Markets upbeat but uptrend narrow

Early indicators for growth in July seem a little mixed. But we also know from historic data that a narrow market is rarely sustained for a great length of time

Good earnings reports, a lenient Fed and stabilising crude prices — all represented positive new for the market. A study by Motilal Oswal says that the Q1 results thus far indicate that earnings have either met or beaten expectations in 62 out of the 105 corporates under coverage.

Major central banks such as The Bank of Japan, the European Central Bank and the US Federal Reserve — all held policy rates in their latest policy updates. That meant a weaker USD. The Fed did however, indicate that it would probably raise rates in September while the ECB will not raise rates until December 2018 at the least. The Fed will continue its Quantitative Tightening and the ECB will also continue its QT. By December, that will take a lot of money out of the system.

The RBI did hike rates, by 0.25 per cent. The Governor, Urjit Patel , indicated apprehensions of a currency war. Overall, the central bank policy advisories of the last fortnight will offer some temporary relief to the rupee. Crude prices stabilised at slightly lower levels, which was another relief.

The trade war will escalate. The US says it is going to increase tariffs by 25 per cent (not the earlier rate of 10 per cent) on up to $500 billion of Chinese imports and the Chinese will respond. India and the US are already in retaliation mode with tariff hikes on each other's goods kicking in last weekend. Cheap Chinese steel is seeking alternative markets in India.

The RBI expects inflation to run at 5 per cent (Consumer Price Index). Commercial banks are expected to gradually raise home loan and vehicle financing rates and bond market yields will rise. The bond market has been bearish for months now, anyway. Mutual fund inflows indicate a massive shift from medium-term and long-term debt to short-term money market funds.

The monsoon remains a question mark. Private weather forecaster, Skymet, calls August as rain-deficient, stating that rainfall will be at 88 per cent of normal. However, the Indian Meteorology Department says rainfall will be normal. The success of kharif sowing depends on this, and so far, rating agency, ICRA, estimates that sowing is about 7-8 per cent below normal.

Early indicators for growth in July seem a little mixed. The Nikkei-PMI for services shows strong growth with growth at its highest since October 2016 at a print of 54.2 for July 2018. (A PMI of above 50 indicates expansion, month-on-month). However, the PMI for manufacturing slowed, to 52.3 from 53.1 in June, while remaining in expansion mode for the 12th month in succession.  

Automobile sales numbers for July indicate declining activity. However, there is a pronounced base effect since auto manufacturers cut back despatches in June 2017 (causing a low base effect) and stuffed channels in July 2018 due to GST launch. Hence, we may need to club together several months of auto sales to get a sense of what's going on.

GST collections, for the past 13 months, have expanded at an average of  0.5 per cent month (gross collections). That’s a lot lower than one would expect if the GDP grew at an estimated rate of above 7 per cent with inflation running at somewhere between 3.5 and 4.5 per cent.

There were two useful developments for Reliance Industries in the last fortnight, quite apart from moderating crude prices, which help refining margins.  First, the Supreme Court allowed the settlement of a case between RCom and Ericsson India with RCom committing to pay Rs 5.5 billion to settle dues with the equipment maker. This makes it possible for RCom to sell its assets to Reliance Jio and that's win-win for both the Ambani brothers. It will help RCom settle a substantial portion of  its outstanding debt of Rs 420 billion.  

The other useful development for RIL was that an international arbitration tribunal ruled that Reliance did not owe ONGC anything for gas exploitation in the KGD-6 field. The international panel instead awarded costs of $8.3 million to be paid to RIL, and its partners BP LLC and Niko Resources Ltd.  The government had demanded a penalty of $1.55 billion and it will probably appeal against the judgment.

In another dispute, Indian IT major, Wipro settled a case in the US by paying $75 million to the energy company, National Grid (US). National Grid had sued Wipro in December 2017 over a dispute related to an enterprise resource planning implementation. The settlement leaves Wipro with no further liabilities and “no admission of wrongdoing”. But it may impact profits in the current quarter.

The market has continued to move up, hitting successive highs on almost every session. This is partly due to the foreign portfolio investors changing stance from being heavy net sellers to moderate buyers. However, the uptrend remains narrow, with significantly lower trading volumes. Small caps and midcaps have languished. Valuations are also at historic highs. Technically speaking, it's hard to set targets for a market in a new zone. But we also know from historic data that a narrow market is rarely sustained for a great length of time.