US markets continued its upward surge

US markets continued its upward surge. Dow and the NASDAQ were stronger on hopes of the trade deal between the US and China. After a strong performance on Friday and Monday, the Dow and NASDAQ continued to grow above 100 points on Tuesday too. The big boost to sentiments came from the hope that the US-China talks currently under progress may fructify into a trade deal. Trump has also been throwing hints of a more dovish rate regime and markets are expecting the status quo on rates from Powell. A dovish rate regime has normally been positive for the stock markets.

Brent Crude prices jumped above the $58/bbl mark on Tuesday and the surge continued for the fourth day in succession. That price of Brent crude has already moved up by nearly 12% in the last one week. The strength in the Brent crude is predicated on a few key factors. Firstly, the trade talks are expected to fructify between the US and China. Secondly, more OPEC cuts in supply are expected shortly. Finally, the demand for crude is expected to be buoyant above the 100 million bpd through 2019. Of course, that is assuming that there is no serious slowdown in global growth.

Mutual fund outflows were led by liquids in December. Money market funds drove outflows; equity SIPs remain buoyant in December. The month of December saw net outflows of nearly Rs.136,000 crore across all schemes with the pressure coming from the money market mutual funds. This is the largest outflow since September when the IL&FS crisis had led to panic selling by liquid fund investors. The redeeming feature was the net inflow of Rs.8022 crore via SIPs into equity and ELSS funds from retail investors. Retail appetite continues to be buoyant for now.

In the midst of the entire melee, there was good news on the gold front. Gold imports fell sharply in 2018 on the back of weak demand. High domestic prices of gold and liquidity constraints led to the gold imports falling by 20% in 2018 to a level of just 762 metric tonnes. The weak demand from Kerala in the light of the massive flooding has also been a key factor since Kerala is the biggest consumer of gold by a margin. Weak gold imports are positive for the trade deficit since gold is a non-productive asset. Higher trade deficit to fund gold is never a good idea and this positive from that perspective.

RBI refuses special classification of loans for IL&FS. Bankers that had lent to the company had asked for separate classification rules for IL&FS loans as a special case. Banks had asked the RBI to extend the definition of NPAs to beyond 90 days as a special case. However, the RBI has made it clear that they would not be able to make an exception in this case as it may amount to setting a wrong precedent. The same classification will now apply. That means the banks will have to start booking their potential bad debts in IL&FS in their P&L accounts and that could impact their profits in this quarter. IL&FS has a total outstanding debt of nearly Rs.96,000 crore and the markets are estimating that nearly 60-70% of this could be irrecoverable. That may not be great news for Indian banks.

The rupee weakened beyond the 70/$ mark once again. The rupee fell by 53 paisa to fall beyond the 70/$ mark in Tuesday trades. After staying below the 70/$ mark for most of the previous week, the rupee weakened to settle above the 70/$ mark. The sharp fall in the rupee was led by crude prices going up for the fifth consecutive day. The rupee also came under pressure due to importer dollar demand. With the trade talks continuing, the rupee also showed the fears of higher retail inflation. RBI would be hoping that the depreciation is not too sharp as the currency reserves are already depleted to below $400 bn.

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