to-date period, the EFA has hemorrhaged more than $4 billion in assets. What's more, year-to-date among the top-ten largest ETFs, EFA is the only fund with net outflows of more than $1 billion, and the second-worst asset story is a distant-second. Unfortunately for iShares, it's also one of its own: the iShares Russell 1000 Growth Index Fund (NYSEArca: IWF) has had year-to-date outflows of $773 million.

Overall, only three of the top-ten ETFs have had net outflows year-to-date, and all three are iShares, the third being the iShares MSCI Emerging Markets (NYSEArca: EEM), which lost $129 million for the year. While BGI still has six of the top 10 industry ETFs in terms of assets, only two of those ETFs have larger asset bases than they did one year ago-the iShares Lehman Aggregate Bond Fund (NYSEArca: AGG) and the iShares Russell 2000 Index Fund (NYSEArca: IWM). And its largest ETFs are off considerably from a year ago: EFA is down from $48 billion in September 2007 to $32 billion as of the end of September. A silver lining for EEM is that, while it is still down year-to-date, it was actually fourth in net inflows in September among the largest ETFs, with a little more than $3 billion gained.

Notable, but not surprising among the September data is the poor performance of exchange-traded notes, the sister-product to ETFs, which have been hard hit by their unsecured debt structure amidst the worsening credit crisis. While there has been debate as to whether the unsecured-debt nature of these investments would cause a direct hit on their marketing, the answer from the September data seems to be a ‘yes.' The ETN industry had net outflows of $443 million in September, with Barclays' iPath family, in particular, accounting for almost all of that unwanted movement, down $474 million in net inflows for the month. Only three among the 12 ETN providers had net inflows in September, and at levels that would were nothing to get overly excited about: PowerShares' ETNs (co-branded with Deutsche Bank) had $68 million in ETN inflows; UBS' family has $1 million; and HSBC's ETNs saw $6 million in inflows. All of the other providers were either flat or negative, and with nine of the 12 ETN providers having $100 million or less in total assets, and marketing efforts hamstrung during the credit crisis, the situation does not look promising in the short-term for these investments.

Among the major exchange-traded product categories, the only dollar loser in September was currency, which had net outflows of $239 million. It was a minor recovery for currency ETFs and ETNs, which in August, had larger outflows of $513 million. The two worst category performers from August found better fortunes in September. Commodity portfolios, which had outflows of $542 million in August, had net cash flow of $3.6 billion in September, but that was primarily buoyed by investors migrating to GLD. The global/international category, which had close to $2 billion in negative net cash flow in August, had positive cash flow of $3.88 billion in September, the second-most among categories, but still far behind domestic equity net cash flow of $47 billion for the month.

Investors distanced themselves from emerging-market debt as the evidence mounted that major economies - the U.S., the UK, Japan and the Eurozone - are sliding into recession and this triggered a major exit from commodities, which is a significant source of export revenue for a large number of developing nations. In particular bonds extended losses on the perception that the $700 billion U.S. bank bailout would not work miracles and thus many developed economies will be struggling to digest the impact of the credit blow-out for some time to come.


Until credibility is restored, we will not see people investing in the numbers that emerging economies like India and Brazil badly need to see. In the present environment people are not simply not willing to take assume what is perceived as "risky" without being paid a large - and from the emerging economy point of view - damaging premium. As a result the cost of protecting developing nations' bonds against default has been steadily rising. Five-year credit-default swaps based on Argentina's debt climbed 44 basis points to 12.55 percentage points last week, the highest since at least June 2005. That means it costs $1.255 million to protect $10 million of the country's debt from default. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


Emerging Market Stocks

Emerging-market stocks had the biggest weekly decline in seven years last weeks, led by banks and energy companies. The MSCI Emerging Markets Index dropped 2.3 percent on Friday to 741.73, following a 3.4 percent decline on Thursday. The index lost 10 percent on theweek, the most since the September 2001 terrorist attacks.


Turkey's benchmark index fell the most in three weeks, losing 4.2 percent to 34,553 in the first trading day since Sept. 29. Russia's Micex Index slumped 5.3 percent, extending its annual loss to 51 percent. India's Sensex index slid 4.1 percent to 12,526.32. Reliance Industries Ltd., India's biggest company by market value, slumped 7.6 percent, to its lowest in a year.

Inflation Falls

But while India's financial system has been taking a beating, Indian inflation, almost un-noticed -slipped back to a 13-week low in late September, giving the central bank some breathing space to keep interest rates unchanged and lossen the liquidity strings when it next meets at the end of this month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi on Thursday.



Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao will undoubtedly seek to steer a middle course, since given that inflation is still double the central bank's target he will not want to seem to be "soft", while on the other hand he will want to be prudent and will try to head off an excessively rapid credit tightening on the backs of the global crunch. In addition, the peak of global inflation has now undoubtedly past, and we are now likely to see growing deflationary headwinds as capacity levels exceed demand across the whole global economy, as Claus Vistesen explains in this excellent and timely post.

The central bank has raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent since December 2006 to contain inflation. The bank will make the outcome of its next meeting in Mumbai known on Oct. 24.

The rate at which Indian banks lend to each other climbed to an 18-month high of 17.5 percent on Oct. 1 as investors hoarded cash. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.

Essentially the wholesale price index fell because of a decline in the prices of farm products such as cereals, fruits and vegetables. The index of primary articles, that includes food items, dropped 0.2 percent, while the indices of manufactured and fuel were unchanged in the week to Sept. 20, today's report said.

Commodities Down

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, tumbled 9.9 percent last week, the most since at least 1956.

Crude oil has lost 12 percent during the week, the most since 2004. The contract for November delivery traded at $94.47 a barrel, up 0.5 percent, as of 12:11 p.m. London time. Copper fell as much as 3.1 percent to $5,670 a ton on the London Metal Exchange, the lowest since February 2007 and was down 12% on the week.

Such downward movement in commodity prices have a double edged impact on emerging economies. On the one hand inflation, which has in large part been driven up by rising commodity prices, will reduce significantly, but on the other hand many emerging economies are dependent on revenue from commodity sales to finance growth and development.


Stocks Down

Indian stocks fell during the week, with the benchmark Sensex stock index declining to its lowest in 18 months. The Bombay Stock Exchange's Sensitive Index, dropped 529.35, or 4.1 percent, to 12,526.32, its lowest since April 2, 2007. The index posted its second weekly decline, falling 4.4 percent. The S&P CNX Nifty Index on the National Stock Exchange fell 3.4 percent to 3,818.30. The BSE 200 Index declined 3.8 percent to 1,515.29. Nifty futures for October delivery fell 2.9 percent to 3,853.


Overseas investors bought a net 845 billion rupees ($18 million) of Indian stocks on Sept. 30, trimming their net outflow this year from equities to $9.1 billion, the nation's stock market regulator said.


Forex Reserves

India's foreign exchange reserves fell marginally by USD 153 million to USD 291.819billion for the week ended September 26 from USD 291.972 billion in the previous week. Reserves had jumped by USD 2.511 billion in the previous week. Foreign currency assets (FCA), during the week, dropped to USD 282.652 billion from USD 282.811 billion a week ago, according to data issued by the RBI on Friday.

Rupee

India's rupee slumped to the lowest since 2003, adding to speculation investors will take continue taking money out of the currency. The currency completed its eighth weekly loss, the longest drop since December 2005. The rupee was down 1 percent on the day to 47.085 per dollar, the lowest since June 2003, as of the 5 p.m. close in Mumbai on Friday. The currency lost 1.15 percent this week.

September Global Manufacturing PMI Shows Sharp Contraction

September seems to have been the ultimate "mensis horribilis" for industrial output internationally, with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

Russian manufacturing shrank for a second month in September, and in so doing registered its first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to the latest VTB Bank Europe Purchasing Managers Report. The PMI came in at a seasonally adjusted 49.8, compared with 49.4 in August. The August reading was the lowest figure in three and a half years, according to the bank statement. On such indexes a figure above 50 indicates growth while one below 50 indicates a contraction.

Manufacturing in China contracted for a second month in August, underscoring the risk of a slump in the world's fourth-biggest economy. The Purchasing Managers' Index was a seasonally adjusted 48.4, unchanged from July, the China Federation of Logistics and Purchasing said today in an e-mailed statement.




Brazil's industrial output fell a seasonally-adjusted 1.3 percent in August, the largest monthly drop this year, bolstering expectations the central bank will ease monetary tightening in response to slowing economic growth. On an annual basis, output rose 2 percent, the slowest pace since March, according to data from the national statistics agency in Rio de Janeiro.




So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.




Current Account and Trade Deficit

The Rupee has also been dropping in reaction to India's deteriorating current account situation. The current account deficit increased to $10.7 billion in the second quarter of 2008 from a $1.04 billion gap in the previous quarter,according to data from the Reserve Bank of India last week.

India's trade deficit almost doubled to a record in August as a surge in crude oil prices increased the import bill and overseas sales of goods slowed. The trade deficit widened to $13.9 billion from $7.2 billion a year earlier, according to data from the Ministry of Commerce and Industry. Imports grew 51 percent, the fastest gain in seven months, to $29.9 billion, while exports expanded 27 percent to $16 billion.

A near doubling of oil prices has boosted import costs, since India relies on overseas purchases for three-quarters of its energy needs. India paid an average $8 billion a month this year for oil imports, up from $5.5 billion in 2007, as crude oil costs surged to a record $147 a barrel on July 11. In India, the 35 percent drop in oil prices since July has been partially offset by the decline in the rupee to a five-year low. India's oil imports in August rose 77 percent to $10.9 billion as refiners paid more for crude oil purchased overseas. Non-oil imports gained 40 percent to $18.9 billion. Imports in the five months ended August 31 rose 38 percent to $130.3 billion from $94.6 billion a year ago. That took the trade deficit to $49.2 billion, compared with $34.5 billion in the same period a year earlier.

Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.


Overseas sales of Indian goods in the five months to August 31 grew 35 percent to $81.2 billion, compared with $60.1 billion, the statement said.

India's current account deficit widened to a record in the three months to June as a surge in crude oil prices increased the nation's import bill. The shortfall, the amount by which imports exceed exports, remittances and other income from abroad, increased to $10.72 billion from a $1.04 billion gap in the previous quarter, the Reserve Bank of India said in a statement in Mumbai. Analysts expected a deficit of $11.52 billion.

India's financial system is evidently showing signs of strain as the impact of both local policy tightening and the global credit crunch steadily take hold. The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings and the U.S. government takeover of American International Group. As a result the Indian finance ministry responded by allowing companies building roads, ports, utilities and other infrastructure projects to borrow more overseas - thus giving them access to cheaper funds - while the central bank announced measures to boost cash in India's financial system.

Indian banks have borrowed an average 642.8 billion rupees from the central bank in the last two weeks, more than five times the average 113 billion rupees in the previous fortnight, further indicating a shortage of funds in the banking system.

Foreign Exchange Reserves Rise Slightly

India’s foreign-exchange reserves rose by the most in five months in the week ended September 19, according to the latest data from the Reserve Bank of India. The rise has surprised many observers, but it should be borne in mind that it coincided with the rise in the dollar against a number of other currencies (and in particular the euro, which the RBI also holds in reserves) on the back of the euphoria about the possible bailout of the US financial system.

Total foreign-exchange reserves rose by $2.51 billion to $292 billion in the week ended Sept 19, while foreign-currency assets - which form the lions share of the reserves -climbed $2.5 billion to $282.8 billion during the week. As we can see from the chart (below) the value of foreign exchange reserves has stabilised since mid-August, so the rot, it would seem, has definitely stopped. I think it is significant that we saw a positive initial response across the key emerging markets to the proposed US bailout, and while we are now seeing considerable volatility as people become nervous about whether it will, finally, arrive.I think when the package is introduced the key emerging market economies will be the principal beneficiaries, as the so called "risk appetite" will bounce back, especially given that the aftermath of the package will be a lower growth period in the OECD economies as the cost of the bailout has to be assimilated.




Even given the recent decline, it is important to bear in mind that India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $56.1 billion in the past year.

Money Supply Continues To Grow

Meanwhile, money supply in India grew year on year by 21 % in the two weeks ended Sept. 12, same rate as in the previous fortnight, according to data from the RBI. M3 - which largely consists of currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 42,26,143 crore as on September 12.

M3 has been rising at an average rate of 21% since the current fiscal year began on April 1, and has been consistently above the central bank’s target of 16.5% to 17% for the fiscal year ending March. At the same time, total bank loans rose by Rs 32,914 crore in the two weeks ended Sept 12, the biggest fortnightly increase since March. Outstanding bank credit was up by 26.1% year on year and reached Rs 24, 91,248 crore. Food credit was up by Rs 847 crore to Rs 45,190 crore, while non-food credit increased by Rs 32,067 crore to Rs24,46,058 crore. Total bank deposits rose by 22.5%, or Rs 6, 25,282 crore, in the same period to Rs reach 34, 05,377 crore.


The Rupee Weakens Again


The rupee has declined almost 17 percent so far this year and is the second-worst performer among the ten most-active Asian currencies excluding the yen. This week it declined for the seventh consecutive week, the longest run in more than 2 1/2 years. The rupee was down 5.6 percent in September, and is thus headed for its worst month since the Asian financial crisis in 1997.

Foreign investors were net sellers of Indian stocks for a fifth straight month in September, and have offloaded $9 billion so far this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year. Indian stocks fell, with the benchmark posting its biggest weekly drop in six months, after talks on a U.S. credit market rescue plan stalled and Washington Mutual Inc. became the biggest bank failure in American history.



The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 445, or 3.3 percent, to 13,102.18. The index had its biggest weekly drop since the week ended March 7. The S&P CNX Nifty Index on the National Stock Exchange slid 125.30, or 3.1 percent, to 3,985.25. The BSE 200 Index declined 3.2 percent to 1,590.58. Nifty futures for October delivery fell 3.9 percent to 3,995.

Standard & Poor's 500 Index futures slid 1.7 percent when negotiations on a $700 billion bailout plan for U.S. credit markets were thrown into doubt by a group of House Republicans who said the plan drawn up by Treasury Secretary Henry Paulson wouldn't work.

The decline in Indian stocks is more a reflection of global sentiment towards emerging market stocks and bonds than it is an indicator of any specific local issue. The MSCI Emerging Markets Index of stocks has been falling since last May - as can be seen in the chart below - and dropped 1.74% percent on Friday to 823.694, its lowest level since Sept. 15. The index is now down 13.6% so far this month, and 33.87% so far this year. But if you look carefully you can see that it peaked up again after 20th September, as speculation increased that there would be a major bailout of the US banking and insurance sector. This bounce back unwound towards the end of last week, as uncertainty grew about the arrival of the package.


A similar picture can be seen of the JPMorgan EMBI+ emerging bonds index (see below), which has been down significantly since the end of August. Since the US package seems now about to be approved for the US congress, as a result we should see sentiment improve significantly, and India may well be one of the principal beneficiaries of this change in sentiment. The coming weeks should clear all this up quite quickly.

The index adds to S&P's existing set of Asian equity indexes targeting some of the biggest names and biggest markets. S&P offers an index on the 50 largest stocks on the National Stock Exchange of India, the S&P NCX Nifty; the S&P HKex LargeCap, which targets the 25 largest Hong Kong-traded stocks; and indexes for Chinese stocks based outside mainland China through its S&P/CITIC China 30 and S&P/CITIC China 50 indexes.

Vietnam has previously only been covered by S&P in broad-based Asia indexes. FTSE already offers two indexes covering stocks that trade on the Ho Chi Minh Stock Exchange; the FTSE Vietnam All-Share Index, covering 90% of the stock universe; and the more narrow FTSE Vietnam Index.

The top five holdings in the S&P Vietnam 10 Index are FPT Corp., Petroleum Technical Services Corporation, PetroVietnam Drilling & Well, PetroVietnam Fertilizer and Chemicals, and PetroVietnam Insurance JSC. Sectors covered include Consumer Discretionary, Energy, Financials, Industrials, Information Technology, Materials and Utilities.

Companies to be included in the index must have a float-adjusted market capitalization above $50 million and a three-month average daily trading value above $250,000, and must trade on local Vietnam exchanges. Weights are liquidity-based, with no single stock having a weight of more than 15% in the index at reconstitution. The index will be rebalanced quarterly.

S&P has launched similar 10-stock indexes covering China and India's markets as well.

Vietnam is currently classified as a frontier market by the major index providers, and it has garnered a lot of attention from investors seeking to diversify their portfolios and take advantage of the outsized returns the country's market has achieved in recent years - although it is down sharply year-to-date. However, many believe that Vietnam represents a compelling long-term story.

There is a Vietnam index-based ETF trading overseas, offered by Deutsche Bank's x-trackers family, the DB FTSE Vietnam ETF (LSE: XFVT) tracking an index provided by FTSE. In the U.S. EFT market, the Market Vectors family recently filed for a Vietnam fund.