Sensex lost over 700 points in just two days

The correction on Dalal Street continued for the second day in succession as the Sensex lost over 700 points in just two days with global cues rubbing off on markets. In fact, the indices were sharply lower with the Sensex losing over 500 points from the peak on Tuesday. Apart from the worsening Trade War scenario, many of the companies with below-par results were also under pressure. VIX remained elevated at 26.50 and the A/D ratio was clearly in favor of the declines. Financially vulnerable stocks were the worst hit and these included the likes of Zee group stocks and Dewan Housing.

US Commerce Secretary, Wilbur Ross, has underscored high tariff and non-tariff barriers in trading with India as a major impediment. Ross has underlined that multiple regulations, high tariff, and non-tariff barriers make the Indian market extremely restrictive. Ross also highlighted that while the US was India’s largest trading partner, India was only 13th on the list due to very restrictive barriers imposed. The US currently accounts for 20% of India’s total exports and Ross has also called for easing ecommerce regulations,  which had worked against US giants like Wal-Mart and Amazon.

As a first step, in the aftermath of the FMP issue, AMFI has issued detailed guidelines on how fund managers should write down their investments in debt instruments when they get downgraded. Currently, speculative grade investments are not covered by rating agencies and they are to be written off at the discretion of the fund. AMFI guidelines are only optional for funds to adhere to. AMFI, being a self-regulatory body, does not have the legislative powers to compel funds to follow their strictures. Adopting the model is entirely at the discretion of the fund houses.

With liquidity likely to again be a major challenge for the markets, the RBI plans more rounds of dollar swap auctions in the next 2 months. With a view to infusing more liquidity in the system, the RBI plans to infuse another Rs.50,000 crore into the financial system through dollar swaps. The dollar swap entails mopping up dollars from the commercial banks with a back-to-back deal to sell it back to them at a premium after 3 years. The first two issues of the dollar swap were oversubscribed. These swaps also limit rupee appreciation as has been visible in the last one month.

The US could stand to lose from the trade war; at least that is what Wall Street appears to believe. The Dow Jones Industrial Average and the NASDAQ Index were down by over 2% on Tuesday as the worsening trade war situation raised concerns of retaliatory tariffs by China. Higher tariffs are also inflationary for US consumers as it increases the landed cost of Chinese products. On the back of slowdown concerns, Brent Crude Oil plunged sharply below the $70/bbl mark. After a volatile day of trade on Monday, the Brent Crude did close above the $71/bbl mark. However, Tuesday began weakly and the concerns over the trade war shaved off nearly 2.2% from oil prices. Oil was trading at $69.70/bbl in the Brent market and has now lost close to 10% from its recent peak. Iran sanctions could offer some support to oil.

Arcelor Mittal homecoming via Essar Steel may be up against another roadblock. Now, Essar shareholders have sought disqualification of Arcelor Mittal as a bidder due to their association with loan defaulting firms. Arcelor had made the best bid of Rs.42,000 crore for Essar Steel in the NCLT bidding process. Promoters of Essar had subsequently made an offer to repay all their outstanding liabilities but the offer was not accepted by the NCLAT on technical grounds. Essar Group has been trying out of its way to retain control of their marquee group property.