REUTERS - Markets remained volatile throughout the week and ended with small gains as upsides were capped due to the United States and China indulging in tit-for-tat tariffs on imports, denting investors’ risk appetite. A plunge in crude oil prices ahead of a key OPEC meeting continued to influence investors.
As the week progressed, bargain hunting led to a bounce in global equities. Better-than-expected U.S. housing data helped improve risk appetite. Back home, the Nifty rebounded on Friday on short-covering in banks. Optimistic comments from oil ministers of OPEC countries over an increase in production and a possibility of reaching common ground kept markets buoyant. The Nifty ended the week flat at 10,822. The mid-cap and small-cap indexes underperformed and were down 1 percent and 2.5 percent respectively.
Tariff counter-attacks by the United States and China will continue in the foreseeable future, leading to escalation of trade tensions globally. These are set to get worse before they get better. However, the ray of hope is the thawing of U.S. relations with North Korea, which seemed like a dead end at one point.
Extending the tariff beyond China, Trump imposed an up to 541.15 percent import duty on large-diameter pipes imported from India. In a retaliatory action, India increased customs duty on 29 products, including pulses and iron and steel products imported from the United States.
The Vienna meeting of OPEC and non-OPEC oil producers to discuss output policy was in focus throughout the week. The OPEC reached a last-minute compromise and reached an in-principle agreement to boost oil production.
The preliminary accord allows for an additional 600,000 barrels a day of oil to flow into the market, about 0.5 percent of global supply.
The new deal would effectively roll back deeper-than-intended cuts from nations such as Venezuela, returning the curbs back to the levels originally agreed in 2016. Brent crude stood at around $75/bbl on Friday.
Meanwhile, minutes from the RBI monetary policy showed that all six members of the policy committee agreed to raise interest rates to counter oil-driven price pressures and expectations of higher inflation in the future. Members were less hawkish than expected.
For FY19, another 50 bps rate hike could be a possibility owing to uncertainty on factors highlighted by RBI such as higher core inflation, inflation expectations, oil prices, closing output gap, strengthening growth trends and capacity utilization.
Aviation stocks were in focus after the DGCA released May 2018 aviation data highlighting that Indian carriers carried 11.9 million passengers during the month, up from 10.17 million in May 2017.
The number of domestic air passengers registered a slower growth of 16.53 percent during May on account of rising fuel prices leading to an increase in fares. This clearly indicates that load factors are elastic.
The primary markets were in action as the RITES and Fine Organics IPOs saw strong demand and could see a premium listing. The RITES IPO was subscribed 67x, according to NSE data. This shows abundant liquidity for good investment opportunities.
On the global front, euro zone finance ministers agreed to ease Greece's debt burden when the country's bailout ends in August. The Bank of England left its key interest rate at 0.5 percent, as the country’s inflation holds at a 14-month low. It maintains its quantitative easing stimulus policy.
For the coming week, markets are expected to remain volatile ahead of the derivative contract expiry on Thursday. Geopolitical tensions will keep global markets on the edge and any fresh round of tariffs or threats by the U.S. or China will make the markets nervous.
The monsoon rains, which have been lagging after an early start, will be watched for further progress. The India Meteorological Department has said the cumulative rainfall during this year's monsoon in the first 20 days of June has been 7 percent below the long period average. It’s early days yet, but the rains could remain a cause of worry.
Markets continue to be painful for mid-cap and small-cap portfolios. The IPO market is an indication of liquidity waiting to be deployed. However, this liquidity requires a trigger which could either be the monsoons getting back on track, an improvement in the global geopolitical environment, or strong value-buying by marquee investors and funds providing the initial impetus.
Investors need to be patient at such times and I would even suggest deploying fresh funds to take advantage of the opportunity provided by the markets.
(Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.)