Will metal stocks continue to rally further?

Yesterday marked two days of consecutive rise for the Sensex and Nifty on the back of a robust metal rally. Sensex moved up by 0.56% to end at 48,949.76 and Nifty moved by 0.73% to end the day at 14,724.80.

Metal stocks such as Hindalco Industries, Jindal Steel & Power, SAIL, Tata Steel and others rallied as well.

Does the metal rally still have the stamina?

The larger question currently looming over the Indian bourses is if the metal rally still has stamina left in it or has it run its course?

According to experts, a weak US dollar, depleting global inventory levels and a resurgence in demand from prime economies including China have led to a multi-year high in the prices of industrial metals. This has consequently triggered the current rally in metal stocks in the domestic scenario. China also recently cut back on export rebates on many of its steel products like the hot-rolled coil, cold-rolled sheet, galvanised plates, bars, rods etc which will gradually generate scarcity of steel products in the global markets. Additionally, China has bumped up the export duty on high silicon steel, ferrochrome and foundry pig iron. This is being widely interpreted by experts as China’s willingness to stave off from interfering and distorting global steel prices. Experts also indicated that China is consistently cutting back on steel output given its commitment to environmental issues and is seeking to prioritise domestic requirements over global demands.

RBI operations

Over the course of the year, RBI has opted not to change benchmark rates despite a persistently stuck inflation rate. To alleviate the situation, the RBI has relied on a number of unconventional strategies starting with Operation Twist.

Operation twist is a quantitative easing technique first practised by the Federal Reserve in the US in the 60s. The idea behind the operation is to manipulate the yields of government securities in such a manner that long-term Treasury yields move downwards while short-term Treasury yields move upwards.

The RBI establishes this by purchasing longer-term government securities. This increases the demand for long-term bonds, consequently pushing up their prices and bringing their yield down as there is an inverse correlation between bond prices and yields. Simultaneously, RBI sells short-term government securities which reduces their price but pushes up their yield.

The central bank seeks lower long-term interest rates as that injects more liquidity in the economy by providing easy credit access to people. At the same time, saving becomes less alluring as deposits do not attract a high-interest rate.

Yesterday, the RBI accepted offers amounting to 10,000 crores solely for the benchmark 2030 G-sec with a coupon rate of 5.85%. It received offers from banks looking to sell G-sec amounting to Rs 63,012 crore.

The central bank also sold Rs 10,000 crore worth of G-sec of 182 bills at 3.56% and 3.57% respectively.

Results of Hero MotoCorp:

An increase in ownership costs hurtled to a 17% fall in HeroMotoCorp’s quarterly net profit which clocked in at Rs 865 crore. The revenue also fell by 11% compared to the last quarter to Rs 8,686 crore.

The company in its statement said that a late recovery in the second half of FY21 helped it achieve strong sales volumes but simultaneously pointed out that the market at large continues to suffer because of the increase in Covid-19 cases. A series of factors that could have worked in favour of the company such as higher two-wheeler sales on the back of a good monsoon, massive agricultural yield, bumped up government spending and a relaxing of Covid-19 restrictions did not work. Meanwhile, an increase in fuel costs and a series of price rises also dented sales.

US unemployment claims

Positive news came in from the US as applications for state unemployment insurance last week slumped to a new pandemic low indicating gradual improvement in the labour market as well as a slow reopening of the economy. Another set of data from the US, according to a reputed business news agency, showed that productivity also picked up in the first quarter as the output rate exceeded the total number of hours worked.