Global markets across Europe and Asia showed positive traction on BREXIT

Global markets across Europe and Asia showed positive traction on BREXIT and trade resolution hopes. Opening after a gap of a week, China bounced by over 1% even as an uptick in Europe was driven by hopes that the BREXIT may be less disruptive. With the trade talks deadline looming in March, there is hope that the US-China trade talks could arrive at something conclusive this week. Interestingly, the MSCI All Country Index is up by over 10% in the first 40 days of the year. There was also heavy demand for dollars and the dollar showed signs of strengthening on return to growth.

Depletion in crude inventories have come back to haunt oil marketing companies in the latest quarter. OMCs took Rs.17,500 crore hit in the third quarter on account of the loss on inventory valuation. Normally, the loss results when the valuation of the crude inventory at the end of the quarter is lower than the valuation at the beginning of the quarter. The price of Brent Crude had fallen from $86/bbl to $51/bbl during this period leading to big losses. All OMCs took a hit on this front! In fact, the major pressure on the earnings of OMCs came purely from the inventory problem.

NCLAT permits 22 IL&FS group companies in India and over 100 companies abroad to service their debt obligations. Some of the mutual funds had recently taken a write-off after 2 subsidiaries of IL&FS defaulted on debt despite having the requisite liquidity available. Government has categorized IL&FS group companies into Green, Amber and Red based on their financial position. Companies in the Green category would be allowed to continue to meet their debt obligations and cannot escape under the pretext of group bankruptcy. Amber and Red can only use cash to meet routine expenses.

In what could be a boost to RBI monitoring of banks, the Government expects all banks to be out of PCA by June 2019. The Prompt Corrective Action (PCA) was introduced for stressed banks to ring fence them from the asset quality worsening. OBC, BOM and BOI had been moved out of PCA in January after their financial metrics improved. The trigger to shift these banks out of PCA will be if net NPAS fall below 6%. PCA puts restrictions on lending, dividend payouts, branch expansion and remuneration and once the banks are out of PCA, they can start lending to customers and return to profitability.

The Sensex lost nearly 600 points in just two trading sessions as sharp selling on Friday was followed by selling on Monday. Despite positive cues coming from US-China trade talks and a more palatable BREXIT, rate sensitive stocks took it on their chin. The A/D ratio favoured declines at 21:29. Banks and autos were among the major losers as Nifty closed below 10,900. But the real carnage was in small caps as over 400 stocks on the BSE hit new 52-week lows. You get a real picture of the breadth of the markets not by the A/D Ratio but by the 52-week H/L ratio of small caps. There was a virtual carnage after liquidity and corporate governance issues weighed heavily on these small cap companies. In fact, among the small caps the worst hit were the very stocks that had led the small cap rally since 2014.

After China, it may be the turn of Germany to worry about its trade surplus with the US. Germany’s trade surplus with the US fell to €49 billion in the calendar year 2018. Germany runs the second largest trade surplus with the US after China. Trump has remonstrated about this issue in the past and has asked Germany to reduce the trade surplus. However, Merkel had pointed out in the past that trade surplus only tells half the truth as it does not capture the current account surplus that the US enjoys with Germany. Watch out for Sino-US trade talks as that could be the key trigger!

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