Nifty and Sensex ended the week sharply higher

Nifty and Sensex ended the week sharply higher on hopes of a likely resolution of the trade war between the US and China and the decision by the US to exempt Indian oil imports from Iranian sanctions. The crude price fell by 15% even as the rupee strengthened to 72.438/$ with exporters selling dollars in exchange for rupees. The coming week will be truncated with just 3 full trading sessions and one Muhurat trading session. The week will be event-packed. Apart from the Iran sanctions, the US Fed meet outcome on Thursday and the US mid-term polls on Tuesday will also be closely watched.

October turned out to be the worst month in terms of FPI selling in the last 2 years. FPI exits from India hit a 2-year high in the month of October 2018. FPIs pulled out a whopping Rs.38,900 crore from Indian markets in October taking the total FPI withdrawal from India in the YTD 2018 to above Rs.1 trillion. FPIs in the month of October withdrew nearly Rs.29,000 crore from equities and around Rs.9,000 crore from debt. In the month of November 2016, FPIs had pulled a larger sum. FPIs have been selling risk-off across EMs and have sold close to $17 billion in emerging market equities in Asia and Latin America.

Hindalco may have finally given a big push to its Aleris acquisition. Hindalco has received $2.27 billion funding to buy Aleris of the US which has been arranged through a consortium of over 10 global banks. The acquisition will be made by Novellis, a subsidiary of Hindalco. The funds were raised at a spread of 175 bps over the LIBOR. While $1.50 billion will be in the form of a bridge loan with a maturity of 1 year, the balance will be funded by a long term loan with 5-year maturity. Deal is expected to be closed by April 2019 subject to regulatory approvals across the US, India and China.

There may be good news for PSU banks and for small businesses. Finance Ministry is to finalize Rs.54,000 crore capital infusion for banks in November. Most of the growth capital would come to banks to increase their funding to MSMEs (Micro, small and medium enterprises) as part of the government’s drive to increase credit to small businesses. Government has also sought RBI support to permit banks under PCA to extend credit as it will free up nearly Rs.65,000 crore of credit capacity for banks like PNB. PCA continues to be the bone of contention between the RBI and the Finance Ministry.

With the US sanctions on Iran taking effect from the 05th of November 2018, Saudi Arabia has been readying itself to boost oil supplies from the OPEC side. The US sanctions on Iran will take effect from Monday although countries like India, Japan and Korea plus five other nations have been exempted from these sanctions with respect to their oil imports from Iran. Iran used to export nearly 2.5 million barrels of oil per day till April but post the sanctions many countries either stopped or reduced oil supplies from Iran. The onus will be on Saudi Arabia. While US allies like Korea and Japan had stopped Iranian imports immediately, other countries like India had continued their imports from Iran, albeit at a lower volumes. Iran has for long been a source of assured crude at the lowest price.

Upstream oil companies are certainly benefiting from the higher crude prices. ONGC profits for Q2 were higher by 34.50% at Rs.8,265 crore. The higher profits of ONGC were largely aided by higher prices of crude and a weaker rupee. The average crude basket price realization for ONGC was up from $49/bbl last year to $73/bbl in the current year. Operating profits were higher by 7.2% and the OPM was up by 230 basis points at 56.40% in the second quarter. Other income was also sharply higher for ONGC. Of course, the overhang of the subsidy burden if crude goes up further is a risk for most of the oil companies.

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