Sensex Opens on a Negative Note; Crude Oil Hits US$80 Per Barrel

Fri, 18 May 09:30 am

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Asian shares are trading on a positive note today. The Nikkei 225 is up 0.4% while the Hang Seng is up 0.1%.

Back home, India share markets opened the day on a negative note. The BSE Sensex is trading down by 167 points while the NSE Nifty is trading down by 39 points. The BSE Mid Cap index is trading down by 0.2%, while the BSE Small Cap index has opened the day down by 0.3%.

Sectoral indices have opened the day on a negative note with capital goods stocks and IT stocks witnessing maximum selling pressure.

The rupee is trading at 67.86 to the US$.

Tata Chemicals share price, Bajaj Auto share price, Ashok Leyland share price, and Strides Shasun share price are among the stocks that will be in focus today as these companies are scheduled to report their results for the quarter ended March 2018.

In the news from banking sector, as per an article in the Economic Times, Finance minister Piyush Goyal promised all possible support to the 11 state-run banks that are under the Reserve Bank of India's (RBI) Prompt Corrective Action (PCA) framework. He also expressed confidence that public sector banks will overcome legacy issues very soon.

After meeting chief executives of these 11 PSBs, he said that it will be ensured that the central government gives every possible support to further strengthen the resolve of these banks to come out of PCA framework as quickly as possible.

The 11 banks under PCA are Dena Bank, United Bank of India, Allahabad Bank, Corporation Bank, UCO Bank, Bank of India, IDBI Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce and Bank of Maharashtra.

PCA is the process to ensure that banks do not go bust. Under the process, the RBI has put in place some trigger points to take corrective actions on banks which are weak and troubled.

Note that PSB's are in the spotlight for their growing bad loan problems and the painful issue of willful defaulters.

Banks, in principle, must be careful about not extending loans to borrowers with poor creditworthiness or payment track record. That too, irrespective of the size of the borrower.

However, the data from State Bank of India shows that when it comes to big corporate borrowers, our banks literally look the other way. The share of large corporates, in total advances of the banking sector, has almost remained unchanged over past three years (at an average of 55%).

However, their contribution to incremental slippages has been huge. At one point, the big corporate borrowers accounted for nearly 90% of total NPAs of the sector.

Therefore, according to us, banks with large corporate books deserve a lower valuation if they can't keep NPAs in check.

In the news from commodity markets, crude oil prices hit US$ 80 per barrel yesterday for the first time since late 2014. This was seen on the back of concerns that Iranian exports could fall because of renewed US sanctions, reducing supply in an already tightening market.

Note that crude oil prices have been witnessing a rising trend of late. Prices have been escalating due to a pick-up in global demand coupled with supply cuts by the Organisation of the Petroleum Exporting Countries (OPEC) and Russia. Even geopolitical tensions between US, Russia, North Korea and Iran have kept prices on the boil.

Steadily Rising Crude Oil Prices

Rising crude oil prices is not good news from India's perspective.

As we wrote in one of the editions of The 5 Minute WrapUp...

• Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.
  
  Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.
  
  Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

What does rising crude prices mean for stock markets?

Richa Agarwal, editor of Hidden Treasure, tracks the oil and gas sector very closely. She believes the rise in crude oil prices is a bearish sign for stock markets globally. At the same time, any market correction, will throw up interesting buying opportunities in small-cap stocks.

This is what she wrote...

• After hitting a low of US$ 30 per barrel in January 2016, prices have more than doubled to US$ 68 in April 2018.
  
  The recent news of Saudi Arabia wanting crude oil prices to touch US$ 100 per barrel doesn't help. The 2008 recession was preceded by crude oil touching US$ 150 per barrel. Any movement upwards can result in a possible downturn for the global market.
  
  While the Hidden Treasure team looks for long-term wealth creators, such macro situations can help to recommend such stocks at a bargain. The ones who keeps calm, when everyone else is losing their heads, will gain the most when the tide turns.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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