Apprehensions of a possible repeat of the 1998 Russian financial crisis following a 20% fall in the rouble, and the persistent decline in global crude oil prices to below $60 per barrel, spooked global markets late on Monday and on Tuesday, leading to sharp cuts in world equities including in India where the Sensex plunged 538.12 points to end at 26,781.44.
Most emerging market currencies lost value against the dollar on Tuesday as worries that weaker-than-expected growth in China and oil-exporting countries could drag global growth down spurred foreign investors to exit. The rouble went past 80 to the dollar, the first time since 1998, the year Russia defaulted on its local debt. ICE Brent crude oil prices were below $60 a barrel.
The Dow Jones Industrial Average was trading in the red in early Tuesday trade, following poor housing starts numbers; on Monday the gauge had closed at 17,180.84 points. Major European markets too were weak in late trade and looked headed for their seventh consecutive session of decline. Moscow’s main stock exchanges tanked 5-12% as investors shrugged off a surprise Bank of Russia decision to take its key interest rate to 17% from 10.5% while those in China dropped 1-2%. Investors anticipate a crisis-like situation in Russia and announcements of capital controls to revive the currency’s sharp drop.
The sentiment was weak in several EM currency markets too with the rupee coming off to a 13-month low at 63.53 per dollar following weak trade data for November. On Monday, the Indonesian rupiah had hit a 16-year low. Ashish Parthasarthy, head of treasury at HDFC Bank, attributed the rupee’s fall to risk aversion in the global markets. “The larger trade deficit has added to the pressure,” Parthasarthy observed.
“I am speechless,” Bloomberg quoted Jean-David Haddad, OTCex Group’s emerging-market strategist. “What a failure for the central bank. Russia would need to announce capital controls today. That is the last solution,” Haddad said. Oil and gas are Russia’s chief source of export revenue and sanctions set out in a Bill passed by the US Congress on Saturday have also added to Russia’s economic woes.
Reports stated China’s manufacturing activity appears to be contracting this month for the first time since May, according to HSBC’s preliminary monthly manufacturing Purchasing Managers’ Index released on Tuesday. China is the world’s largest user of steel and second largest consumer of crude oil.
Indian shares declined 2% on Tuesday, reflecting a similar fall in world indices amid speculations of another financial crisis in Russia. The Nifty declined 1.85% or 152 points to end at 8067.60. Broader markets witnessed deeper cuts as “risk off” sentiments forced traders to book profits. The Mid-cap index ended down 2.96% whereas the Small-cap index lost 3.36% from Monday’s closing. Foreign portfolio investors who have been shopping furiously for Indian stocks and have run up a tab of $16.8 billion in 2014 so far have started taking risk off the table. On Tuesday, they sold about $200 million worth of shares in the cash segment; in the last six sessions, they have offloaded shares worth $500 million.
A section of the industry believes the recent 6-7% drop in Indian markets is “healthy” and “positive”, and the opportunity is a buying opportunity for the long term. “Economic fundamentals have begun to show some improvement and the outlook for the market and the economy has improved considerably, driven by lower crude prices, which puts India in a relatively better place compared to peers. From being amongst the least preferred markets more than a year ago, India is now amongst the most preferred markets to invest in our view.
Notwithstanding the recent geopolitical tensions, we think FII inflows would continue to remain strong,” said Rakesh Arora, MD and head of India research, Macquarie Capital Securities (India).
Market breadth was weak as 27 out of 30 Sensex companies ended in the red. Overall, 2,362 scrips ended weak as against 518 companies that ended positive. Metal stocks were the biggest losers, with Sesa Sterlite (-7.77%) falling the most in 16 months. Hindalco lost 5.67% and JSW Steel ended down 5.6%. Tata Steel lost 2.8% taking the gauge of metal companies down 4.1%. Reliance Industries share ended down nearly 2% on Tuesday, taking the losses to more than 13% in the last three weeks. ONGC has lost roughly 13% in share value since November 25, including the 2% fall on Tuesday. The BSE Oil & Gas index lost 1.5%, hit by the fall in crude oil prices.
While lower oil prices help reduce subsidies and ease inflation in a country that imports 80% of its energy, the persistent fall in oil has turned investors’ focus on the negative impact on future earnings of oil producing firms like RIL and ONGC, which is still to see a relief in subsidy burden, analysts said.
The impact of inventory management on the financials of these companies is another closely watched factor, they added.