International Market Review

The global financial markets turmoil which we are wtinessing is of historic proportion. The VIX index (a guage of risk aversion) has climbed to 53 levels, highest in the history of the index, the commercial paper market (life-blood of the short-term financing needs) has dried up with issuance falling 30-40% in the recent times, the corporate bond spreads (indicator of borrowing costs for the corporates at large) have widened to 300-400 bps over the US Treasuries and the bank lending standards as depicted by the surveys by US Fed, ECB, BoE and BoJ have been tightened across very significantly both for commercial enterprises as well as households. The complete freeze in the credit markets has singificantly increased the downside risks to the real economy.

Below we list down some of the very recent developments in the global financial markets and its implication to India.

IMF raises its estimate of credit related losses
The IMF now estimates that credit related losses could reach as high as USD 1.4 trillion up from USD 1.3 trillion estimated just 2 weeks ago and USD 945 bn estimated in April this year.
It has warned that the global financial institutions may need USD 675 bn in fresh capital over the next several years to recover from the current credit crisis.
The IMF also feels that overall risks to the EMs have risen sharply in the wake of massive capital outflows.
Ben Bernanke speech paints a bleak picture
The Fed decided to lend directly to American nonfinancial corporations as the commercial paper markets froze. In some cases the CP rates have climbed to as high as 7% when 3-4% is the normal range. This is the first time since Great Depression that Fed is using its powers under 'unusual and exigent circumstances'. For this the Fed will set up a special-purpose vehicle that will purchase top rated 3M commercial paper.
Bernanke hinted at the need for interest rate cuts sooner than later as he feels that recent developments in the economy would bring inflation rates back in line with price stability. The economic outlook has worsened with the reduction in credit in the wider economy as even creditworthy borrowers are not able to get credit/mortgages, the credit card limits have been cut.
The bleak outlook presented by the Fed triggered a plunge of more than 500 points in Dow Jones Tuesday to 9447 levels, the lowest levels since September 2001. Over the last 5 trading sessions Dow has fallen nearly 13%.
Problems emerging fast in Europe
Europe is now showing signs of extreme distress and various European government carried out series of rescue measures. While these measures seemed to have helped, they have also revealed the need for a much more coordinated move.
The UK government is planning to make an offer to buy stakes in RBS, Barclays Plc, and soon to be combined HBOS Plc & Lloyds TSB Group and it has also plans to provide additional assistance of GBP 50 bn. To cover potential losses, the government may buy stakes mainly through preferred shares. The government may also be planning to enhance its deposit guarantee probably for the corporate deposits as well.
The move came after RBS stock was down 39%, HBOS fell 42% and Barclays fell 9% on Tuesday and the Overnight GBP Libor rate climbed 80 bps in one day from 5.08% to 5.84%. The UK banks remain heavily dependent on credit markets for their funding such that loan-to-deposit ratio for UK domestic banks stand at 143%, up from 105% in 2000.
Iceland is all set to buy loan of $4 billion from Russia to avoid bankruptcy.
Most of the European markets are down 7-9% at opening on Wednesday
Asian stocks feeling the heat
Nikkei fell 925 points to 9203 , its biggest one-day fall since 1987 on account of unnamed report that suggested that Toyota's profits would fall by 40% in the year to next March in the wake of major slowodwn in North America and China. BoJ injected USD 14.5 bn into the money markets. Japan's bankruptcies have jumped 34% last month, the fastest pace in eight years. JPY appreciated strongly against the USD reaching below 100 as carry trades unwind.
The Hong Kong Monetary Authority cut its benchmark interest rate from 3.5% to 2.5%, just 50 bps above the US Federal Funds Rate. The Reserve Bank of Australia also cut its benchmark rate and expanded the types of collateral it would take for lending in money market operations.
Most of the Asian markets are down 5-8% and Indonesia stock market had to suspended trading.
India- Sensex falls below 11000 before recovering
Sensex lost more than 900 points intraday low breaking 11000 barrier before recovering to above 11000. The FII outflow from Jan to Sept this year has been to the tune of USD 9.1 bn and another half a billion in last few days.
The RBI has cut CRR by 50bps to 8.5% which will come into effect from October 11 and is expected to release about INR 200bn in the system. This measure was mainly to enhance systemic liquidity in the system given the spike in overnight call rates due to advance tax outflows, government intervention in forex markets to stabilise the rupee and government borrowings. The recent fall in crude oil prices has led to decline in inflationary pressures within the country which came down to 11.99% for the week ended September 20.
The SEBI lifted ban on a requirement forcing investors to register in India before buying shares and limits on offshore derivatives that were imposed last October.The regulator also overturned rules that banned overseas investors from issuing participatory notes (P-Notes) on derivatives.This means investors can issue P-Notes on single stock and index futures and options. It also scrapped a rule which said P-notes could only account for up to 40% of the value of assets held by a fund. (P-notes are used by overseas investors to buy securities through foreign institutional investors registered in India)
Also, Indian entities investing in infrastructure projects can now bring upto USD 500mn in India without information to RBI. The government has also allowed companies operating in the refining, exploration and mining sectors to bring into India upto USD 500mn of ECBs, a ten fold expansion from the earlier cap of USD 50mn. All these measures have been taken to boost capital flows within the country.
Implications to India:

The fall in Indian markets today is more to do with negative global cues and FII outflows. We feel that global financial crisis is still not fully known and it will take another 5-6 months to completely unfold the depth of such crisis. Indian government is taking steps to boost liquidity in the system. We do not expect an interest rate cut in the upcoming monetary policy meet, however further CRR cut is not completely ruled out. Earnings growth is moderating and fiscal concerns are adding to the overall pessimism. The upcoming Q2 results will provide some direction to the market in the near term. In uncertain times like this, investors are tempted to try to time their investments. However, over the longer term, investors who are willing to accept periods of market volatility are often well-positioned to grow their wealth. The markets are expected to remain in corrective mode exhibiting high volatility for some more time.

House View: Technically there is nothing wrong with Indian Market, Hold to whatever investements that have been made. If you have fresh liquidity, take postions in the stocks which have been battered down the most. We again suggest ICICI Bank, DLF, RELAINCE, RPL, RPOWER, TATA STEEL, BHARTI AIRTEL, SBI
Disclosures: No personal holdings
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