Trade war tremors: Markets sink but negotiation window offers some hope

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Mumbai | Published: March 24, 2018 5:16:28 AM

Equities got pummelled across the globe on Friday as fears of a trade war heightened. Indian benchmark indices ended the session on Friday at five-month lows with the Sensex shedding 1.24% (409 points down) to end at 32,596.54, while the Nifty slipped 1.15% (116.70 points) to 9,998.05 — its first close below 10,000 since October 11, 2017.

Trade war, stock market, sensex, nifty, nikkei, donald trump, imports on china, World Trade Organisation, US bonds, indian equitiesSome market experts who agree with the “limited India impact” view consider the sharp dive in equity values an opportunity. (Reuters)

Equities got pummelled across the globe on Friday as fears of a trade war heightened. Indian benchmark indices ended the session on Friday at five-month lows with the Sensex shedding 1.24% (409 points down) to end at 32,596.54, while the Nifty slipped 1.15% (116.70 points) to 9,998.05 — its first close below 10,000 since October 11, 2017. Weak cues from Asia (the Nikkei fell by 4.5%, Kospi 3.25% and Hang Seng 2.5%) led to selling as the session began (with the SGX Nifty already 1% down before the morning bell), but saw some recovery later in the afternoon as European cues were not as weak (Germany’s DAX was down 1.7%, France’s CAC 1.51% and UK’s FTSE by 0.61%), given some reasoning that the announcement of the imposition of tariffs by US President Donald Trump on $50 billion of imports from China on Thursday may not go through without negotiations that may water it down significantly.

However, in retaliatory fire, China unveiled indications to levy tariffs on $3 billion of US imports, focusing specifically on certain commodities of importance to states that voted for Trump, according to agency reports. China also said it would pursue legal action against the US at the World Trade Organisation in response to the planned tariffs on steel and aluminium imports. “It is worrisome without any doubt and once it gains momentum it becomes an uncharted thing,” said Shankar Sharma, co-founder and chief global strategist of First Global.

“We have not seen anything like it for a long time, and the only mitigating factor can be that America cannot afford higher prices by imposing a tariff. You will raise prices for consumers which will, in turn, raise inflation. So that can be the factor why this may not go very far,” added Sharma. “As the US and China are the two biggest economies of the world, any trade war between them could spook the revival in global growth that was being witnessed. This is causing jitters in the global and domestic markets,” added Arun Thukral, MD & CEO, Axis Securities.

Markets participants, however, felt that India would remain mostly unscathed. “In the crossfire of East and West, collateral damage is bound to happen, but Indian industry will remain largely insulated from these trade wars and imposition of tariffs. Imposition of duty on steel and aluminium by the US is a non-event for now for India, as India only exports 2% of its total steel output and 5% of aluminium output to the US,” said Siddhartha Rastogi, director, Ambit Asset Management. “One may not see meaningful change in earnings due to these trade wars, however, market reactions may be sharp. Markets react to news more often than earnings, and any tariff war between nations can trigger selling in China, in turn impacting Indian equity markets or selling in the Dow, again triggering a sell-off in Indian equities.

One is also worried about dumping of US treasuries by the Chinese, who are the largest investors in US bonds, with holdings of more than a trillion dollars. This will push bond yields higher globally, triggering a sell-off on all risky instruments,” Rastogi added. Some market experts who agree with the “limited India impact” view consider the sharp dive in equity values an opportunity. “With corrections in the equity market, I feel that stocks have come into the value zone. There are multiple domestic as well as international factors like banking and political issues and recent protectionism from the US, which have impacted Indian markets in the last few weeks. However, for an investment now in equities, the risk-reward will be favourable,” said Gopal Agrawal, chief investment officer of Tata Mutual Fund.

That said, the near-term outlook for the equity market remains unclear. “Markets are expected to remain volatile ahead of F&O expiry next week, as well as the end of Indian financial year end (the last week before the long-term capital gains tax kicks in). While traders should remain cautious, the decline in good fundamental stocks would offer buying opportunities for long-term investors,” said, Siddhartha Khemka, vice-president, Motilal Oswal.

According to Abhimanyu Sofat, head of research, IIFL, “One of the major reasons for the market jitters is the hardening of US 10-year bond yield to 2.9%. In case it crosses 3%, considering high leverage in the global economy, there is a chance of a risk-off trade happening globally. This would affect foreign fund flows to Indian equity markets as well.” Market participants, however, expressed hope that things will improve as there could be a revival in earnings in the next quarter.

“Once the new financial year begins, people may take a fresh view on India. The markets may go through the pain for a few more sessions. Though markets are looking bad, corporate earnings are improving. I think markets will ultimately determine which companies are doing well, which companies are expanding. This quarter when the results come out, the markets will make a decisive move,” said a market veteran on condition of anonymity.  In a notable development, foreign portfolio investors bought equities worth Rs 1,628.19 crore on Friday, while domestic institutional investors sold shares worth Rs 935 crore, provisional data from the exchanges showed.

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