US Stocks Whacked For The Third Day
Stocks took a solid beating, falling around 3% in what was the worst session in almost 10 months
On Episode 551 of The Core Report, financial journalist Govindraj Ethiraj talks to Amit Pabari, Managing Director at CR Forex.
SHOW NOTES
(00:00) The Take
(05:00) Indian markets fall around 3% in biggest drop in 10 months, fare better than most major global indices
(05:46) US stocks whacked for the third day, S&P 500 enters bear territory
(06:56) Oil prices fall, India raises taxes
(10:25) The US Dollar’s journey and its impact on other currencies and outlook
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 Tuesday, the 8th of April, and this is Govindraj Ethiraj, headquartered in Broadcasting and Streaming from a warm Mumbai, India's financial capital,
The Take
As the trade war escalates, India cannot afford to stay silent. It's not the tariffs the markets are worried about so much.
It's the recession in the United States that could lead to other countries as well that could follow, which has everyone now running for cover. Goldman Sachs has raised the odds of a U.S. recession to 45% from 35%. The second time it increased its forecast in a week.
At least seven investment banks have similarly raised their recession risk forecast, with J.P. Morgan at the top of the table, with odds of a 60% on fears that tariffs will not only ignite U.S. inflation but also spark retaliatory measures from other countries, according to Reuters. As each day passes, the situation becomes intractably worse. The longer the trade crisis lasts, the more determined countries and companies will be to ensure they are better protected in future.
Companies will still come around as they have shareholders to report to and growth to demonstrate. Countries don't face those shortcomings, if you want to call it that. Not in the short term for sure.
But companies also look for direction from countries, particularly the ones where they're domiciled. China's establishment has clearly demonstrated as of Monday that it will fight. Now, this is unlike India, which has clearly demonstrated that it does not want to fight.
Now, China's move, at least to an extent, was not expected. On Friday, it responded to America's reciprocal tariffs with blanket duties of its own and additional export controls. The Communist Party's official newspaper followed that up with a Monday editorial declaring Beijing is no longer clinging to illusions of striking a deal even as it leaves a door open to negotiations, according to Bloomberg.
Then came a statement from Chinese President Xi Jinping asking for strengthened efforts to fully unleash the country's consumption potential to spur growth. According to a Bloomberg report, state-run broadcaster China Central Television reported, the leader saying, as revitalising consumption, expanding domestic demand, and enhancing investment efficiency were on the top of the country's agenda, without specifying when and where he made those comments. Now, while India is not going the Chinese route, and does not need to, possibly the time for silence is now ending.
A trade war is a war, and the world is in the middle of it. In any war, citizens look to the leadership for direction, and India's government has been silenced so far. Silence is also a good strategy in terse situations like this, but only works up to a point.
India is a large domestic market, and that's what's keeping stock prices, for instance, from taking the same level of hit as many other countries, particularly export-facing ones like China and Japan. But tens of millions of Indians, including those who run large and small businesses, need a sense of where we stand at this juncture. And it is tough and unfortunate if we have to glean everything from tidbits of information that emerge through source-attributed stories.
Remember, we often say we are the fastest growing large economy in the world. If so, then surely we could be batting more on the front foot on this. Professor Stephen Altman, Director of the DHL Initiative on Globalisation at NYU Stern's Centre for the Future of Management, told me over the weekend that it was important to emphasise that the US represents only 13% of imports and 9% of exports.
So, the US is an important player in world trade, but it's far from large enough to be able to unilaterally determine the future of trade, he told me. So, if that's the case, or at least close to it, what should India or could India's strategy be, and for that matter, plan A, B, or C? Will we help businesses in terms of fiscal and monetary support if their enterprises are hit?
An interest rate cut seems imminent, but could there be fiscal support for export industries who are affected? Does India have new lines of trade opening up with other countries? Is there a possibility, and if so, what?
What about past discussions that we are reviving, as we evidently have with the European Union? And at a more fundamental level, what is India's role in this new world? Not every question must be answered in granular detail at one go, and some details on trade talks will always remain close to the chest.
Professor Altman told me that he had quite an optimistic expectation about trade growth for India, predicting that India, in its baseline scenario, would achieve about 6% of the world's trade growth, the third largest amount only after China and the United States. Moreover, he said the current scenario probably creates opportunities for India's share to be even larger. How India navigates this environment will, of course, determine how the future shapes up, which is why we are now past the point of silence.
And that brings us to the top stories and themes.
U.S. stocks are whacked for the third day and S&P 500 enters bear territory.
Indian markets fall around 3% in the biggest drop in 10 months but fare better than most major global indices.
Oil prices fall as India raises taxes but does not pass on the new prices to consumers.
The U.S. dollar's journey and its impact on other currencies and the outlook.
It Was Monday Madness
Stocks took a solid beating, falling around 3% in what was the worst session in almost 10 months after the tremors from a massive sell-off in western markets over the weekend in Asia on Monday morning reached Indian shores. The Sensex fell or rather crashed about 2,226 points or close to 3% to end at about 73,137 while the Nifty closed down 742 points or about 3.2% at around 22,161. The big concern as we've been discussing is the recession or the potential of which could start in the U.S. and quite soon by the looks of it and spread elsewhere. Obviously, this affects the fate and fortunes of many companies in information technology and pharmaceuticals. The Nifty mid-cap 100 and small cap 100 indices were also down at about 3% each. Wall Street saw a fresh round of hammering with the Dow Jones swinging wildly opening down going into the positive on reports that the U.S. government might pause tariffs for about 90 days which was then denied and that in turn led to the markets continuing their downward journey crashing about a thousand points mid-morning in the U.S. Last week just to recap the Dow posted back-to-back losses of more than 1,500 points including a 2,231 point fall on Friday. The S&P 500 dropped 6% on Friday for its worst performance since the pandemic in March 2020 and it lost 10% in two days. The Nasdaq composite entered a bear market on Friday down 22% from its record after losses on Thursday and Friday of about 6% each according to CNBC.
So the markets are evidently still a falling knife and it's not clear when the domino effect of the western markets into Asia and back will stop though it looks like things could even out somewhat. I think the better idea would be to stop watching stock prices and indices for a week or two till things settle at least somewhat even if it gets worse. In any case there are quite a few market holidays coming up this week and next starting this Thursday and onto two holidays next week.
India Raises Oil Prices But Not For Consumers
The Indian government was quick to capitalise on falling oil prices now below $65 a barrel but not passing on to consumers but to raise some resources for itself. So the government raised excise duty on petrol and diesel and took some pains to point out that it was not passing on the higher costs to consumers according to India's oil minister Hardeep Puri. The government has raised excise duty on a litre of petrol and diesel by 2 rupees each from April 8th taking the tax to 13 rupees and 10 rupees respectively.
A government official quoted by Reuters said they would raise about 32,000 crore rupees with this. Meanwhile global oil prices were weak on Monday thanks to those rising trade tensions between the United States and China which in turn led traders to focus on the possibility of a recession and therefore reduced demand for crude oil including the fact that there is likely to be or will be increased supply at the same time from the Organisation of Petroleum Exporting Countries plus countries. In the markets Brent futures were down about $1.60 to about $63.97 a barrel on Monday which is just under $64 a barrel. On Friday oil prices fell about 7% and last week Brent lost about 11% in all. Meanwhile something we mentioned yesterday Saudi Arabia has dropped prices for Asian buyers reflecting a view that they expect demand to be affected and are pre-emptively offering lower prices which obviously is adding to the downward momentum of prices and OPEC will now come back to 411,000 barrels a day in the market in May up from the previously planned 135,000 barrels per day.
The EU Looks For Fresh Deals With India
The European Union wants India to eliminate tariffs on car imports under a long pending trade deal and the government is apparently willing to sweeten its current proposal to seal the talks according to sources who spoke to Reuters. India is apparently open to a phased reduction of tariffs to 10% from more than 100%. Now that is despite industry lobbying for India to retain at least a 30% tariff even if it starts reducing the levy and not tinkering with import duties on electric vehicles for four more years to protect domestic players.
Tariff cuts will be a victory for European car makers like Volkswagen, Mercedes-Benz and BMW widening their access to be a win for Elon Musk's Tesla which will start sales of imported EVs in India this year and these are most likely going to be sourced from Tesla's Berlin plant. So you can see how a potential reduction in duties from the EU or rather on the EU will help Tesla and possibly others as well. India's Commerce Ministry says Reuters conveyed the EU's demands and India stands to officials from the Heavy Industries Ministry and auto industry representatives in a meeting last week.
So India sells about 4 million cars a year and is also one of the most protected in the world. Remember those 100% duties and domestic car makers have argued that sharp tariff cuts would wipe out investment in local manufacturing. So what the Indian auto industry is saying is that they're okay for an immediate reduction of tariffs on some petrol cars to 70% from more than 100% and then carrying out cuts in phases to 30%.
On electric vehicles Reuters said car makers want no tariff cuts until 2029 followed by a phase reduction on limited exports to 30%.
Which way is the US dollar going?
So the rupee reported its steepest one-day decline in nearly three months on Monday as tariff wars pulled down Asian currencies and stocks. The rupee closed at 85 rupees 83 paise per US dollar down 0.7% for the day which is the worst single day fall since January 13 according to Reuters adding that the onshore Chinese yuan declined about 0.4% to a near four-month low of 7.3 which in turn pushed Asian currencies down. The Reserve Bank of India may tolerate a steeper slide if China lets the yuan weaken to cushion the impact of US tariffs according to Reuters.
Meanwhile the dollar index also was higher slightly to about 102.9. So the question really is where is the dollar going and what can we take away from its movement and what does its current price reflect and where could it go? I spoke with Amit Babari, managing director of CR Forex based in Mumbai and I began by asking him to explain to us the journey of the dollar in recent months and what we could take away to use to interpret its position against the rupee.
INTERVIEW TRANSCRIPT
Amit Pabari: Generally as a thumb rule whenever there is uncertainty in the market there are few asset classes which people consider as safe haven number one is gold second is dollar third is Japanese yen now as you all know that dollar is a reserve currency so in times of uncertainty people will start accumulating dollars right so now there are two kind of an era we can say one era when trump was announcing that he is going to elect as a president candidate so he used to say that he is going to make America great again so people thought that really US is again going to become great so that is why they started purchasing dollar as a result yield dollar index all went higher now the basic problem what has happened in last 80 90 days after trump have got or you can see become a president he is challenging the rules what they have made for their own challenging his allies first right now we do know america is an ally to greenland canada mexico europe australia new zealand we all know he has taken steps which is hurting their allies only second issue of trust in two years back when biden understood that russia have attacked on ukraine they have frozen their asset from that time onwards we have seen that all centre bank across the world have started accumulating gold so now all across the country there is a fear uncertainty that if trump is going to put tariff on all of them then the world trade is going to go down recession is likely to come in similar thing happened in 1930 also and that point of time also recession came and similar thing happened in 1828 also when dollar was not considered as a safe haven nor it was considered a supreme this thing so broadly speaking we can say that till the time we do not get a trust back on dollar we can say that it will get sold off heavily every uptick will become a selling opportunity so in the near term are we expecting trust to come back i think trump has to make a u-turn complete not on tariff apart from tariff on his other foreign policies also
Govindraj Ethiraj: and what is this meant in terms of the value of the dollar or the dollar index as everyone looks or watches
Amit Pabari: yeah so basically dollar index currently is trading a 103 kind of a level you know near term high was 114 so we think that 105 50 106 is going to act as a strong resistance for dollar index and eventually dollar index is going to break 100 come out in 2025 and can move lower
Govindraj Ethiraj: towards 97 98 oh that's quite a sharp fall and is that something that you're seeing happening
Amit Pabari: in coming months yeah in next six months we will view that dollar index can go towards 97 98 kind of levels
Govindraj Ethiraj: right and what does that mean then for other currencies including the rupee
Amit Pabari: so basically whenever dollar gets weaker emerging market currencies get stronger and probably the theme for 2025 can be sell us equity and start shifting money into emerging market equities that can be the theme or sell us equities or start putting money in gold that can be two themes which can play out for 2025 till the time we do not get trust back in foreign policies of trump
Govindraj Ethiraj: Right now the rupee versus the dollar now you've made the case for a weaker dollar going ahead now will the rupees strength or its position be driven by how much weak the dollar gets or its own intrinsic capability or ability which is of course dependent on the indian economy
Amit Pabari: if you have to consider a longer period of history say last 15 20 25 years we will observe that whenever a good data point of indian economy comes there are only 15 to 20 percent times that rupee will react positively or whenever that bad data come only 15 to 20 percent time rupee will react negatively so in last 20 years we have understood that rupee momentum is generally or primarily driven by what is happening outside india basically what is happening to dollar or what is happening to crude so these are the most important parameters now as we think that dollar is going to get weaker so probably we have a case where rupee can get strengthened now there is a catch here what is the catch here the catch here is that a gift given by the previous governor to the new governor when the new governor joined at that point of time approximately 65 to 70 billion dollars we were net on a short side in forward contracts which are due in next one two three months definitely they can roll it over this data point is as on 31st june 2025 now ideally what will rbi think rbi will think that it is a time of uncertainty if flows are coming in the debt market if flows are not coming in the equity market so whatever flows are coming let me observe them at the lower level so i can have a safer reserves and a safer forward book so approximately we are expecting that 84 80 is going to hold as of now 84 80 to 85 is going to hold as of now and probably with a lot of uncertainty around rupee can again bounce back towards 86 and a half kind of a level but saying all of that one thing is very clear in the short term we are not expecting rupee to move beyond 87 87.10 kind of a level so any uptake should be taken as an opportunity by exporter to increase their hedge ratio
Govindraj Ethiraj: we don't usually talk much about this but how is the rupee stacking up at this point against other currencies for example the british pound or the euro singapore dollar i mean typically other currencies that we trade with
Amit Pabari: So basically what has happened euro is trading near all-time high why fundamentally what has happened euro have moved from 1.0 to 1.10 kind of a level and rupee didn't appreciate drastically generally there is an inverse relationship if euro is getting stronger then rupee will also get stronger but this time as previous governor had given a gift to the new governor we were forced to buy dollars at a lower level so relatively european is trading near all-time high governor is also trading near all-time high
Govindraj Ethiraj: okay and you're saying that this is something that will run independently or parallel to where we are or will be on the dollar
Amit Pabari: the question is if dollar index is getting stronger by five percent whether rupee is going to get stronger by five percent the answer is no it can get stronger by two two and a half percent so now basically euroiner pair will not fall drastically it is going to move higher only as far as euroiner gvpiner is concerned because the pace of euro strength will be more and then the pace of rupee getting strengthened because of the forward book what rbf sold of 77 billion
Govindraj Ethiraj: Amit thank you so much for joining me
Amit Pabari: Pleasure is mine
