Global Stock Markets Tumble on Rising Bond Yield Pressure

Sat, 3 Feb RoundUp

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It has been a rocky week for global financial markets. World stock markets declined this week as a jump in global borrowing costs cooled the year's euphoric start in financial markets.

On Wednesday, the Federal Reserve held interest rates steady but indicated a more hawkish inflation outlook. US Treasury yield rose further after economic indicators seemed to confirm the Fed's inflation outlook. The Dow Jones Industrial Average plunged 4.1% this week fuelled by inflation concerns and political tensions.

The European stocks started the month on a dismal note. European shares suffered their biggest weekly loss in more than a year on Friday as investors' appetite for risk dried up. The euro and the British pound strengthened further against the dollar, putting additional pressure on stocks of European exporters. German and French markets were down by 4.2% and 3% respectively this week, while the UK's FTSE plunged 2.9%.

Investor sentiment in Asia was hit by concerns about rising interest rates. In China, profit booking ahead of the Lunar New Year holidays in mid-February led to a correction. China's Shanghai Composite fell 2.7% over the week. Japan's Nikkei, a major underperformer in the past couple of weeks, was down by 1.5% this week.

Back home, the Union Budget triggered huge volatility in the stock markets. Indian share markets slumped 800 points on Friday as market participants were disappointed with the government's Union Budget for the fiscal year 2018-19. The Finance Minister in his Budget speech announced a 10% levy on capital gains of over Rs 1 lakh without the benefit of indexing. The government's move to bring back long-term capital gains tax on equities and retain securities transaction tax (STT) has raised questions in many quarters.

BSE-Sensex ended the week on a negative note and plunged 2.7% to 35,067, while the Nifty 50 slumped 2.8%, to 10,761 this week. Meanwhile, the BSE MidCap was down 7.1% and BSE SmallCap declined 7.7% this week.

Key World Markets During the Week

On the sectoral indices front, stocks from Consumer Durables and Realty witnessed selling pressure.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

The Finance Minister tabled the Union Budget 2018-19 on Thursday. This was the last full budget of the current government.

The Finance Minister revised his fiscal deficit target for 2018-19 to 3.3% of the gross domestic product (GDP) against the earlier target of 3%, after breaching the deficit target for 2017-18. While the budget estimate of the fiscal deficit for 2017-18 was 3.2% of the GDP, the revised estimate is now 3.5% of the GDP, the same as 2016-17. The government hopes to breach the disinvestment target in 2017-18 by collecting Rs 1 trillion against the budget estimate of Rs 725 billion. For 2018-19, the government has set a disinvestment target of Rs 800 billion, including gains from privatization of Air India Ltd.

The budget focused mainly on agriculture and rural sectors, along with the creation of the world's largest National Health Protection program, that would reach up to 10 crore poor families. Budget reduced the tax rate to 25% for companies who have a reported turnover of up to Rs 2.5 billion. This will benefit the entire MSME sector, which accounts for 99% of the companies filing their tax returns. Revenue foregone is Rs 70 billion.

The finance minister also announced that three public sector insurance companies-The Oriental Insurance Company Ltd, National Insurance Company Ltd, United India Insurance Company Ltd- will be merged into a single insurance company and listed on the exchanges. In addition, the finance minister announced a slew of reforms for the infrastructure sector, to spur growth and employment.

In news from the economy, as per an article in The Business Standard, India's annual budget could push up inflation and prompt the central bank to raise interest rates sooner raising the probability of a scenario that could hurt the nascent economic recovery. Jaitley raised government spending for rural areas and support to farmers while slowing the pace of fiscal consolidation.

Traders and analysts believed these moves could add to inflationary pressures at a time when retail inflation is at a 17-month high. That would make the Reserve Bank of India more cautious when it announces the monetary policy review on Wednesday next week. A cautious stance at the RBI would increase the probability of interest rate increases in the coming fiscal year. That, in turn, could raise tensions between the government and the central bank, which has resisted pressures for deep rate cuts to boost growth as it worried about increasing inflation.

Moving on to news from the GST space. The government postponed the implementation of the e-way bill requirement for movement of consignments in the goods and services tax (GST) regime after technical glitches led to disruption in trade. The e-way bill, an electronic documentation tracking the movement of goods, was mandatory for all inter-state movement of goods from 1 February.

The GST Council had mandated that E-way bill for inter-state movement of goods will come into force from February 1, and states would have time till June 1 to move ahead with intra-state E-way bill.

However, more than 16 states decided to implement it from 1 February itself, leading to technical glitches. Businesses had two weeks trial time before the system was due for rollout in February, but policymakers chose to defer implementation to avert technical glitches causing disruption in the supply chain at a time GST revenue has started stabilising. Once implemented, e-way bill is needed for all movement of goods valued at more than Rs 50,000. within or outside a state.

Movers and shakers during the week

Top Gainers During the Week (BSE Group A)
Company	26-Jan-17	2-Feb-17	Change	52-wk High/Low
EICHER MOTOR	26,524.95	27,850.10	5.0%	33,484 / 22,990
IOC	390.9	409.6	4.8%	463 / 364
OPTO CIRCUITS	9.76	10.17	4.2%	12 / 7
MPHASIS LTD	822.1	852	3.6%	918 / 522
BRITANNIA	4,626.35	4,730.00	2.2%	4,964 / 3,052
Top Losers During the Week (BSE A Group)
BHUSHAN STEEL	59.95	47	-21.6%	103 / 48
*JAIN IRRIGATION	145.35	114	-21.6%	150 / 83
*RELIANCE NAVAL & ENGINEERING LTD.	49.4	38.8	-21.5%	73 / 34
*IFCI	30.75	25.25	-17.9%	35 / 21
JAIPRAKASH ASSO.	22	18.1	-17.7%	30 / 9

Source: Equitymaster

Some of the key corporate developments in the week gone by.

In news from stocks in the FMCG sector. Dabur and Marico were in focus this week amid a legal battle brewing between them both. Dabur took rival Marico to the Delhi High Court for allegedly violating trademark and copyright laws by comparing their hair oil products and denigrating its Dabur Amla in a print advertisement.

The court issued a notice to Marico and scheduled the next hearing for February 7, the person said. News reports said Marico ran print ads last week that used pictures of Dabur Amla hair oil and compared it with its Nihar Shanti Amla hair oil. Mumbai-based Marico's consumer products include Parachute, Saffola, Nihar Naturals, Livon, Set Wet, Mediker and Revive. Dabur has a portfolio of over 250 herbal and Ayurvedic products. It would be interesting to see where the legal battle heads in the days to come.

Moving on to the news from the banking sector. ICICI Bank announced its third quarter results this week. The bank reported a 32% drop in its profits for the third quarter ended 31 December 2017 to Rs 16.5 billion. Net interest income for the quarter rose 6%, while non-interest income was down 20%. Profits in the first two-quarters of the fiscal were slightly above the Rs 20-billion mark.

On a consolidated basis, taking into account the performance of its subsidiaries, profit for the quarter was at Rs 18.9 billion, compared to Rs 26.1 billion in the corresponding quarter of the previous year. Further, additions to the gross non-performing assets were at Rs 43.8 billion during the quarter, substantially lower than the Rs 70.4 billion added in the same quarter of the previous fiscal. Gross NPAs for the bank were at Rs 460.4 billion at the end of December 2017 and were at 7.8% of loans. Provisions declined sequentially to Rs 35.7 billion, from Rs 45 billion in the previous quarter. Provision coverage increased to nearly 61%. Meanwhile, domestic loan growth for the bank picked up speed during the quarter, growing at 16% year-on-year, propelled by retail loans which grew faster at 22% YoY.

State Bank of India (SBI) has raised the interest rates offered on bulk deposits above Rs 10 million by 50-140 basis points. Thus, indicating the possibility of a spike in interest rates in the banking system. While the hike has come a week before the Reserve Bank of India is to announce monetary policy, it has not made any changes in the deposit rates offered to retail investors.

Reportedly, the rise in bond yields and the bulk deposit rates has spurred expectations that the Reserve Bank will tighten rates and the government will go for a wider deficit. The bank would offer 6.25% on bulk deposits for one year, a rise of 100 basis points, with immediate effect. The bank has sharply raised rates for 46-210 days by 140 basis points from 4.85% from 6.25%.

With this, bulk deposit rates have been aligned with the retail rates below Rs 10 million. It will offer 5.25% for deposits between seven days to 46 days, a hike of 50 basis points. It would offer 6.25% for all deposits in the range of 46 days to 2 years and 6% for deposits between two years to 10 years.

Moving on to news from the automobile sector. As per an article in The Livemint, Mahindra and Mahindra Ltd (M&M) is planning to start a business that will operate a fleet of electric cars and turn its electric vehicle (EV) manufacturing unit into a supplier of parts to EV makers. The company plans to turn its unit Mahindra Electric Mobility Ltd into a supplier of batteries, starter motors, power electronics and transmission to its parent and other vehicle makers.

Also, it was recently reported that Maruti Suzuki is looking for lithium suppliers for a battery plant in Gujarat, planning to build a brand new electric car for India and working with its dealers to set up vehicle charging networks as part of its initiative to build an electric car business portfolio. As the momentum in favour of vehicles running on green technologies such as electricity gathers pace, the traditional business models of the automotive industry are expected to change.

Moving on to the news from pharma sector. As per an article in a leading financial daily, Lupin has received a final nod from the US health regulator to market its Clobetasol Propionate cream used for the treatment of various skin conditions. The United States Food and Drug Administration (USFDA) granted the final approval to market its generic Clobetasol Propionate cream USP, 0.05%. The company's product is a generic version of Fougera Pharmaceuticals Inc's Temovate cream.

And here's an update from our friends at Daily Profit Hunter...

The Nifty 50 Index witnessed extreme selling pressure this week. It started the week on a positive note with the index rallying 60 points to touch a new life-time high. But the buying was temporary, and it slipped 80 points on the very next day.

The pressure continued until Thursday where the index witnessed wild swings as the Finance Minister presented the FY19 Union budget. Finally, on Friday, the bears continue to dominate, as the index fell 256 points in a single day to end the weekly session nearly 2.80% lower.

Last week, we mention that the RSI indicator was in its extreme overbought territory. This called for a correction and as a result the index slipped more than 300 points in a single week. If the index keeps dropping, what happens at the 10,500 level, which is an important support, would an interesting level to watch out for.

So will the index correct to 10,500 level or will it resume it up move from here itself?

Stay tuned...we'll fill you in next week. You can read the entire stock market commentary here.

Nifty 50 Index Plunges 3% for the Week

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