Equity and credit markets can retest recent lows, warns Chris Wood

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a 'bull phase', typically defined as a rise of 20 per cent or more from the recent lows.

Equity and credit markets can go back to their recent lows, and probably slip even further if the infections caused by the coronavirus (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock markets and credit markets will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now.

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.

Oil price drop, valuation comfort: Time to buy in this market correction

Analysts at Jefferies say the risk-reward is now favourable for investors to start buying.

The sharp correction in the markets over the past few sessions on account of global cues and developments back home have put the overall market valuation in an attractive zone and investors with a long-term view on equities can use this opportunity to buy, say brokerages.

On a year-to-date basis, the benchmark Nifty is down around 14 per cent. Last time, it had dropped more during the period under consideration was in 2011, when the European debt crisis had dampened global investor sentiment. The index is down over 10 per cent from its record high of 12,352 on January 17.

Analysts at Jefferies say the risk-reward is now favourable for investors to start buying. With India not significantly impacted by the two major global events this year, they believe, its underperformance to peers is largely driven by domestic factors then such as slowing growth and the banking sector issues.

“Nifty is trading at 15.4x one-year forward price-earnings (PE) on consensus earnings, in line with long-term average and lowest since January 2017. The benchmark 10-year bond yields are at 6.07 per cent, lowest since the global financial crisis (GFC). However, with valuations much more amenable now, we believe that the risk-reward is favourable,” wrote Mahesh Nandurkar of Jefferies in a co-authored report with Abhinav Sinha.

Those at ICICI Securities, too, share a similar view and suggest investor with a long-term view on equities can look at fundamentally sound companies following the across-the-board sell off.

"Currently ‘earnings yield of the Nifty 50 index exceeds bond yield by 45 bps and such instances have provided high expected returns in the past. Examples include demonetisation (44 bps) and taper tantrum (+44 bps). Given the pre-emptive steps by policy makers, we assign very low probability of a global recession and view the current environment of earnings yield exceeding bond yield as an opportunity to buy equities," wrote Vinod Karki and Siddharth Gupta of ICICI Securities in a recent note.

Crude oil prices fall as coronavirus death toll climbs, US inventories grow

WHO's Emergency Committee is set for another meeting later on Thursday to reconsider whether the rapid spread of the virus should now be called a global emergency.

Market News : Oil prices fell on Thursday as the death toll from the new virus in China climbed to 170 and more airlines cancelled flights to the country's major cities, while rising US crude inventories added to the negative tone.

Brent was down 35 cents, or 0.6 per cent, at $59.46 a barrel by 7:55 am, having risen 0.5 per cent on Wednesday. US crude was down 30 cents, or 0.6 per cent, at $53.03 a barrel, after dropping 0.3 per cent in the previous session.

Still, oil prices have steadied in recent days after a rout that pushed them to three-month lows and the market is trying to assess the damage to economic growth and demand for crude and its products.

"There isn't a compelling case crude needs to go lower until we know more about how bad the demand destruction from the coronavirus epidemic is going to be," said Stratfor oil analyst, Greg Priddy.

A second flight of Japanese evacuees from Wuhan, China, where the outbreak started, landed in Japan on Thursday, with nine showing symptoms of fever or coughing, broadcaster NHK reported. Infections in China have passed 7,700.

The World Health Organisation's Emergency Committee is set for another meeting later on Thursday to reconsider whether the rapid spread of the virus should now be called a global emergency.

Airlines around the world are suspending or reducing direct flights to major cities in China as travel warnings are issued by governments and passenger numbers drop.

Bigger-than-expected gains in US crude oil inventories last week also meant "oil prices were dealt the cruellest hand of them all," said Stephen Innes, chief market strategist at AxiCorp.

Crude stocks rose by more than seven times market expectations, gaining 3.5 million barrels in the week to Jan. 24, the US Energy Information Administration (EIA) said on Wednesday.

Gasoline stocks rose to a record high, increasing for a 12th consecutive week to 261.1 million barrels, the EIA said.

Asian shares slump; gold, oil soar after Iran missile strike on US forces

US crude soared 4.42% to $65.47 a barrel.

Asian shares and US treasury yields plunged on Wednesday, while gold and oil shot higher after Iran fired rockets at an Iraqi airbase that hosts US military forces, stoking fears of further sharp escalations in a developing conflict.

Iran's missile attacks on the Ain Al-Asad air base and another in Erbil, Iraq, early Wednesday came hours after the funeral of an Iranian commander whose killing in a US drone strike has raised fears of a wider war in the Middle East.

In morning trade, MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.5%. Japan's Nikkei dropped 2.5% and Australian shares fell 1%.

US crude soared 4.42% to $65.47 a barrel.

"We've moved on from how Iran will respond to now anticipating the U.S. 52-pronged response as the U.S. military forces in the region are in a heightened state of alert while likely preparing for war," said Stephen Innes, strategist at AxiTrader. "It's not going to be pretty today"

The sharp sell-off in risk assets was accompanied by steep drops in U.S. Treasury yields as investors flocked to safety. Benchmark 10-year Treasury notes yielded 1.7188%, down more than 10 basis points from a U.S. close of 1.825% on Tuesday.

The two-year yield dropped to 1.4581% compared with a U.S. close of 1.546%. The dollar also plunged against the yen, with the Japanese currency touching its strongest point against the greenback since October. The U.S. currency was last down 0.69% against the yen at 107.67 .

The euro gained 0.1% on the day to $1.1161

The flight to safety and a falling dollar supported gold, which rocked 1.91% higher on the spot market to $1,603.93 per ounce.

Business Standard

India's BPCL buys US crude set to arrive in China after new tariffs kick in

Six tankers carrying about 12 million barrels of US crude were on the way to China at the time of the announcement of new tariffs.

An Indian state-owned refiner has swooped in to buy American oil that was en route to China but due to arrive after new tariffs kicked in.

Bharat Petroleum bought one or two cargoes of US crude that were recently diverted from its original destination of China, Refineries Director R Ramachandran said in an interview. He didn’t identify the seller, how big the shipments were, or the name of the ships. It’s possible BPCL could buy more American oil that was headed to China, he said.

Beijing announced it would impose the 5 per cent levies -- the first ever Chinese tariffs on US oil -- on Aug 23 and they took effect Sept 1. Six tankers carrying about 12 million barrels of US crude were on the way to China at the time of the announcement. At least one of those vessels arrived before the deadline, while another ship may have offloaded its cargo at a port near Qingdao before the tariffs took effect.

Unipec -- the trading arm of China’s state-owned oil giant Sinopec -- offered US crude that couldn’t arrive in the Asian country before Sept. 1 in late August. At least three potential Asian buyers received offers from Unipec, according to people with knowledge of the matter.

Indian refiners have increased their purchases of American oil this year as supplies from Iran and Venezuela were hit by White House sanctions. The Asian nation bought an average of 287,000 barrels of US crude a month in this year through May, compared with a monthly average of 131,000 barrels in 2018, according to Energy Information Administration data.

China was the biggest foreign buyer of American crude as recently as the middle of last year but imports were subsequently slashed as the trade dispute worsened. Purchases picked up again this year, reaching 1.5 million tons in July, data from the General Administration of Customs show.

Ramachandran also said BPCL is looking to process US West Texas Intermediate Light and Louisiana Light Sweet crude, two American grades that the Indian refiner has yet to purchase.

Business Standard

Dollar-rupee swap, open market operations: RBI plans steps to inject cash

These moves are expected to increase cash in the financial system and help push interest rates down, potentially helping borrowers where an interest rate cut has not.

Business Standard : The Reserve Bank of India (RBI) will probably conduct at least one more swap of rupees for dollars after the general election, said three officials with direct knowledge of the plan, part of an effort to support economic growth.

The central bank also plans to conduct open market operations of up to Rs 500 billion over the next two months, one of the officials said, expanding a quantitative easing programme to spur the slowing economy.

These latest moves are expected to increase cash in the financial system and help push interest rates down, potentially helping borrowers where an interest rate cut has not.

"We want to make sufficient liquidity available, but we cannot open the floodgates of liquidity. It has to be done in a calibrated and measured way," said one official who declined to be named because of the sensitivity of the matter.

The Reserve Bank of India declined to comment.

Prime Minister Narendra Modi is facing a tight re-election race in the staggered poll that began on April 11 and will end on May 19. Votes will be counted on May 23.

Economic growth slowed to 6.6 percent in the October-December quarter, the worst in five quarters, and economists see a further slowdown in January-March largely due to high interest rates and surging oil prices.

Despite cutting its key policy rate by 50 basis points this year to 6 percent, the RBI has struggled to get banks to reduce lending rates due to tight cash conditions and high deposit rates.

The RBI wants the real interest rate - the delta between the inflation rate and rate people pay to borrow - to ease for borrowers, a separate government official said.

In May, the RBI announced a fresh round of open market operations to purchase a total of Rs 250 billion worth of bonds in May, with the first auction for 125 billion rupees held on May 2.

"There could be two to four more open market operations by the RBI in the next two months (June-July) of similar quantum," the second official said.

"We are also in discussions for more forex swaps after the elections," he added.

A third official said the RBI would probably review the amount of rupees in circulation in June and determine the liquidity required by the banking system before finalising details of the rupees for dollars swap auction.

Why India's upcoming general election is good news for the oil market

Election campaigning will boost fuel use in a nation where oil demand is already growing at the fastest pace in the world.

The largest democratic exercise on Earth is set to give the oil market a shot in the arm.

About 875 million Indians will go to polls over the next three months to elect their leader, dwarfing the 158 million Americans who registered to vote in the 2016 US residential elections. Before they vote, they’ll be courted by a slew of competing political parties -- a process that will boost fuel use in a nation where oil demand is already growing at the fastest pace in the world.

The lift will be provided by hordes of party faithful, who traverse teeming cities and remote villages across the world’s seventh-largest country in a campaigning frenzy before what’s expected to be a closely fought election. Their use of motorcycles and sports utility vehicles at a time when some refineries are closed for maintenance will support returns from making fuels in Asia over the next few months, according to a Bloomberg survey of traders who participate in the market.

“The election, which coincides with scheduled maintenance, should see India pull imports of gasoil and gasoline and this usually adds to bullish sentiment,” said WengInn Chin, a senior oil market analyst at Facts Global Energy in Singapore. In the lead up to the polls, the increased consumption is expected to increase gasoline and diesel demand by as much as 80,000 barrels a day, he said.

That will be in addition to the nation’s already growing demand for gasoline and diesel, consumption of which grew by about 75,000 barrels a day and 100,000 barrels a day, respectively, in January. Demand for liquefied petroleum gas is also surging, with state refiners seeking to import cargoes of the cooking fuel as the government tries to keep voter morale high by ensuring rural households are well supplied.

The profit from turning crude into diesel reached a two-month high late last month, and has climbed over 25 percent so far this year. Refinery maintenance will keep supplies tight in coming months, while the International Maritime Organization’s new rules on ship fuel next year will drive the fuel’s demand in the longer term. That’s set to keep the so-called crack at an average of $14.50 a barrel this month, according to the Bloomberg survey of traders.

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India's diesel consumption to hit record high ahead of 2019 Lok Sabha polls

Diesel consumption also faces increasing competition from electric vehicles.

India's diesel consumption may rise to a record this year on increasing infrastructure spending by the current government as it tries to hold off challengers in general elections that will be held over April and May.

Surging diesel consumption in India, the world's third-largest oil user, underscores the country's importance as a driver of global oil demand. Amid increasing concerns that crude demand growth may slip in 2019 because of slowing economic growth, India's burgeoning fuel consumption may help underpin oil and fuel prices.

Analysts at Fitch Solutions and consultants Wood Mackenzie forecast India's diesel demand to rise in 2019 by 5.7 percent and 6.4 percent, respectively, from 2018. The country consumed a record 6.9 million tonnes of diesel a month in 2018, or about 1.7 million barrels per day (bpd), data from the Ministry of Petroleum showed.

"There is strong energy demand which is bound to happen because of different sectors... We are a diesel driven economy," said Sanjiv Singh, chairman of Indian Oil Corp, the country's top refiner.

"The bottom-line remains that energy demand is bound to grow. We're seeing GDP at more than 7 percent, (and) ... a lot of urbanization," Singh added.

ALSO READ: 38 more cities to get diesel at doorstep as 3 OMCs plan to extend service

India's economy is expected to grow by 7.2 percent in the 2018/2019 financial year, which runs from April to March, versus 6.7 percent the previous year, according to government data.

"Tied to a constructive GDP outlook - and alongside the country's positive demographics, low vehicle penetration and loose monetary policy - is our forecast for rapid growth in vehicle sales, which again will be positive for diesel," said Peter Lee, an analyst at Fitch Solutions, adding that diesel cars account for nearly a quarter of new vehicles in India.

According to 2015 data, the latest available, from the International Organization of Motor Vehicle Manufacturers, India held 22 cars per 1,000 people versus 821 cars per 1,000 people in the United States.

Business Standard

Grand alliance to take on BJP, RSS a sentiment of people: Rahul Gandhi

The opposition has been asking PM Modi to bring prices of petrol and diesel under the Goods and Services Tax (GST).

The grand alliance of opposition parties to take on the BJP and Prime Minister Narendra Modi is not just the sentiment of politicians but also of the people, Congress President Rahul Gandhi said on Wednesday.


The Congress, he said, is trying to join together these voices and the work is going on.


"It is the sentiment of the people and not just political parties which are opposed to the BJP, to have a mahagathbandhan (grand alliance) that can take on the BJP, the RSS and Prime Minister Narendra Modi," he said at a press conference.


"Prime Minister Modi and the BJP are attacking the Constitution and institutions of the nation," he alleged, saying the question facing the people is how to stop this.


He said the opposition has been asking Prime Minister Modi to bring prices of petrol and diesel under the Goods and Services Tax (GST), but "he is not interested."


"There was an attack on Mumbai (through demonetisation). There are small industries, traders here... The leather industry and the cloth industry. They were attacked through the 'Gabbar Singh Tax'. The whole country is sad. Small businessmen are sad and we are fighting for them," he said.


He said during the UPA government's rule, the crude price was $130 a barrel that has now come down to $70 a barrel.


"However, the benefit has not been passed on to the common man. Where does this money go? In the pockets of 15 to 20 rich people," Gandhi alleged.


The 47-year-old Congress president is on a two-day visit to Maharashtra since yesterday.