Markets Rise In A Relief Rally After An 8% Pounding From Peak
The recent rally appeared to be more of a short covering and relief rally and could thus have some more legs
Title: Markets Rise In A Relief Rally After An 8% Pounding From Peak
Description: On Episode 427 of The Core Report, financial journalist Govindraj Ethiraj talks to Raymond Vickery, Senior Associate at Center for Strategic and International Studies and Former US Assistant Secretary of Commerce as well as Amit Parbari, Founder and Managing Director of CR Forex.
(00:00) US Elections
(08:56) The Take
(13:44) Markets rise in a relief rally after a 8% pounding from peak.
(15:29) The rupee hovers around a record low, what could turn it around?
(24:02) America’s retailers say families could spend upto $7,600 more per year if tariffs were increased on 6 consumer product categories.
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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US Elections
Good morning, its Wednesday, the 6th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
This is a late edition The Core Report as we track the US presidential elections.
Before we start off, polling is over in the United States for the presidential elections and counting is on.
Donald Trump was leading around 7 am in key states but this might be early to call at this point.
As a reminder, the markets including stock and equities have been pricing in a Trump win.
So to recap, what are the key issues at stake within the United States and from outside looking in,including for countries like India.
I reached out to Raymond Vickery,
Senior Associate, Center for Strategic and International Studies; Former US Assistant Secretary of Commerce, Trade Development and an old India hand to get his take and began by asking him to talk about what the major issues were going into the elections.
INTERVIEW TRANSCRIPT
Raymond Vickery: I think that there's a lot at stake here. If you look at the issues, the exit polls from Pennsylvania show that the number one issue is defense of democracy. And there are many, many people who are concerned about it, particularly coming out of the 2020 election, when former President Trump said that he, in fact, had won.
And when you strike at the integrity of elections, you strike at the heart of democracy. India has gone to great lengths in terms of its electoral system to assure a full and fair elections. We're doing the same thing here.
And I think the good news on that particular issue is that across the nation, we have had so far the most secure and straightforward election that we've ever had. So defense of democracy is very important. If you look at those same exit polls in Pennsylvania, however, the number two issue is the economy.
And the economy, whether you're in India or the United States or any other great democracy, is going to be foremost in people's minds. The Trump side has been able to paint a picture of vast achievement under President Trump and destruction of the economy under President Biden and Vice President Harris. Really, the facts don't bear this out at all.
In fact, if you have GDP growth, it's about the same. And the claims that Trump had that it was the best in history, just are wrong. There have been about eight presidents since World War II in the United States who've had a better GDP growth.
That having been said, you do have the problem coming out of the pandemic of having pumped up our economy to keep people employed, which has had some hangover in regard to inflation, particularly in regard to the price of groceries. And that's something that people see. And it's something that Trump has been very good at demagoguing on to be able to convince people that there was a golden age back when he was president and not now.
I think that those are very clear kinds of issues which are moving people as is immigration. Trump has painted this picture of vast numbers of criminals, people from insane asylums coming over the border. You may recall in the debate, he talked about Haitians eating the pets, dogs and cats of people in Ohio.
None of that's true. But we do have a problem with immigration. Everybody can see that.
In fact, there was a bipartisan bill to be able to address it and solve it. And Trump, in essence, vetoed it by calling up members of the Senate and House. So those are main issues on abortion.
It's very clear. Trump takes the position that he rightfully was able to stack the Supreme Court and overturn Roe versus Wade. Kamala Harris, very much for a woman's right to choose.
One of the things that's very interesting to me is with all the climate disasters we've had in the United States, whether it be in Western North Carolina floods or the vast number of forest fires out in the West, climate change and what you do about it has not seemed to move many votes in this election, which is an area in which there is a vast difference between the candidates. President Biden with Vice President Harris in the same administration have gone all in on things like electric vehicles, on subsidies for saving the electricity. But that does seem to have have moved many votes.
I think those are primary issues at this point.
Govindraj Ethiraj: Right. And the other question is really now from outside in, and this is really more of geopolitics. So for the new president, what would you feel are the key concerns today and how would they likely go, depending on which president came in?
And therefore, what could other countries like, including India, maybe be watching more closely?
Raymond Vickery: Well, let's take the economy. Trump has made great strides in terms of emphasizing grocery prices and inflation. But his measures that he wants to put in can be some of the most inflationary measures of all.
He said 10 to 20 percent on all imports across the board, whether they're from friends like India or whether they're from adversaries. Now, that's going to do one thing that's going to run up a lot of prices very, very rapidly. In addition, he wants to reenact the kinds of tax cuts for the richest Americans to pump yet more money into the system and at the same time increase the deficit.
So I think that with India, the economic relationship is very, very important. Instead of looking at across the board tariff increases, and as you know, Trump has bad mouthed India as one of the chief culprits in terms of the international trade. You have with Kamala Harris a concept of friend sourcing, and that is trying to move supply chains from unreliable partners like China to partners like India and not saying, yes, we're going to try to build economic fortress America and exclude the rest of the world.
That's very attractive in demagoguing. People think that somebody else is responsible for whatever economic problem they're having, but I think that that's a major, major area. I think on relations with other countries about meeting the challenges such as China, which still, in spite of what's happened on the border, claims an entire Indian state, Arunachal Pradesh, then the question is how best to get China to play by the rules of the game and international rule of law.
And in that regard, Trump has a transactional approach. If you've got to pay up and you will pay in, yeah, maybe we'll stand by you. If you're not doing right, we're not going to do that for you.
The Biden-Harris approach has been that of the quad, and that is taking the democracies of Asia, particularly Japan, Australia, India, the United States, which is a Pacific power, and saying, yeah, we're going to work together, and it's not going to be transactional. It is in the United States' interest to be able to see that India has the tech transfer to make it a prosperous nation and a great partner in regard to China. So I think that that's a major difference.
Govindraj Ethiraj: All right, Mr. Vickery, we've run out of time. Thank you so much for joining us.
Raymond Vickery: Thank you, Govind. It's good to see you again.
The Take
I read an interesting column titled how finance influencers use storytelling to misguide people.
For instance with headlines like this is how I made Rs 5 crore in one year essentially targeting insecurities among the younger generation and pushing them to speculate in the stock markets.
As the author of this article, Sandeep Das, a former management consultant at PWC writes in Mint, influencers tap into multiple emotions at the same time, fear, anguish, FOMO or fear of missing out and even ridicule. “Do you still invest in fixed deposits ?”
Speaking of fixed deposits, it's a good time to bring up the Sebi report that highlighted the fact that 9 of 10 individual traders lost money in the F&O market in 2024.
So you would have been better off putting your money in a fixed deposit or even under your mattress.
Speaking of mattresses, that is if you had the cash to start with and did not borrow it off a buy now pay later kind of app.
Thanks to influencers or otherwise, millions of youngsters would have lost their collective shirts in the last few years.
The precise impact of which may never be very clear since the losses would be absorbed by families or longer loans.
There are many outlets.
Apart from reckless derivatives trading, some would have lost in crypto currencies or in crypto trading.
Others have lost and will lose money in the stock markets, some because they may not have the patience to wait for the markets to recover. Of course not all who have lost out are youngsters.
But even more will lose because they borrowed to start with and interest rates are high and gets compounded with delays. Whether it was for a now distant holiday or a high priced smartphone, the true cost of money will be increasingly felt now.
Because incomes have not kept pace with aspirations.
And so today, for a variety of reasons including regulatory actions, the party is ending or at least shrinking.
Staying with the markets, it is clear that smart stockbrokers feasted on the general ignorance by creating content and luring more unsuspecting young users, via a pliable and amplifiable social media system.
And they continue to do so, many of them barely having seen a single full market cycle themselves.
While the Securities & Exchange Board of India has woken upto the prospect of regulating the many get rich quick advice dispensers, not all are covered, including the stock brokerages, large and small.
This is a good time to take stock, quite literally.
When markets rise as they have been in the last few years, making money feels simple and is the equivalent of throwing a dart at any random point on the dartboard knowing you will hit bulls eye.
Smart investors wait precisely for moments like this.
Foreign portfolio investors saw the writing on the wall in late September when they realised companies were not going to turn in good results and that the earnings driven growth was going to fizzle out.
Institutional players in the derivatives market have been smarter than you and me.
Even as small traders lost their shirts, the big proprietary traders, including FIIs, made a profit of about Rs 59,000 crore in FY24 using algorithms.
Not surprisingly, they have been selling since, close to $11 billion by now.
The amount is not large in proportion to their holdings which must be close to $800 billion or more but it is the strategy which is worth noting.
As foreign investors have sold, Indian investors have continued to pump money, including substantial amounts through mutual funds.
Not that Indian savers or investors have many choices in a high inflation environment.
Hopefully, the 8% correction which could go to 10% if I go by some market strategists will cause us to pause and think again about what it takes to make money.
And that while external factors like the US elections have some role to play in the medium to longer term economic outlook, that has little to do with the fundamental question of why small cars are not moving out of dealerships or the low cost housing sector is not doing well.
We should think of that too. And focus on the real story and not the story telling that has mesmerised us.
WHich brings us to the top stories of the day:
Markets rise in a relief rally after a 8% pounding from peak.
The rupee hovers around a record low, what could turn it around ?
What do the latest power consumption numbers tell us about economic activity ?
America’s retailers say families could spend upto $7,600 more per year if tariffs were increased on 6 consumer product categories.
Markets
The stock markets recovered on Tuesday after the pounding they received on Monday.
The rally appeared to be more of a short covering and relief rally and could thus have some more legs.
The Nifty 50 has dropped almost 8% from the record highs the Indian markets hit on September 27, or around 5 weeks ago.
Indian markets since then have been on a downward journey while other markets including Asia and the United States have been moving up.
Tuesday’s rally was led by financials and metals, the latter because it appeared that prices would rise because of stimulus expansion by China .
A fund manager at Fident Asset Management told Reuters that investors were parking their funds in segments with valuation comfort ahead of key events like the presidential election.
The Sensex rose almost 1,226 points on Tuesday from the day’s low.
In the final close, the Sensex was up 694 points at 79,476.63 while the Nifty50 was up 217 points at 24,213.
Investors are also looking at a Federal Reserve interest rate cut of 25 basis points (bps) at its policy announcement on Thursday which means more liquidity in the markets.
Whether that will directly help India in the near term is not clear.
Asian markets are still ruling strong with Japan, China and Hong Kong all up sharply as was Japan.
All these markets have been rallying ahead of the US elections alongwith Wall Street which have been pricing in a Donald Trump victory.
Only the Indian markets have now diverged since late September ever since FIIs began selling on falling earnings and demand slowdown in the economy.
Meanwhile oil prices have edged up again, now quoting
OIl prices have edged up meanwhile, as middle east tensions have not subsided and the oil producing countries are holding out on increased production.
Crude is presently quoting around $75.42 a barrel.
Where Is The Rupee Headed?
The Indian rupee was nearly unchanged on Tuesday, but under pressure from foreign outflows from domestic equities and of course constant intervention by the Reserve Bank which has kept the band tight.
The rupee closed at 84.1075 against the dollar, compared to its previous and record low close of 84.1150.
So where is the rupee headed and what are the factors that will determine its fate in coming months ?
Remember, one key reason for the rupee’s weakness, along with other Asian currencies is the strong dollar reflecting of course the strong US economy which we have discussed here earlier.
I spoke with Amit Parbari of CR Forex in some detail on what was going on in the forex markets and of course in the context of the rupee and the pressures it was facing.
INTERVIEW TRANSCRIPT
Amit Parbari: Let us see how all currencies have performed against dollars. If I have to compare dollar index in last one month, dollar index becomes stronger by close to 2.76 percent from 1st October to 31st October. That is 2.76 percent. Chinese currency got weaker approximately by 1.45 percent. South African bank got weaker by 1.02 percent. Balinese Ringgit got weaker close to 5 percent.
So basically dollar has got stronger in last one month because of which all emerging market currencies have got weaker. Now definitely they have outperformed all other emerging market currencies. Rupee has got weaker by near 0.20 percent between 1st October to 31st October. You can say that RBI has done a good job in protecting rupee weakness and that data you can get it from reserve data also that reserves are also falling down below 700 billion dollars. So this was one of the reason why all currencies got weaker, we have also got weaker.
Govindraj Ethiraj: So you're saying that the dollar is obviously on a very strong wicket right now and it is continuing to power ahead. So what could change that?
Amit Parbari: Now there are two data points. If you have to predict what is going to happen in the future, you have to understand what state of economy is in US right now. You don't know whether whoever wins tomorrow, either Kamala Harris or Norrison, whatever they have said in their electoral campaign, based on that we are able to understand that their deficit is going to increase.
In future, if whatever they are saying, they do exactly the same. If that deficit is going to increase, then one of the biggest problem in US currently is their rising debt that has gone to 36 trillion dollars. So 36 trillion dollars, now their interest payment is how much?
Interest payment is approximately 25 percent they are paying as interest payment. So basically because of this reason, Fed is bound to cut the interest rate. If Fed is going to bound the interest rate at the fastest level or at a higher level than dollar index, which is currently trading near 104 kind of a level, we think that 105 to 106 is going to act as a very, very strong resistance for dollar index and gradually dollar index is going to hinge towards 102.
That is the first target. Second target is 100. And by 2025, we will not be surprised if it goes below 100 and start trading near 93.5, 98 kind of a level. If dollar index gets weaker, then all emerging market currencies have to get stronger.
Govindraj Ethiraj: Right. So that's from the dollar side. If you were to look at the intrinsic strength of the rupee or the intrinsic value of the rupee, how are you seeing that right now?
Because obviously, some of it is influenced by the fact that we've seen these huge FII outflows, more than 10 billion dollars in October alone. So that's what's happening here. Is there any other such intrinsic or domestic factor that's playing?
Amit Parbari: I knew this question was going to come. You know, this is an obvious question. Everybody is worried about the FII.
So it goes to 11 billion dollars in the month of October itself. Now, let me give you a couple of more data points. FII holding in Indian equity markets is close to 750 billion to 900 billion dollars.
Approximately giving it to 800 billion. If they are taking away 11 billion, which is not a big number, I think they have just been rebalancing. Now, the question is whether they are going to come back to India after the US election.
I think they should and they will be coming. The entire fundamental reason is that India's growth story continues and it is going to attract people to put money in India. Underweight, overweight, they might select some other CM.
There will be more overweight in India, there will be underweight. But it will be completely wrong on my side if I say that they are not going to come back. They are definitely going to come back.
We are expecting them to come back. You know, post Christmas, in the first week of January or second week of January, they can again come back in a full-fledged manner. Right.
Govindraj Ethiraj: So, I mean, whether or not that determines the value of the rupee. So therefore, are you also saying that the rupee could, from here on, strengthen a little bit?
Amit Parbari: Technically speaking, rupee should ideally be trading to up to 83.5 or 83 kind of a level. I will justify my point why I think that rupee should trade to up to 83.5 level or 83 level. Let me give you a data point.
In 2022, crude was trading at $135 at the peak of Russia-Ukraine war. From that level, crude has come down almost by 50%. So, crude currently trading at $70 per barrel.
Rupee at that point of time in October 2022 was trading near 83 level. Now, crude has fallen down by 50%. At the peak of 2022, dollar index was trading close to 114 kind of a level.
Dollar index from 114 has come down to 104 kind of a level. Rupee was trading at 83, rupee is trading at 84. So, basically, whatever flows came, RBI went on in the market and started observing dollars.
So, if I were to compare the data points, I personally think that rupee could trade near 83.5 and 83. So, after rupee getting weaker towards 85 or 86, that probability will become less than 3%. Ideally, if crude comes in and RBI will not intervene on the buying side, then ideally, rupee can move lower.
And how do we understand that RBI is not buying dollars? So, 83.50 is a pivotal point. If 83.50 is broken, then rupee can appreciate by 50% to 1.5 rupee in fast and furious manner. So, any exporter who is thinking that rupee is going to get weaker and is keeping his position at the highest level of risk, ideally, exporters should go and hedge their exposure.
That is what we are recommending to our clients. Great. Wonderful to hear that.
Govindraj Ethiraj: Thank you so much for joining me, Amit.
America’s Tariff Impact
The reference is to the likelihood of America raising tariffs on imports.
Whichever way the election was set to go, America First would be a key focus of the new administration, FIEO Director General Ajay Sahai told me yesterday.
A new report by America’s National Retail Federation has said that a universal tariff of 10% or even 20% on all imports into the United States from all countries, and B) an additional tariff of 60% or even 100% on all imports from China on top of existing tariffs would have a significant impact on the costs of a wide range of consumer products sold in the United States.
The Federation says that the conclusion across research has been of net negative impact on the United States with results ranging up to $7,600 in additional costs annually per household.
This study focused on six consumer products categories found in nearly every home across the United States: apparel, toys, furniture, household appliances, footwear and travel goods.
It concluded that for all categories examined, total average tariffs would exceed 50% in the extreme tariff scenario, up in most cases from single or low double digits currently.
All this would reduce American consumer spending power by $46 to $78 billion every year the tariffs are in effect.
Even accounting for alternative sources of supply and potential new U.S. production.
While impacts as a share of the U.S. economy may seem small, it is a different story for individual products, including many consumer goods whose prices already are inflated by extra tariffs on Chinese imports.
The Federation also argues not surprisingly that the additional costs associated with these proposed tariffs would be too large for U.S. retailers to absorb and, when passed on to consumers, would result in prices higher than many consumers would be willing or able to pay. Some consumers would stop purchasing the items and demand would fall. Others would continue to buy at higher prices.
Consumers would pay $13.9 billion to $24 billion more for apparel, $8.8 billion to $14.2 billion more for toys, $8.5 billion to $13.1 billion more for furniture, $6.4 billion to $10.9 billion more for household appliances, $6.4 billion to $10.7 billion more for footwear, and $2.2 billion to $3.9 billion more for travel goods.
