Pick-up in services, manufacturing activity

Smaller stocks have already seen a significant correction in the last six months. If the FIIs stay net positive through July, the major indices could move up some more. However, the hike in MSP might rankle

The trade war looks set to intensify as the first set of punitive US tariffs on Chinese goods and China’s retaliatory tariffs kick in. If the US decides to escalate by targeting a wider range of goods, china will presumably broaden its retaliatory tariffs. It remains to be seen if the US will follow a similar pattern versus the European Union (EU) and Canada. India has also released a list of retaliatory tariffs but those will only come into effect in early August if talks scheduled to resolve the situation fail.

Global markets have been pretty nervous about this situation. There’s been currency turmoil and massive pullouts from emerging markets. However, the last week or so has seen FPIs returning, with steady buying of rupee equity.

Fears of a negative impact on global demand have led to softening metals prices. However, crude prices remain high because of the US demand for sanction on Iran. There is a chance of a big trend reversal in the commodity markets if the US softens its stances. In that case, metals could spike, while crude prices dip. However, the guarantee that hard currency tightening will continue through this fiscal, and the next for that matter, does imply that the risk-off attitude and the move towards safer assets will continue.

India’s current account could go deep into deficit if crude prices stay high and global trade is curtailed by the situation. The rupee has responded to that possible scenario by sliding. The RBI has already spent a fair amount on propping it up. External Balance of Payment situations remain comfortable overall with $415 billion in reserves (about 10-11 months of imports).

But FPIs hold about $190 billion in rupee assets — this is hot money. External debt totalled to about $529 billion (March 2018) with approximately 40 per cent of that, $222 billion, due to mature sometime this fiscal. So, the rupee could come under more pressure, especially if the current account deficit breaches three per cent of GDP. It will do that if the Indian crude basket averages prices of above $73/barrel. The crude basket averaged $72.8/barrel in Q1.

Gas prices are less volatile but also tend to travel up in tandem with crude. Multiple city gas distribution circles are up for bidding this week. These are long-term monopolistic licences. It will be interesting to see the market response under the circumstances.

In some good news, growth may be accelerating, however. The PMIs for June are suggesting higher activity in both services and manufacturing. However, the services PMI has a recent track record of being up two months and down one month in contrast to the manufacturing PMI which has been in the expansion mode now for a long period.

The substantial hike to MSP for kharif crops will cost the centre anywhere up to ~350 billion in extra expenditure and it could also generate more inflation. If that cash does help to kick start the distressed rural economy, however, it might provide a consumption boost. Agro-specific stocks and FMCG, tractors, twowheelers, etc. have received investment on that premise.

Tata Steel’s proposed JV with ThyssenKrupp will shovel a lot of debt off the balance-sheet of the listed entity (Tata Steel). The surprise resignation of the ThyseenKrupp CEO, Heinrich Hiesinger, immediately after signing the deal, could mean some uncertainty but the Board of the German company seems to be on board. Meanwhile, ICICI bank soldiers on, with a new chairman and Sebi extending Ms Kochhar’s deadline to respond to the show cause notice.

In other corporate news, the IDBI bank “sale” to LIC is being seen as transferring government stake to another entity that is owned by government. One reason why the deal has attracted outrage is that it uses money that is directly gathered from citizens in the form of premiums to try and rescue an institution that is in the ICU. The rules have also been bent by a great deal to allow LIC to come in.

The weaker rupee has meant a focus on IT stocks. The NSE IT Index has been a strong performer in the recent past, gaining over 4.5 per cent in the last month itself and over 39 per cent in the last year. There’s been a lot of interest in sector funds as a result. Given that the rupee is expected to slide some more, it's expected that sector-specific funds could continue to give extra returns.

Technically speaking, the market continues to see a divergence. Big stocks continue to range-trade, with strong domestic institutional support. Smaller stocks have already seen a significant correction in the last six months. If the FIIs stay net positive through July, the major indices could move up some more.

The Nifty has range-traded between 10,400-10,900 for a significant length of time. A breakout or breakdown from this zone may lead to a 4-5 per cent move in the direction of the breakout. That’s either 9,900 or 11,400. The upside breakout would be a new high. The downside breakdown would signal a big bear market.