LAHORE - Investors adopted a cautious approach throughout the week despite a positive budget for the capital markets. Concerns related to continued diplomatic tension between the US and Pakistan, rupee depreciation, weakness in oil prices and monetary policy expectations weighed heavily on the minds of investors. Consequently, the oil heavy KSE-100 index was down 2.3 per cent WoW to close at 13,559 level. Average volumes also reflected the limited interest in the market as they plunged by 32 per cent WoW to 95m shares. Foreigners too were downbeat as they sold shares worth $16.8m.The US did agree to reimburse $1.18b to Pakistan on account of CSF but the issue of reopening of NATO supply routes remained unresolved. The stalemate was further fuelled on the difference of opinion on drone strikes and the Salala tragedy. A senior US official is expected in the country next week to break the deadlock between the two countries on reopening of NATO supply routes.As per market expectations, the SBP adopted a wait and see approach by keeping DR unchanged at 12 per cent. In its Monetary Policy Statement, SBP highlighted managing external and fiscal pressures as key concerns in the immediate term. Moreover, the SBP also emphasised the importance of reviving private investment in the economy and the need of fundamental reforms to turnaround the economy.News of restoration of gas supply to Engro’s Enven plant kept the stock in the limelight throughout the week as it outperformed the market by 4 per cent. On the other hand, POL underperformed the market by 1.6 per cent on the recent slide in oil prices.News that CGT ordinance has been challenged in the court forced investors to aggressively offload their shares. Across the board selling was witnessed with major pressure seen in cement stocks like DGKC that fell by 2.7 per cent with a volume of 13 million shares. While oil stocks fell amid declining international oil prices. State Bank of Pakistan (SBP) has stated that monetary policy is less effective in the current economic landscape and consequently has decided to maintain discount rate at 12 per cent for the next two months. The central bank has once again emphasised the need for fundamental restructuring of the economy.It was explicitly highlighted that total stock of government borrowing directly from SBP has swelled to Rs 1,660b – Govt has borrowed Rs414b up till end May12. This is in negation to the SBP (Amendment) Act 2012 requiring government to maintain zero quarterly borrowing and retire the total stock in next seven years. Although SBP is not expecting any sharp increase in inflation but is worried over its persistence at high levels; largely due to monetisation. The economic managers pointed towards fiscal authority and stated that reduction in reliance over banking system and retirement of borrowing from SBP without bringing structural reforms is not possible.Experts said that decline in int'l commodities prices is expected to have divergent impact on different listed sectors. Decline in int'l oil prices is expected to negatively affect E&P sector's profitability. A $10/bbl change in oil prices alters sector's FY13 earnings by 6.3 per cent with POL being the most sensitive (7.0 per cent), while OGDC and PPL earnings change by 6.5 per cent and 5.9 per cent, respectively. For refineries, reduce prices means lower benefit of deemed duty in absolute terms and result in inventory loss. For every $10 change in the oil prices, deemed duty changes by $1.4/bbll, which effect NRL and ATRL annualised earnings by Rs3 and Rs2 per share. However, for NRL, the reduction in oil prices bodes well for lube margins at least in the short run. Decline in coal prices could further improve margin of local cement manufacturers. Our estimates suggest that every $10 per ton decline in coal price improves DGKC and Lucky FY13 earnings by 8-9 per cent Similarly, falling steel prices bodes well for Auto Assemblers and slightly improve their margins, assuming Rs-Yen parity to remain same.Compared to other commodity prices, international urea and DAP prices remained relatively immune. However, domestic urea prices still more than 30 per cent discount to int'l prices, the change in int'l prices has minimal bearing on predominantly urea producers like FFC, Fatima and Engro. For DAP producers like FFBL, the int'l DAP prices has remained relatively immune to commodity price fall boding well for the profitability.