BackMarkets bounce back as US, Iran move away from military conflict
Sentiment also improved as China said it will sign first phase of trade deal with USWeak domestic macros could still stall the stock rally. Nomura forecasts weaker growth outlook in the near term
PremiumMUMBAI : Global markets heaved a sigh of relief on Thursday after the US and Iran stepped away from the brink of war and China confirmed it will sign a trade deal with the US next week. Oil and gold prices fell, while US treasuries traded mixed. Indian markets joined a global rally, with benchmark stock indices gaining more than 1.5%.
Stock markets in India saw the biggest single-day gains in three months, with the BSE Sensex ending at 41,452.35, up 634.61 points or 1.55% and the Nifty closing at 12,215.90, up 190.55 points or 1.58%. Stocks were up across Asian markets, with equity benchmarks in Japan, Taiwan, South Korea, Hong Kong and China up 1.6-2.3%.
In his speech after Iran attacked Iraqi bases housing US troops with a barrage of missiles, US President Donald Trump offered the West Asian country a diplomatic opening. Any new nuclear deal, he said, must allow “Iran to thrive and prosper, and take advantage of its enormous untapped potential. Iran can be a great country."
Meanwhile, China announced that vice premier Liu He will travel to Washington to sign the first phase of the trade deal with the US next week, locking in Beijing’s commitment to a ceremony already announced by Trump. Liu, who has acted as Chinese President Xi Jinping’s top trade negotiator throughout the tariff conflict, will travel to the US from 13-15 January at the head of the delegation, Chinese ministry of commerce spokesperson Gao Feng said Thursday in Beijing.
Shrikant Chouhan, senior vice-president, Equity Technical Research at Kotak Securities said the stock markets bounced back on easing crude prices and the recovery in domestic currency. “Crude prices eased from the high of $70 a barrel to $65 per barrel post Donald Trump’s press conference that indicated signs of cooling tensions between the US and Iran. These positive developments triggered a 130-point plus opening for the benchmark Nifty. The markets are into overbought zones; hence, fresh long positions should be avoided at current levels. On the sector front, auto-related stocks should be in focus."
International gold prices were down 0.27% to $1,552.29 per ounce at 7pm while the gold price on MCX lost 2.43% to ₹39,706 per 10g. The ten-year US bond yield traded flat at 1.87%, while that on India’s 10-year government bond was at 6.530% compared with its previous close of 6.559%.
The India volatility index or VIX, the so-called fear index, fell 10.16% on Thursday, which may indicate a lowering of apprehension among investors. The VIX index had jumped 16.39% on Wednesday, the most in this year. The volatility index typically has an inverse correlation with the benchmark Sensex and Nifty indices.
However, weak domestic macros could still stall the stock rally. Nomura forecasts weaker growth outlook in the near term with real GDP growth of 4.7% in FY20 as opposed to a consensus estimate of 5.1%. The World Bank on Wednesday also cut India’s growth estimate for FY20 to 5% from 6% estimated earlier, a day after the country’s statistics office pegged growth in the current financial year at 5%, the lowest in 11 years.
“Despite slowing growth, markets have held up; one of the reasons for this we think is a benign external environment; in particular, oil prices have remained weak and fund flows have been supportive. India needs to attract foreign savings as it attempts to kick-start an investment-led growth. Thus, high oil prices and fund outflows present significant risks to growth recovery, in our view," it said in a note on 7 January.
Nomura thinks a 5-6% correction in Nifty is likely in the near term as the 50-share index is currently trading at 18.3 times one-year forward consensus earnings, supported by a drop in yields.
An earnings recovery may continue to elude Indian companies in Q3, with analysts predicting weak sales growth, citing muted demand, tight liquidity and political disruption. However, cost control measures are expected to lead to an uptick in margins, while profits could be held up by tax cuts announced in September.
Bloomberg contributed to this story.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
