The Markets Demonstrate Their Weakness
After starting the day on a somewhat positive note, the stock markets took a U-turn and started diving, more than 1,000 points down
On Episode 445 of The Core Report, financial journalist Govindraj Ethiraj talks to Bjarne Schieldrop, Chief Analyst of Commodities at SEB Research as well as Tamal Bandyopadhyay, Consulting Editor at Business Standard.
(00:00) Stories Of The Day
(01:09) The markets demonstrate their weakness, diving on external cues
(05:02) India’s trade minister says to wait till the Trump administration comes in before jumping the gun
(07:51) Where are oil prices going now as war tensions rise again?
(14:47) Another central bank led gold rush has started off
(15:32) Are unsecured loans flowing into the stock market?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Friday, the 29th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
Top Stories And Themes
The markets demonstrate their weakness, diving on external cues.
India’s trade minister says to wait till the Trump administration comes in before jumping the gun.
Where are oil prices going now as war tensions rise again ?
Another central bank led gold rush has started off
Are unsecured loans flowing into the stock market ?
Markets Fell
After starting the day on a somewhat positive note, the stock markets took a U turn and started diving, more than 1,000 points down.
The fall was the steepest in nearly 2 months, thanks to IT stocks leading the way and investors adjusting positions on expiry of monthly derivative contracts.
IT stocks tumbled 2.39% after U.S. inflation and consumer spending data overnight suggested interest rate cuts could be slower than expected. That could impact spending by clients in the U.S., a key market for IT companies, Reuters reported.
The BSE Sensex plunged 1,190 points to close at 79,043.74.
The NSE Nifty50 was down 360.75 points at 23,914.15, after trading in the range of 24,345.75 to 23,873.35.
There were broader factors as well, including stepped up attacks by Russia against Ukraine, a fall in US markets and of course the absence of fresh domestic cues.
Broadly speaking, this would mean that the markets were looking for an excuse to fall or for the sellers to jump in again even as the buyers stayed away.
Could there be upward cues for the market ?
Well it is possible if companies start hinting or revealing signs of a turnaround in their sales numbers or profitability for the 3rd quarter which is from October to December, but that is a little time away.
Wall Street is also running somewhat flat now as the overall euphoria following Donald Trump’s victory is beginning to fade.
Stocks fell in light trading on Wednesday as investors took some risk off the table following big November gains, CNBC reported.
The S&P 500 snapped a seven-day winning streak while the Nasdaq and the Dow Jones Industrial Average were all down marginally.
Traders appeared to take profits on big technology names that have largely performed well this year, which can explain the Nasdaq’s underperformance.
Nvidia, which has surged more than 173% in 2024, lost more than 1% in the session. Meta Platforms slid 0.8% despite rallying around 60% this year.
Dell and HP fell more than 12% and 11%, respectively, after providing weak earnings guidance, CNBC reported.
Rupee
The Indian rupee weakened on Thursday to close very close to its all-time low, pressured by foreign portfolio outflows and month-end importer demand for dollars even as intervention by the Reserve Bank of India or RBI, India’s central bank helped limit losses, Reuters reported.
The rupee closed at 84.4850 against the U.S. dollar, down from its close of 84.4525 in the previous session.
The currency had hit its all-time low of 84.5075 last week.
Meanwhile Bloomberg is reporting that Indian banks suffered a deficit of liquidity this week for the first time in two months as dollar sales by the authorities to support the rupee drained cash from the financial system.
Banks borrowed a net 141.98 billion rupees ($1.68 billion) of funds from the Reserve Bank of India on Monday, the first time they have needed a fund injection since Sept. 25, according to a Bloomberg index.
Liquidity conditions have deteriorated significantly from the beginning of this month, when banks were parking around 2 trillion rupees of surplus cash with the RBI every day, Bloomberg said
All this pushed up the interbank weighted average call rate — a benchmark for overnight borrowing costs — to near the highest levels since June.
The rate climbed to 6.73% last week, more than 20 basis points above the RBI’s current repurchase rate of 6.50%, said Bloomberg.
Friends or Foes
India’s trade minister on Thursday said India was looking forward to starting talks with the new administration in the United States under Donald Trump, who the minister said was a “friend of India” and the country’s ties with the US were only getting better with time.
The Union minister’s comments come amid apprehensions that the new US administration may impose tariffs on imports into the US from all countries which would naturally include India.
The trade minister rightly pointed out that over the last 10 years -- across Barack Obama, Donald Trump and the Joe Biden administrations -- India’s relationship with America has only got better with time.
“We need not jump the gun and let the new government take charge and express their formal and official view. To the best of my understanding of the situation and my own experience with Trump’s administration, I do not foresee any problem whatsoever,” the minister said in a briefing reported by Business Standard.
In October, Trump had termed India as the “biggest tariff charger” and has threatened reciprocal tariffs. During his campaign, Trump had proposed tariffs between 10-20 per cent on imports across the board, with a particularly steep 60 per cent levy on Chinese goods.
So what do these numbers stack upto ?
A helpful note from Crisil Market Intelligence just out says total merchandise trade with the US touched $120 billion in fiscal 2024.
While trade with China came close to $118 billion — its highest level ever.
With both these partners, India’s total trade doubled over the last decade and rose 1.4 times over the last five years (chart 1).
If you did not know already, India enjoyed a trade surplus with the US of $35 billion last financial year which means we exported more to them than we imported.
On the other hand, with China imports from there have kept increasing even as exports have fallen.
More specifically, with the US, there has been rapid growth in India’s imports of mineral fuels and gems and jewellery and exports of machinery, pharmaceuticals, mobile phones, semiconductors, other electrical equipment and electronic items (chart 3).
While with China, exports of cotton have dropped dramatically while exports of mineral oils and machinery have slowed. Imports of machinery, among others, have surged (chart 3).
In its trade with the US, India’s imports of mineral fuels and gems and jewellery grew faster in the recent period, while machinery imports slowed.
Where Is Oil Going?
It appeared momentarily that the ceasefire between Israel and Hizbollah forces in Lebanon was going to reduce war tensions somewhat and perhaps they have.
But other forces have taken over.
Oil steadied as OPEC+ is expected to delay a production restart, a decision that would help stave off a looming supply glut, Bloomberg is reporting, adding that crude struggled to find a direction in the last session before the US Thanksgiving holiday, as a cease-fire between Israel and Hezbollah and falling refined products futures countered bullish expectations that OPEC+ will choose to extend production curbs on Sunday.
Brent also steadied to settle below $73.
Interestingly, in the US inventories of motor fuel reached the highest in more than two months in the Gulf Coast last week, according to fresh government data, while implied diesel demand plunged to a 15-year seasonal low. Prices for both fuels touched the lowest in more than a week.
There are other questions including how winter demand is looking this year and other factors of supply and demand.
I reached out to Bjarne Schieldrop, Chief Analyst of Commodities at SEB Research based out of Oslo in Norway.
INTERVIEW TRANSCRIPT
Bjarne Schieldrop: Yeah, I mean, we have seen that it's hard for oil to go below 70. And I think part of that is because we've seen declining inventories. And we saw that also yesterday in data for last week.
You know, inventories in the US fell more than normal of the season. Yet again, not a lot, especially crude stocks are now close to 40 million barrels below the five year to 2019. It's not a big surplus market as of today.
It's all about expectations that it's going to be a surplus market next year, number one, and in combination that OPEC holds five, six million barrels per day in spare capacity and wants to put barrels back in the market. Those are the two bearish elements in the market. But as of today, I mean, it's a balanced market with OPEC doing nothing.
So that's the one hand in terms of the geopolitics. I think it's interesting. Immediately following Donald Trump being elected president, when that became clear, we haven't seen a single rocket from Iran towards Israel.
And also, we haven't heard any threatening words from Iran versus Israel. Rather, we heard that, oh, maybe we should stop enriching uranium to weapon grade. It's like total change in attitude from Iran following election of coming president Donald Trump.
Govindraj Ethiraj: Right. So you talked about two things, the bearish factors. One is the perception of a surplus market next year.
And the second on whether or not OPEC will increase production. So a decision on that has also been postponed. Is that correct?
Bjarne Schieldrop: Well, I mean, they postponed it. First, it was planned to happen in October. And then it was supposed to in November and then in December.
And now they talk about what to do in January. And I think the markets truly expect them to cancel production increase in January as planned by 2.2 million barrels divided by 12, some 180,000 barrels per day in that month. But the fact that they actually are postponing the planned 1st of December meeting shows that they are not in full agreement on what to do.
Will they or won't they? And suddenly they need more time to discuss more. And essentially, that should be bearish for the market, saying, OK, the risk that they increase is actually higher suddenly.
Govindraj Ethiraj: Right. So Björn, if you were to take a small step back, how is the overall winter demand and supply situation looking like? I mean, is this a tougher winter?
Is it better than last year?
Bjarne Schieldrop: Normally, you see that demand is actually weaker in the first half of the year and then stronger in the second part of the year. That is the normal pattern. So as an effect, one should expect to see oil prices being bearish in the first half of the year and bullish in the second.
But that is actually the opposite. Very often you see that oil prices rally through the first half of the year into northern hemisphere driving season. That is the normal pattern.
But since we know that demand is falling from Q4 to Q1, staying weak in Q2, then OPEC usually is very tentative to making sure that you don't have a big, unseasonally big inventory increase. Because that is the seasonal norm, is that you actually do build inventories. So you want to avoid building more than normal inventories in the first half.
So now we are talking about the first half, we're talking about January, and we're talking about normal inventory rising. And OPEC wants to probably avoid a big rise, a big increase in inventories.
Govindraj Ethiraj: Right. Last question. This is the first time we are speaking after Donald Trump's election.
And since you mentioned him, now, one of his campaign pledges, of course, has been to increase production of oil, including through fracking. And US is already the world's largest producer. And prices are where you said they are.
So what does that mean? Or rather, what is the market expecting? Will companies actually want to drill more and produce more?
Because they seem to be already doing that. Exactly. I completely agree with you.
Bjarne Schieldrop: I mean, Biden administration hasn't helped back shale oil players at all. I mean, they have increased production significantly under his watch. So yes, there have been some restrictions here and there.
But overall, they've been free to increase production aggressively, and they have done so as well. So I don't think that there's anything holding back US oil production. And as such, whatever Donald Trump says is not going to impact them to make more oil.
And they fully understand the situation today. OPEC has a massive amount of spare capacity. We heard his statements that the US should be increased by 3 million barrels per day from here.
It won't happen because shale oil producers are not stupid. Because if they increase by 3 million barrels in short time now, OPEC wouldn't have a choice but to go for volume. Because if they don't get there, they cannot sort of shed more market share.
They have to sort of move back at some time. So the only consequence of US shale oil producers lifting production by 3 million barrels would be a sharp drop in oil price. And then what happens when prices are low?
Shale oil production falls rapidly. So rather than gaining 3 million barrels per day, I think shale oil producers would lose 3 million barrels if they try that kind of strategy.
Govindraj Ethiraj: Bjarne, it was a pleasure speaking to you. Thank you so much for joining me.
Bjarne Schieldrop: Thank you very much. Have a nice evening.
Gold Central Banks
More central banks are trying to hedge themselves against the uncertainty of a post Trump world.
Bloomberg reports that a whole bunch of east European nations are buying up gold.
They range from the Czech Republic to Poland and Serbia which are stocking up on gold and are also one of the biggest buyers of the metal, in turn driving up prices.
In general of course, central banks around the world are stocking their gold arsenals as a shield against external shocks such as prospective trade wars brought on by Donald Trump’s second presidency and geopolitical tensions in Ukraine and the Middle East.
But eastern European monetary guardians have made a particular show of topping up their gold piles.
Are Bank Loans Flowing Into Stockmarkets
Nine of 10 individual traders lost money in the futures and options (F&O) segment of the stock market in three years between 2021-2022 (FY22) and FY24, a study by the Securities and Exchange Board of India (Sebi) said recently.
An estimated 11.3 million retail investors collectively lost Rs 1.81 trillion during the three years (an average of Rs 2 lakh per trader); FY24 alone accounts for Rs 75,000 crore in net losses.
The latest study follows the capital market regulator’s January 2023 report, which had found that 89 per cent of individual F&O traders lost money in FY22.
The question that many have been posing in the last year or more has been if people are taking unsecured loans to invest in the stock markets or more appropriately in some cases gamble in them, particularly in derivatives.
There is some anecdotal evidence to this effect but there are no clear official figures or directions here.
At the recent Business Standard BFSI Summit, former banker KV Kamath said the financialisation of savings has been propelled by technology, but that’s only one side of it, adding that people who have lost money in the F&O segment have come from the unsecured loan market. That is why I think the RBI is right to caution on unsecured lending and end use of money that is borrowed from providers of funding… So, financialisation is good. But I think rash activities are not good… That is why the red flag is being raised by both regulators.”
So what is all this adding upto, I asked Tamal Bandyopadhyay, consulting editor at Business Standard who wrote a column on this theme from which I also borrowed the earlier mentioned quotes.
I began by asking him what was the answer to the question on whether unsecured loans were making their way into the markets?
INTERVIEW TRANSCRIPT
Tamal Bandyopadhyay: A lot of people believe in this, particularly Mr. K. V. Kamath.
On record, he has gone on saying that the money is flowing into the stock market and that's a matter of concern. And to support his argument, what Mr. Kamath says or quotes is that the SEBI study. Now, what the SEBI study said between 2022 and 2024 financial year, it says that about 11.3 million retail investors collectively lost 1.81 lakh crore in the F&O trade. And in FY24 alone, this comes to 75,000 crore. I'm not getting into all the details, but it says that only 7.2% of individual traders made a profit over the three-year period. And about 1% of individuals managed to earn just about a lakh after adjusting transaction cost.
And then the key question which all of us are asking, where did these traders come from? What's their financial background? What's their socio-economic background?
And the SEBI data throws up this interesting fact that at least 75% of these traders had declared an annual income of less than 5 lakh. So with less than 5 lakh income, how do you have the money to play in the market? So that's the presumption is this money is going to the stock market.
And just one more addition to that, in a recent one-on-one conversation with RBI Governor Shaktikanta Das, when I asked him this question, his answer was, there is no hard data on this. There is only anecdotal evidence. And then he did mention that RBI had conducted a quick sample survey to get a broad sense of what's happening.
That's all he said. He did not share the outcome of the survey. He says that it's very difficult to quantify how much money is flowing into the markets, but we have got a broad sense.
So what Kamath spoke about this money flowing into the stock market, SEBI data talks about what is the financial background of those F&A traders. And RBI Governor talks about a survey being done. He refuses to give the actually what exactly the finding of the survey, but he makes it very clear that RBI has got a sense.
So if you see all this in totality, yes, there is a concern that money has been, or rather had been flowing in.
Govindraj Ethiraj: And had been, I think is an important point here, because the data that you're now presenting shows that because the Reserve Bank, in response to a potential excess in consumer borrowing or lending, has already tightened as of late last year, tightened the risk weightages, making it therefore more expensive and more difficult for ordinary people to take unsecured loans. And all of that has worked because you're arguing that actually now at this point of time, the personal loan segment has now started slowing down.
Tamal Bandyopadhyay: Yeah, that's it. You know what happened is in November 2023, Reserve Bank of India, what they did, it raised the capital requirement, so-called the risk weightage for unsecured personal loan from 100% to 125%, which means the banks, they would require more capital to lend to this sector. And that translates into a higher cost for the borrowers.
The numbers what I'm talking about, the result is this till September 20th of this year. So if you see where the personal loan is flowing between, say, September 2020 and 2023, and 23 and 24, the past two years, I'm just looking into the subsegment of the personal loans. Now, the personal loans for buying consumer durables was 9.8% in the past year, meaning between 2022-2023 September, which is marginally down 8.6% in the previous year. That's very marginally down. But if you see that for other personal loans, meaning which is not classified for what you are asking, no question asked, your end-use is not monitored. That particular segment of personal loan, it's down from 26.3% growth in between September 2022 and 2023. From 26.3%, it has come down to 11.4%. So you see less than half of it. So that's the segment we are focussing on. Because within the personal loan, there are segments which are secured against loan against shares, loan against fixed deposits, so on and so forth, loan against gold.
That's a separate story. But if we just focus on only other personal loans where the lenders are not keeping a tab, what is the end-use of that personal loan? There it is sharply down.
It had grown at 26.3% between September 2022 and 2023, but in the subsequent year, between September 2023 and 2024, the growth dramatically came down to 11.4%. And you're also saying that NBFCs who borrow from banks and then lend onwards to all kinds of consumers are borrowing less, or rather, at least the growth in their borrowing has also dropped quite sharply. No, no, it's not borrowing less. Banks are giving much less loan.
In fact, when the RBI rescued banks' loan to NBFCs, because the end-use of such loan is typically this unsecured person, etc., etc. So that's a thing. It has also dramatically come down.
NBFCs, in turn, are giving loans. So when I spoke about that loan growth has come down, it's only the banking segment loan growth, not the NBFC segment. But that's a separate story.
I don't have the numbers, but one number is very critical. The banks' money flowing into the NBFC segment, the growth in that, which was 21.9% in between 2022 and 23, September, has come down less than half of it to 9.5%. So banks lending to NBFCs also less than half.
Govindraj Ethiraj: Right. Okay. So you've also talked about how, as a separate point and as a separate story, how the growth in housing as well as vehicle loans is down.
So to me, that is quite interesting, because obviously that reflects, let's say, the more discretionary part of the spending. But the, I mean, the kind of spending you would do because you need to, and you're not able to. So what does that tell us?
Tamal Bandyopadhyay: Well, it's elementary, Mr. Watson. So that shows that the growth we have been talking about, I mean, we are just, it's a question of a few days, we'll get to know the second quarter growth. So essentially, this is not a very happy story.
If the housing and vehicle loan is going down, I mean, till now, we are talking about rural consumption was an issue. And then latest numbers show that rural has gone up now. But unfortunately, this is one of the signs that everything is not hunky-dory on the growth front.
I mean, let's hope that the festive season has given a booster and we need to wait for the numbers. But yes, these housing loans and vehicle loans going down, the growth is going down, indicative of what's happening. It's not a good story.
Govindraj Ethiraj: Right. Tamal, thank you so much for joining me. Yeah.
Tamal Bandyopadhyay: Thanks. Thanks.
