Of Union Budget 2018 and the Sell-Off in Stock Markets

Global financial markets traded on a negative note this week.

On Wednesday, the Federal Reserve held interest rates steady but indicated a more hawkish inflation outlook. US Treasury yield rose further after economic indicators seemed to confirm the Fed's inflation outlook.

Citing solid gains in employment, household spending and capital investment, the Fed said it expects the economy to expand at a moderate pace and the labor market to remain strong in 2018.

It also said its committee had unanimously selected Jerome Powell to succeed Yellen, effective February 3.

On interest rates, the Fed said it expects further gradual rate increases. The target range for the federal funds rate currently is 1.25% to 1.50%.

The Dow Jones Industrial Average plunged 4.1% this week fueled by inflation concerns and political tensions.

European stock markets started the month on a dismal note. European shares suffered their biggest weekly loss in more than a year on Friday as investors' appetite for risk dried up. The euro and the British pound strengthened further against the dollar, putting additional pressure on stocks of European exporters. German and French markets were down by 4.2% and 3% respectively this week, while the UK's FTSE plunged 2.9%.

Investor sentiment in Asia was hit by concerns about rising interest rates. In China, profit booking ahead of the Lunar New Year holidays in mid-February led to a correction. China's Shanghai Composite fell 2.7% over the week. Japan's Nikkei, a major underperformer in the past couple of weeks, was down by 1.5% this week.

Indian Indices Bleed; Sensex Ends Over 800 Pts Lower

Back home, the Union Budget triggered huge volatility in stock markets. Indian share markets slumped 800 points on Friday as market participants were disappointed with the government's Union Budget for the fiscal year 2018-19.

The BSE-Sensex ended the week on a negative note and plunged 2.7% to 35,067, while the Nifty 50 slumped 2.8%, to 10,761 this week. Meanwhile, the BSE Mid Cap was down 7.1% and BSE Small Cap declined 7.7% this week.

The Finance Minister in his Budget speech announced a 10% levy on capital gains of over Rs 1 lakh without the benefit of indexing. The government's move to bring back long-term capital gains tax on equities and retain securities transaction tax (STT) has raised questions in many quarters.

The tax slabs remain unchanged. However, Mr Jaitley provided certain deductions which could marginally benefit the salaried individual.

The budget provided a standard deduction of Rs 40,000 for salaried individuals. Standard deduction essentially means that the employee does not require to furnish any investment proofs or bills to claim this deduction of Rs 40,000. However, there's a catch here.

If you claim the standard deduction of Rs 40,000, you would be unable to claim any medical reimbursement and transport allowance. Medical reimbursement could be claimed up to a maximum of Rs 15,000 and transport allowance could be claimed up to Rs 19,200.

Hence, if you claim a deduction of Rs 40,000 as a standard deduction, you would have to forgo the medical and transport allowance which amounted to Rs 34,200 (15,000+19,200). So, there is a net benefit of Rs 5,800 (40,000-34,200) on account of this proposal. Additionally, the benefit is that you do not have to furnish any documents to claim the standard deduction.

This benefit is further diluted by increasing the cess payable from the current 3% to 4%. Considering the overall scheme of things, it is likely that the salaried taxpayer would have to shed out more in taxes.

In a major boost to corporates, Mr Jaitley reduced the corporate tax rate to 25% for companies having a turnover up to Rs 250 crore.

This would benefit the companies in the and Micro, Small and Medium enterprise (MSME) segment. Earlier the benefit of lower taxation was available only to companies having a turnover of up to Rs 50 crore.

This would leave corporates with surplus cash which could be retained for growth or paid out as dividend.

Nifty 50 Index Plunges 3% for the Week
Nifty 50 Index Ends at Life-time High

The Nifty 50 Index witnessed extreme selling pressure this week. It started the week on a positive note with the index rallying 60 points to touch a new life-time high. But the buying was temporary, and it slipped 80 points on the very next day.

The pressure continued until Thursday where the index witnessed wild swings as the Finance Minister presented the FY19 Union budget. Finally, on Friday, the bears continue to dominate, as the index fell 256 points in a single day to end the weekly session nearly 2.80% lower.

Last week, we mention that the RSI indicator was in its extreme overbought territory. This called for a correction and as a result the index slipped more than 300 points in a single week. If the index keeps dropping, what happens at the 10,500 level, which is an important support, would an interesting level to watch out for.

So will the index correct to 10,500 level or will it resume it up move from here itself?

Stay tuned...we'll fill you in next week.

COMMODITIES

Gold Trades on a Flat Note

Gold traded on a flat note during the week. It opened its week on a positive note on Monday amid a firm trend in precious metals overseas. Slight losses were seen midweek on the back of a firm dollar. During the end of the week, gold managed to recover losses and ended its session marginally higher.

Gold Ends Marginally Higher

Volatile Trades for Crude Oil

Crude oil witnessed volatility this week. It started its session on a positive note. Gains were seen as a survey showed strong compliance with output cuts by OPEC and others including Russia. This also allayed concerns about surging US production and aided crude oil prices. However, a slight sell-off was seen midweek, which led crude oil to end its session marginally lower.

Note that crude oil prices have been on a rising trend this year. However, this is not good news from India's perspective.

As our friends at Equitymaster wrote in a recent edition of The 5 Minute WrapUp...

    Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.

    Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.

    Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

Crude Oil Ends Marginally Lower

CURRENCIES

Dollar Clocks 0.8% Gains

The dollar traded on a positive note during the week. While it opened its session on a flat note, gains were seen midweek. Towards the end of the week, the dollar maintained momentum and ended its session with a 0.8% weekly gain.

Dollar Trades on a Positive Note

Commodities 25th Jan 02nd Feb % Change
Gold/10 gms 30,361 30,367 0.02%
Silver/kg 39,960 38,651 -3.28%
Crude Oil/barrel 4,190 4,186 -0.10%
Natural Gas/mmBtu 200.10 184.90 -7.60%
Currencies 25th Jan 02nd Feb % Change
USD / INR 63.75 64.24 0.77%
EUR / INR 79.24 80.34 1.39%
GBP / INR 91.00 91.43 0.47%
JPY / INR 58.52 58.50 -0.03%

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1 Responses to "Of Union Budget 2018 and the Sell-Off in Stock Markets"
inox capitals
04 Feb, 2018
Thanks for the detailed post on budget.Overall it was a horrible budget with no relief for the salaried class, who are the only guys who pay regular tax.STT has been retained.What does Mr.Jaitley want, bring down a booming stock market? On one side no relief for the salaried guy and taxation for the investors other side hike in pay for MPs wow! Allocation of funds to farmers budget after budget is useless unless we actually see it reaching the farmer at ground level.Structural change needed at bureaucracy level and local administration is the need of the day else all the money will as usual go into a blackhole called corruption.Like 
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