Bernanke's U-turn cheers markets

Markets that wore a lacklustre look for most part of the week sprang to life today in the wake of US Fed Chairman's latest comments. With the possibility of the quantitative easing continuing for an extended period of time, investors bought into stocks in the hope that new wave of liquidity coming in from west will boost stock prices. Consequently, the BSE Sensex edged higher by a strong 382 points while the NSE-Nifty logged in gains of around 118 points. BSE Mid Cap as well as BSE Small Cap indices turned out to be a bit of a laggards, edging higher by 0.7% each. Metals and banking stocks emerged as the highest gainers.

As far as other Asian indices are concerned, all of them closed the day in the green with the European indices too trading in the positive. The rupee was placed at Rs 59.8 to the dollar at the time of writing.

Aluminium major Hindalco traded with a lot of traction on the bourses today, edging higher by more than 4%. Beside the overall positive sentiment, the stock also received a boost on the back of news that Novelis, its international subsidiary, has reportedly raised the price of all automotive aluminium sheet products sold in Europe by around 160 Euros per metric tonne, with immediate effect. This is the second such move as earlier in June, the company increased the prices of painted aluminium sheet products in Europe by 100 euros per tonne. The move is likely to boost profitability of the consolidated entity at a time when LME metal prices remain subdued.

MOIL, India's largest manganese ore miner also edged higher by close to 5% today. This was on the back of news that the company has been granted prospecting licence over an area of 597 hectares in the district of Nagpur and Bhandara in the state of Maharashtra. As of now, existing leasehold area of the company in Maharashtra is spread over an area of 696 hectares and with this new allotment the total area shall be 1293 hectares, an increase of 86%. It should be noted that the company had already earmarked a sum of Rs 2.5 bn in anticipation of the grant and to be spent towards conducting geophysical studies, exploratory drilling etc.

Metal, bank stocks elicit interest
01:30 pm

Indian equity markets continued to trade strong during the post noon trading session. Barring stocks from consumer durables sector, all other sectors witnessed strong buying interest. Stocks from metal and banking sector were among the leading gainers.

BSE-Sensex is up by 368 points and NSE-Nifty is trading up by 112 points. While BSE Mid Cap is trading up by 0.80%, BSE Small Cap index is trading up by 0.59%. The rupee is trading at 59.90 to the US dollar.

Majority of the food stocks are trading in the green with ITC and Ruchi Soya Industries among major gainers. As per a leading financial daily, ITC is adopting a low carbon growth path by expanding its wind power generation capacity. The company has installed wind farms with over 70 MW capacity close to its facilities and is in the process of setting up 63 MW more. Presently, the contribution from renewable energy to the overall energy consumption for ITC is about 41%. The company wants to increase the share of renewable energy to over 50% over the next three years. Reportedly, ITC has invested over Rs 4 bn and is expected to invest a similar amount in setting up renewable energy projects in the country in future. The company has also reduced its overall power consumption across all business divisions in FY13.

Most of the Telecom stocks are trading in green with Acc networks and Bharti airtel are leading among the gainers. As per the financial daily, Bharti Airtel has sued telecom ministry for serving penalty notice to the company. The department of telecommunications (DoT) had received demand notice of Rs 6.5 bn. Reportedly, the company believes that the penalty charged is "devoid of any merit", and thus the department has no clear justification on the stated facts and in law. DoT said that it had found that the company was routing its national and international calls as local calls (SLD). The department had warned to stop carrying on the said act in 20013, however Bharti continued to do till 2005. This activity had caused loss to the government exchequer and state run Bharat Sanchar Nigam Ltd (BSNL) in 13 service areas. Bharti Airtel was trading up by 3.%

Indian mkts sustain momentum
11:30 am

Indian share markets have remained buoyant in the last two hours of trade. Barring consumer durables, all other sectors are trading in green with metals and banking witnessing the maximum buying interest.

The BSE-Sensex is up by 410 points and NSE-Nifty is up by 127 points. BSE Mid Cap index is up by 1.1% and the BSE Small Cap index is up by 0.9%. The rupee is trading at 59.66 to the US dollar.

Barring Metals and Minerals Trading Corporation of India Ltd. (MMTC), other mining shares are trading in green with MOIL Ltd and Sesa Goa Ltd leading the gains. According to a leading financial daily, the shares of the second-largest Government-owned company, Coal India have hit new lows on fears of divestment at a discounted price, deteriorating fundamentals such as lack of growth in coal production, and a fall in global coal prices. Though the stock has corrected by nearly 30% over the last couple of years, two-third of its fall has taken place in the last six months. The current environment makes it very difficult for the Government, which owns 90% of Coal India to raise money from capital markets in order to meet its FY14 divestment target. The market is expecting the divestment to happen at a significant discount as has been seen in the cases of other PSU divestments. The Company' s production growth has been a mere 0.4% at 102.9 mt for the April-June quarter(1QFY14).Coal India's subsidiaries, Northern Coalfields (NCL) and Mahanadi Coalfields (MCL) have been mainly responsible for the production loss. Coal India's share is trading up by 4%.

All but three automobile shares, Force Motors, Maharashtra Scooters and Tube Investments are trading in green with Hero Motocorp and Escorts leading the gains. According to a leading financial news daily, The Supreme Court has asked automaker Tata Motors to consider returning 912 acres of land in Singur, West Bengal. In 2008, following violent protests against the factory by farmers led by the Trinamool Congress, Tata Motors pulled out of West Bengal and moved the plant to Sanand in Gujarat. The Court has asked the Company's counsel, Gopal Jain to be ready with an answer by August 6. Tata Motors holds a 90-year-lease for the land and claims to have paid compensation to 90% of the farmers. The state government has offered to pay back the compensation amount with interest to the Tata's in lieu of the land. The Supreme Court has also asked Tata Motors to consider alternate uses of the Singur industrial land that is with the Company. Tata Motor's share is trading up by 1.7%

Markets up as Bernanke changes stance
09:30 am

In recent times, the US central bank had hinted about a prospective pullback of its quantitative easing program. This had led to significant volatility in the global financial markets. However, Ben Bernanke appears to have changed his stance as per his most recent comments. In other words, the central banker has indicated that its monetary easing program may continue as the US Fed is still far away from achieving its employment and inflation targets. As a result of this equity markets and gold prices soared, while the US dollar declined.

In Asia, all major stock markets, barring Japan (down 0.3%), have opened the day with significant gains. Markets in Indonesia (up 2.4%), South Korea (up 2.3%), China (up 2.2%) and Hong Kong (up 2.2%) are leading the pack of gainers. The Indian equity markets indices have also opened the day on a strong note with stocks in the capital goods and banking space leading the gains.

The Sensex today is up by around 344 points (1.8%), while the NSE-Nifty is up by around 98 points (1.7%). Mid and small cap stocks are also trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 1% and 0.8% respectively. The rupee is trading at Rs 59.78 to the US dollar.

Finance stocks have opened the day on a firm note with Indiabulls Financial Services, Motilal Oswal and Power Finance Corporation (PFC) leading the gains. As per a leading financial daily, non-banking finance company Shriram Transport Finance Corporation (STFC) has announced its first retail non convertible debenture (NCD) issue for the financial year 2013-14. The issue base is about Rs 3,750 m. However, there is an option to retain oversubscription of up to Rs 7,500 m. The issue is set to commence on July 16, 2013 and close on July 26, 2013. The tenure of the NCD is three years and five years. The effective yield on the NCD would be 10.9 % for three years and 11.15% for five years per annum. It must be noted that 50% of the issue has been reserved for retail investors. While the share of HNIs has been capped at 30%, the share of institutions and non-institutions has been capped at 10% each. STFC's NCD issue has been rated "AA/Stable" by CRISIL and "AA+" by Care.

Auto stocks have opened the day on a firm note with Escorts, Tata Motors and Mahindra & Mahindra (M&M) leading the gains. As per a leading daily, the trade union strike at Bajaj Auto's Chakan plant in Pune has entered the third week and both the parties seem unwilling to relent. It must be noted that the trade union had gone on strike on June 25, 2013. The reason for the strike was the union's demand for higher wages as well as the allotment of 500 equity shares of the company for each of its 925 employees at Re 1 per share. However, the management has termed the strike illegal and refused to accept the demands of the trade union. The trade union, on the other hand, has gathered significant support from several trade unions in the Pune industrial cluster. Of the 1,600 workers employed at the plant, less than 500 workers are said to be reporting to work. The company has said that operations at the plant have not been significantly affected and the plant was functioning at about 80% capacity.

Is there a bubble in gold loans?

The euphoria over rise in gold prices over past few years had not just caught on with buyers and investors. Companies offering loans against gold had also gone overboard in a bid to capitalize on the trend. Not just specialized gold financing companies, but even banks became big ticket gold loan providers. However, the subsequent correction in gold prices impacted the gold loan providers by eroding the value of their collateral.

Another segment that has been impacted by the rise in demand for gold is the gold leasing segment. Bullion banks and central banks lend out physical gold to institutional investors and manufacturers. The borrowing rates on such gold have been near historically low levels over the past four years due to plentiful supplies. However, the government's recent ban on gold imports and dwindling physical supplies has taken the borrowing rates to highest levels since 2009.

In fact the shortage of physical gold has also brought speculators into the fray. Speculators are now borrowing physical bullion and then selling it to jewelry manufacturers and institutional investors.

The government's disapproval of gold purchase and gold investments is therefore not having the desired effect on the economy. It may have led to a temporary fall in import bills. But the same seems to have come at the cost of speculative tendencies in financing against gold.

The Reserve Bank of India has also expressed concern over the risk exposure of banks and NBFCs towards gold loans. In fact, recently the gold financing companies have witnessed significant pressure due to the fall in loan to value ratio. For example, Manapurram Finance and Muthoot Finance are facing rough weather on back of write offs.

As an industry gold loans cannot be compared to high risk exposure ones like microfinance or equipment finance. However, speculative tendencies over the value of collateral can, not just create a bubble, but also hurt the fundamentals of key players in the sector.