When the US sneezes the world catches a cold. This was amply demonstrated on Thursday as US stocks plunged overnight, sending other markets, including others across Asia reeling.
Dow Jones and Nasdaq fell 3.3% and 4% respectively. Indices in Asia too plunged, with Japan’s Topix falling as much as 3.5%, Hong Kong’s Heng Seng 3.9%, Korea’s Kospi 3.5%, Shanghai 4.4% and Australia 2.5%.
Sensex fell as much as 1,037 points, to the lowest level in six months, pared losses to trade about 2.5% lower than its previous closing. All but one of the 30 Sensex stocks fell. Expectation of subdued earnings growth in the quarter ended 30th September is adding to the nervousness as is outflow of funds by foreign investors and liquid funds managed by mutual funds. TCS, the biggest by market capitalisation, will report earnings later today.
The International Monetary Fund (IMG) lowered India’s GDP growth outlook to 7.3% from 7.4%. Rising global crude oil prices is expected to push up critical fuel costs and inflation, causing spending cuts by consumers and rising input costs for companies. While the RBI held its repo rate earlier this month, bankers expect it to make up later with rate increase.
Christine Lagarde, managing director, IMF said at the Fund’s annual meeting at Bali today that the outlook for global economy had deteriorated to “drizzling, though not yet a downpour” from “clouds hovering” six months ago and “sun shining, fix the roof” about a year back.
Rising rates and trade war with China is causing concerns US companies may get hurt, affecting growth. Comment by President Donald Trump complaining that the US Federal Reserve was raising rates too fast, added to the nervousness, triggering a selloff.
“I think the Fed has gone crazy,” US media cited Trump as saying. Trump’s frustration stems from rising cost of funds just when the world’s largest economy is picking up with low unemployment rate.
Adding to it is the concern that US-China trade war could hurt earnings of US manufacturing and technology companies. A tit-for-tat increase in tariff between the world’s two biggest economies could increase the cost for consumers and also push up inflation and interest costs.
Impact of the trade war and increase in tariffs comes as the US Federal Reserve increased its key rates four times in 2018 and forecast it will raise rates another three times in 2019. Yield on the benchmark 10-year U.S treasury traded at 3.15%. The 10-year treasury rose to a high of 3.27% earlier this month, climbing about 100 basis points over the past 52 months.
China’s $13.5 trillion economy and a population of 1.4 trillion makes it one of the world’s leading consumer and producer of commodities, and manufactured products. Likewise the $21 trillion US economy is globally the most dominant. A trade and tariff war between the two giants could impact earnings of companies across the globe.
Rising US yields has also prompted foreign portfolio investors (FPI) to pull out their investments from emerging markets including India. FPIs have pulled out Rs80,227 crore from India since 1 January 2018, according to data compiled by NSDL. FPIs invested a net Rs2,00,048 crore in 2017, and pulled out a modest Rs23,079 crore in 2016.
Calling it a tough month for equities, Adrian Mowat, chief emerging market equities strategist at JP Morgan told a local TV channel that stocks in emerging markets are not offering much value.
Yet, Ajay Srivastava, managing director of Dimensions Consulting said in a televised interview that while it was not a bull market by any measure, still investors should avoid selling.
Impending national elections, accelerating inflation, likely increase in interest rates and widening of current account deficit and fiscal deficit could spoil India’s growth.