Oil stocks fell after BPCL announced disappointing results

Nifty retreated on Tuesday as oil and metals came back to haunt the index. Oil stocks fell sharply after BPCL announced disappointing results on Monday. With the China-US trade war continuing, there is also a fear of a global slowdown in trade and GDP growth and that had its impact on metal stocks. The A/D ratio was skewed negatively at 2:3. Chinese Yuan also played spoilsport as it touched a 10-year low in the midst of the US-China trade war. With Donald Trump persisting with higher tariffs on China, economists are predicting a GDP growth of just 6.4% this year and 6.3% next year for China.

The Italian intransigence at the EU just got a new dimension. Italian PM justified an expansionary budget on growth worries. The tiff between Italy and the EU has been on for some time as the EU had sent back Italy’s budget last week to include more austerity measures into it. This is the first time that a budget had been sent back by the European Commission. Italy has also affirmed that it will not change its deficit target of 2.4% despite exhortations from the European Commission. That could only worsen the stand-off between Italy and the EC and could have negative implications for default spreads.

The sharp fall in Brent Crude prices continued as it fell more than 2% to below the $76/bbl mark. This correction takes Brent nearly 14% lower from the peak of $87/bbl touched in early October. With the rising risks of a trade war slowing down global trade and GDP, oil demand is likely to slow down. This is more so for the world’s largest oil consumer, China. Lower Brent is a blessing in disguise for India as it narrows the trade deficit automatically. Interestingly, the prices are lower despite worries of sanctions on Iran and the ongoing war of words between the US and Saudi Arabia over the Khashoggi issue.

PSU banks may have finally some reason to celebrate. After Union Bank on Monday, Bank of Baroda posts 20% growth in second quarter on lower provisions. This was on the back of lower provision for bad loans as the asset quality improved. BOB has reported a qualitative improvement in the quarterly numbers. BOB is also likely to benefit from higher recoveries from the NCLT process and that is also likely to work in the favour of its profitability this year. We have already seen Union Bank reporting satisfactory numbers and that has had its impact on PSU bank sentiments.

Even as IL&FS continues to default on its debt obligations on a regular basis, the Government of India may look at a full-fledged sale of IL&FS to overcome the crisis as the government runs out of time. IL&FS may be forced to immediately divest some of its key assets to pay off the liabilities. With outstanding loans of $12 billion, IL&FS poses a systemic risk to Indian financial markets. The new board is of the view that the entire process could take 6 to 9 months overall. IL&FS was a case of maturity mismatch where short term borrowings war used to fund long term loans. LIC Housing Finance recently put off its plans to raise short term funds via NCDs as LIC Housing Finance is now looking to raise longer tenor funds to avoid maturity mismatch, like in the case of IL&FS.

After Sun Pharma’s Halol, now Reddy Labs has problems at Duvvada plant. The Reddy Labs Duvvada plant in the state of Andhra Pradesh which audited by the US FDA has received a total of 8 observations. The US FDA has already issued a Form 483 to the company detailing its observations. Considering that this is the second time the company has received this notice from the FDA, it is obviously likely to take a longer time for resolution. Pharma companies in India have been under some positive frame after a long time due to a weak rupee. Even CRISIL has projected double digit growth for Pharma companies.

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