Markets remained on edge through the week on increasing trade tensions between the United States and its key trade partners, including China. Rising oil prices stoked fears that inflation will accelerate back home and the trade deficit could widen. The rupee falling to lifetime lows also played havoc.
The sell-off in global markets led to a near capitulation before equity indexes regained their poise towards the end of the week. U.S. President Donald Trump said he will use a strengthened national security review process to thwart Chinese acquisitions of sensitive U.S. technologies, a softer approach than imposing China-specific investment restrictions. Global markets rose sparked by the unclear strategy towards Chinese trade.
The Nifty touched a low of 10,558 during the week and rebounded to 10,723, resulting in sharp volatility. For the week, it ended down 0.99 percent to 10,714 while the midcap and smallcap indexes continued to fall and were down 2.4 percent and 3 percent respectively.
Crude oil prices gained relentlessly as U.S. sanctions against Iran threatened to remove a substantial volume of oil from world markets when global demand is rising. OPEC and Russia have said they will raise output to meet demand. However, WTI crude ended at $74.15 a barrel, its highest closing price since Nov. 24, 2014. Brent ended at $79.44 a barrel. Importers of Iranian crude, including India, had hoped that the United States would allow time to gradually reduce oil imports by issuing sanction waivers.
The rupee, one of the worst performers among major Asian currencies, fell to a lifetime low as factors such as a stronger dollar, higher oil prices, wider current account deficit and FII outflows pushed the currency lower. Though it recovered marginally on RBI intervention, the new low of 69.08 per dollar indicates that the rupee has depreciated around 8 percent this calendar year. Along with the rupee, most Asian currencies too had edged lower as U.S.-China trade frictions kept investor sentiments on edge.
In stock-specific action, Tata Motors fell 12.6 percent during the week as Trump threatened to escalate a trade war with Europe by imposing a 20 percent tariff on all U.S. imports of EU-assembled cars. Recently, JLR helped global sales of Tata Motors cross a milestone to grab 10 percent of the global premium vehicle market.
Cement stocks were in focus on reports the GST Council will consider a proposal to reduce rates on more items used in construction to 18 percent from 28 percent. At present, raw material such as cement and paint come under the 28 percent tax slab.
Sugar stocks were in focus after the Cabinet Committee on Economic Affairs (CCEA) approved the ex-mill price of ethanol derived from C-heavy molasses to 43.70 rupees per litre from 40.85 rupees per litre. The ex-mill price of ethanol derived from B-heavy molasses and sugarcane juice was fixed at 47.49 rupees per litre. The move will help boost ethanol output and enable the sugar industry make payment of cane arrears.
In the primary market, Varroc Engineering got subscribed 3.59x with the QIP portion subscribed 9.16x and retail 0.95x. The IPO size is 19.51-19.55 billion rupees with a price band of 965-967 rupees per share.
Friday marked the end of the week, month and quarter. Monday will see Q3 officially kicking in. As a trend and practice, at the start of each quarter, large investors usually rebalance their portfolios, so we could see sizeable moves in the stocks, bond, commodity and currency markets Monday onwards. The mutual fund rebalancing of mid and small caps is now out of the way.
Monday onwards, companies will release automobile sales data for June. Related stocks will be in focus. The economic calendar in the first week of July is a lot busier. Locally, we have manufacturing PMI data for June on Monday. It fell to 51.2 in May from 51.6 the preceding month. Services PMI will be declared on Wednesday. It dropped to 49.6 in May from 51.4 the previous month.
Globally, the Caixin China Manufacturing PMI and U.S. ISM PMI data for June will be unveiled on Monday, with the U.S. ISM non-manufacturing PMI for June expected on Thursday.
The Federal Open Market Committee (FOMC) will release the minutes from its June 12-13 policy meeting on Thursday. At its June meeting, the Fed was hawkish. The FOMC updated the dot plots in which they indicated two further rate rises are likely this year. However, if the minutes suggest otherwise then there is risk for some dollar profit-taking ahead of Friday’s jobs report. U.S. non-farm payrolls and unemployment data for June will be unveiled on Friday.
The correction in mid and small caps got extended further last week. Investors were seen booking out portfolios, financiers were dumping stocks due to margin calls and even the bravehearts were seen taking a step back. However, these are the times when one should increase exposure to equities. I would even suggest shifting a portion of debt investments to equity. In markets like this, more than liquidity, one needs to have high conviction and the ability to ignore panic to invest.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.
The views expressed in this article are not those of Reuters News.