Wapas?
In this edition: Motabhai returns after an enforced sabbatical, market news back on now, and moti vaato as always
The Indian stock market ended the truncated week on a flat note, with mixed cues from global and domestic factors. Foreign investors sold aggressively, global bond yields rose, and the US dollar appreciated in the early part of the week. However, recovery in crude oil prices, bond yields, and a policy outcome as expected by the RBI led to a recovery in the later part of the week.
The BSE Sensex gained 0.25%, or 167.22 points, to close at 65,995.63, while the Nifty50 added 15.2 points to end at 19,653.50. The BSE Small-cap index gained 0.8%, the BSE Mid-cap index shed 0.8%, and the BSE Large-cap index ended flat.
The Indian stock market faced volatility throughout the week, due to a number of factors, including rising crude oil prices, inflationary pressures, and the likelihood of another rate hike by the US Federal Reserve. The increase in US bond yields and the weakening of the Indian rupee also made Indian stocks less attractive to foreign investors. Additionally, the lack of liquidity and catalysts to stimulate buying has created strong resistance at higher levels
IT stocks underperformed the market throughout the week due to negative global cues, while pharma stocks saw strong buying interest as investors sought safety in the face of global uncertainty. However, the market ended the week on a positive note, supported by healthy industrial growth of 12% year-over-year.
International Markets
US stocks rose sharply on Friday, led by technology shares, after investors assessed a jobs report that showed strong hiring but slowing wage growth.
The S&P 500 and Nasdaq had their biggest daily gains since late August, and the S&P 500 rose for the week, snapping a four-week losing streak. Technology stocks were the biggest winners, followed by communication services stocks.
Stocks initially fell after the jobs data, which showed that US employment increased by the most in eight months in September. However, stocks began to rebound by late morning as investors interpreted the data as a sign that the economy is strong enough for the Federal Reserve to continue raising interest rates without causing a recession.
Investors are wondering if the US Federal Reserve will stop raising interest rates after the recent spike in long-term US Treasury yields. The benchmark 10-year US Treasury yield hit a 16-year high on Friday.
The latest data also showed a slowdown in wage growth, which may be due to the fact that most of the jobs added last month were in lower-paying industries.
The Dow Jones Industrial Average rose 288.01 points, or 0.87%, to 33,407.58, the S&P 500 gained 50.31 points, or 1.18%, to 4,308.5, and the Nasdaq Composite added 211.51 points, or 1.6%, to 13,431.34.
For the week, the S&P 500 was up 0.5%, the Dow fell 0.3%, and the Nasdaq rose 1.6%.
Market Movers
1. 14% Surge In Financial Savings
In 2023, financial savings increased by 14% in absolute terms, according to Reserve Bank of India (RBI) Deputy Governor Michael Patra. Patra also noted a significant shift in household preferences from financial to physical savings. He explained that the absolute level of savings increased by 14% in 2023. There has been an increase in financial liabilities of households. If you observe where these liabilities are being directed, they are mostly towards housing. Households are shifting from financial savings to physical savings. When they make this shift, they contribute to investment; the physical part of savings goes directly into investment. So, in the next year, you will observe an uptick in investment.
However, net financial savings of households declined significantly, reaching a 50-year low of 5.1% of gross domestic product (GDP) in the financial year 2023 (FY23), down from 7.2% in FY22, according to RBI data. Additionally, annual financial liabilities of households surged to 5.8% of GDP in FY23, compared to 3.8% in FY22.
Net assets held by households decreased, from Rs 22.8 trillion in FY21 to Rs 16.96 trillion in FY22 and further to Rs 13.76 trillion in FY23. Household debt has been on the rise. Reports indicate that household debt, measured by the stock of financial liabilities, remained notably high at 37.6% of GDP in FY23, compared to 36.9% in FY22.
2. RBI Directs Banks To Oversee Personal Loan Activity
The Reserve Bank of India (RBI) is closely monitoring the unsecured personal loan segment, which has experienced significant growth in recent years. The RBI is concerned about the potential risks associated with this type of lending, given the lack of collateral.
The RBI governor, Shaktikanta Das, has urged banks and non-banking financial companies (NBFCs) to strengthen their internal monitoring mechanisms and risk management practices. He has also emphasized the need for more stringent underwriting standards.
RBI Deputy Governor, J Swaminathan, has noted that the exceptional growth in retail credit, particularly unsecured credit, calls for vigilance.
Presently, retail loans constitute one-third of the overall loans in the banking sector. Unsecured retail loans comprise 10-15% of the total loans in the banking industry. From the lender's perspective, this loan category is viewed as riskier due to the absence of collateral. In compensation, lenders impose higher interest rates on these loans.
Despite the recent improvement in asset quality, some experts suggest that the delinquency ratios of non-bank lenders should be scrutinized more closely. These entities are constantly experimenting with different customer cohorts to expand their sourcing opportunities, which may not always yield success. In such a scenario, the delinquencies of non-bank lenders could rise.
Both banks and non-bank lenders tend to serve distinct borrower profiles. Banks typically lend to individuals with high creditworthiness, while non-bank lenders cater to the underbanked segment. Recently, non-bank lenders have introduced products like "buy now pay later," which can carry inherent risks.
Overall, the RBI is concerned about the potential risks associated with the rapid growth in unsecured personal lending. The RBI is closely monitoring the situation and has advised lenders to strengthen their risk management practices.
3. India's Forex Reserves Fall For 4th Week, Fall To Over 5-Month Low
India's foreign exchange reserves fell for the fourth week in a row to $586.91 billion, the lowest in more than five months, as of September 29, according to data from the Reserve Bank of India (RBI).
The RBI intervenes in the foreign exchange market to prevent sharp movements in the rupee. However, this intervention also leads to a decline in reserves.
The RBI governor has said that India's forex reserves are still "sizeable" and "very comfortable". The rupee fell 0.1% against the dollar in the week to September 29.
Overall, India's foreign exchange reserves are declining due to RBI intervention in the foreign exchange market. However, the RBI governor has said that the reserves are still "sizeable" and "very comfortable".
Motabhai ni Moti Vaato
The Indian stock market snapped a two-week losing streak and closed moderately higher for the week ended October 6. This may have been partly due to oversold conditions.
Experts expect the recovery to continue in the coming week, but volatility cannot be ruled out due to the beginning of the September quarter earnings season. Participants will also closely watch the September inflation numbers for the US and India, as well as the FOMC minutes.
The equity market uptrend was supported by falling oil prices, healthy domestic PMI data, and the Monetary Policy Committee's decision to keep the repo rate unchanged. However, the RBI still sees inflation as a major risk and its hawkish tone, along with its announcement of an OMO sale to manage liquidity, led to a sharp rise in the 10-year bond yield on Friday.
Significant FII outflow due to elevated US bond yields and the US dollar index capped gains.
Overall, the Indian stock market is expected to be volatile in the coming week, with the direction of the market depending on a number of factors, including the September quarter earnings season, US and India inflation numbers, and the FOMC minutes.
The corporate earnings season for the July-September period of FY24 will begin next week, with IT majors TCS, HCL Technologies, and Infosys releasing their scorecards on October 11 and 12, respectively. Other notable companies releasing their quarterly earnings next week include HDFC AMC (October 12), HDFC Life Insurance Company (October 13), Avenue Supermarts (October 14), and HDFC Bank (October 15).
Even recently listed companies like Samhi Hotels, Signature Global (India), and Zaggle Prepaid Ocean Services will be announcing their results next week on October 11. Overall, a number of high-profile companies will be releasing their quarterly earnings next week, which could have a significant impact on the Indian stock market.
Investors around the world will be looking for cues from the FOMC minutes for the September policy meeting, which will be released on October 11, and US inflation data, which is scheduled for October 12. They will also be paying attention to speeches by several Fed officials next week.
Analysts expect inflation, which is an important data point for the Federal Reserve to make a decision about the interest rate, to cool down a bit in September from 3.7 percent in August, but it will still be far above the central bank's 2 percent target.
By holding rates at the September policy meeting, the Fed signaled that interest rates may remain higher through 2024, with one more rate hike by the end of 2023. Fed officials expect inflation to be at 2.6 percent by the end of 2024, and they have ruled out a deep recession. Core inflation in August was at 4.3 percent, down from 4.7 percent in the previous month.
China will also release its inflation numbers for September. In August, inflation was 0.1 percent.
Overall, investors will be closely watching a number of key economic data points next week, including the FOMC minutes, US inflation data, and China inflation data. These data points could have a significant impact on the global stock market.
The stock market has rebounded in recent days after sharp losses in September and the third quarter. Investors are now awaiting data on September consumer price inflation and producer price index readings, due next week. They are also eager for the upcoming quarterly earnings season, with major banks including JPMorgan Chase (JPM.N) due to report next week.
Shares of Exxon Mobil were down 1.7% after reports that the U.S. oil producer is in advanced talks to acquire Pioneer Natural Resources. Pioneer's stock jumped 10.4%.
Volume on U.S. exchanges was 10.58 billion shares, compared with the 10.72 billion average for the full session over the last 20 trading days. Advancing issues outnumbered declining ones on the NYSE by a 1.96-to-1 ratio, and on Nasdaq, a 1.73-to-1 ratio favored advancers.
The S&P 500 posted six new 52-week highs and 52 new lows, while the Nasdaq Composite recorded 27 new highs and 260 new lows.
In the shortened week that just ended, foreign institutional investors (FIIs) have sold a net of Rs 8,400 crore worth of shares in the cash segment. This is because the US 10-year treasury yield rose to a 16-year high and the US dollar index reached its highest level since November of last year. Domestic institutional investors (DIIs) were able to offset the FII outflow, but experts say that the outflow may continue unless there is a cooling down in US bond yields and the dollar index.
DIIs have net bought Rs 4,400 crore worth of shares in the first week of October, while the US 10-year treasury yield closed the week at 4.8 percent and the US dollar index closed at 106.10.
The recent sharp fall in oil prices was a positive development for the Indian equity markets, as India is a net oil importer. The decline in oil prices was driven by a number of factors, including rising US bond yields, a stronger US dollar, and concerns about global demand.
International benchmark Brent crude futures corrected by 8.26% during the week, the biggest weekly loss since March. This decline continued a downtrend that has been in place for the past three weeks.
The fall in oil prices is good for the Indian economy because it will reduce the country's import bill and boost consumer spending. This is likely to have a positive impact on corporate earnings and the Indian stock market.
Word Wise
Core Inflation
Core inflation is a measure of inflation that excludes the prices of food and energy. This is done because food and energy prices can be volatile and can fluctuate wildly due to factors such as weather, crop failures, and geopolitical events. By excluding food and energy prices, core inflation provides a more accurate picture of the underlying trend in inflation.
Core inflation is calculated using the same basket of goods and services as the overall inflation rate, but it excludes food and energy prices. The most common measure of core inflation is the Consumer Price Index (CPI) excluding food and energy, which is known as the CPI-less-food-and-energy.
Core inflation is important because it is a more reliable indicator of long-term inflation trends. Food and energy prices can be volatile and can be affected by factors that are outside of the control of central banks. Core inflation, on the other hand, is less volatile and is a better indicator of the underlying inflationary pressures in the economy.
Central banks use core inflation to guide their monetary policy decisions. If core inflation is rising too rapidly, central banks may raise interest rates in an attempt to slow the economy and bring inflation under control. Conversely, if core inflation is too low, central banks may lower interest rates in an attempt to stimulate the economy and boost inflation.
In the United States, the Federal Reserve targets a core inflation rate of 2%. This means that the Fed aims to keep the CPI-less-food-and-energy rising at a rate of 2% per year. The Fed believes that this is a sustainable rate of inflation that will support economic growth without causing prices to rise too rapidly.
Here are some examples of items that are included in the core inflation basket:
Housing
Transportation
Medical care
Apparel
Furniture
Appliances
Electronics
Recreation
Here are some examples of items that are excluded from the core inflation basket:
Food
Energy (e.g., gasoline, electricity, natural gas)
Tobacco
Alcohol
Financial services
Core inflation is a valuable tool for understanding the underlying trend in inflation and for assessing the effectiveness of monetary policy.
I hope you enjoyed this week’s edition! Apologies for my absence over the two weeks
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Motabhai.