Dear Reader,

Have the dogs of war lost their fangs? Are they all bark, no bite? To be sure, oil prices have moved up sharply, stock markets have come off a bit, the US dollar has strengthened somewhat, and gold prices have gone up on safe haven demand. But there’s hardly any panic, notwithstanding the prospect of an Israeli attack on Iran’s oil infrastructure, which, as this video clip shows, Biden not only did not deny, but said instead, “We’re in discussions about that…’’. The US may be top dog, but it sure seems here as if the tail is wagging the dog.

My colleague Neha Dave said, "The worst-case scenario for oil prices, global trade, and financial markets will be an escalation to the extent where Iran attempts to block the Strait of Hormuz." But as our columnist Vivek Kelkar wrote, that would not be easy, as "US naval assets are already parked just outside the Straits in the Gulf of Oman." The markets don’t seem to believe that will happen, or that Iran could lash out after an Israeli strike to hit the oil assets of the Gulf countries—the CBOE Vix is still not at its highest level in the last month.

The reason is, as this FT story, free to read for Moneycontrol Pro subscribers, says, “The good vibes washing around global markets are proving to be very hard to shift.’’ With inflation under control and central banks in rate-cutting mode, markets are in a good mood. That has been aided and abetted by Xi Jinping’s promise of a large dose of stimulus, which has led the Hang Seng index to zoom up 11 percent this week, the Middle East be damned. Simply put, the dogs may bark, but the caravan moves on.

The Nifty Vix too isn’t near the highs of September. One reason, of course, is the remarkable sang-froid of the Indian retail investor. As a strategy note by Kotak Institutional Equities titled ‘When luck runs out….’ points out: “The market has brushed aside all negative news so far—(1) the BJP losing its majority in the lower house of the parliament in the 2024 national elections, (2) the government raising capital gains tax on equities in the July 2024 budget, (3) 1QFY25 results earnings missing estimates, (4) several themes disappointing and (5) Middle East situation deteriorating rapidly.’’ The note adds that with valuations so high the greatest risk is the zero margin of safety.

My colleague Shishir Asthana points to the underlying reasons for oil prices to stay subdued, such as China’s massive shift to renewable energy. He argues, “Oil prices surged for a week when Russia, a major oil producer, invaded Ukraine, but soon corrected. Comparatively, Russia produces 10.8 million barrels of oil per day, significantly more than Iran's 4 million barrels per day.’’ He also underlines the fact that while wars may lead to short-term dips in markets, they rebound sharply afterwards.

Could it be that we have become inured to wars? That would be nothing new. “Cry ‘Havoc’ and let slip the dogs of war’’ is an oft-quoted phrase from Shakespeare’s play, ‘Julius Caesar’. Less quoted is the rest of the speech by Mark Antony, which includes this bit: “Blood and destruction shall be so in use/And dreadful objects so familiar/That mothers shall but smile when they behold/Their infants quarter'd with the hands of war; All pity choked with custom of fell deeds.’’ That could well be a vivid description of the horrors being visited on Gaza.

But perhaps we are barking up the wrong tree. Maybe the blasé attitude is a realistic recognition that it’s a dog-eat-dog world. Or, in the markets, perhaps it’s just the knowledge that, as Baron Rothschild said during the Napoleonic wars, "Buy when there's blood in the streets, even if the blood is your own." He should know, having made a fortune during the Battle of Waterloo, though, of course, the blood was certainly not his.
India, being a big oil importer, has a dog in this fight. Even so, the RBI in its last Monetary Policy Report in April 2024 had assumed as its baseline forecast that the price of the Indian basket of crude oil would average $85 a barrel for 2024-25, and it’s still substantially lower than that level. To be sure, the Middle East conflict puts paid to the notion that the RBI would cut rates at its meeting next week, but then the odds were anyway against a reduction. What’s more, we pointed out that monetary policy is already being eased, via abundant liquidity.

There is, however, a hint of a slowdown in the Indian economy. The HSBC Composite PMI for India for September came in at 58.3, the lowest reading since November 2023. While growth is still strong, the momentum shows a deceleration. The manufacturing PMI survey press release said, “For the third straight month, rates of expansion in factory production and sales receded, both of which were at their weakest since the turn of the year but above their respective long-run averages.’’

The services PMI showed that the pace of growth in new business was at a 10-month low. My colleague Vatsala Kamat pointed out that things aren’t looking too good for automakers. GST growth in September was a mere 6.5 percent, a 40-month low. A report by Bernstein’s Venugopal Garre titled ‘India Strategy: Visible signs of a slowdown’ said, “Several demand trends show a slowdown — be it premium two-wheelers, passenger vehicles, or overall retail sales momentum. Rental growth across hotels this fiscal year has been <4%, real estate inventories have been building, new launches are flattening, and gold jewellery demand has shrunk by 17% in Q2 2024. Retail demand overall has been weaker.’’

For the markets, there are Sebi’s F&O curbs and, as columnist Ananya Roy says, “considering that China’s stock markets are significantly undervalued compared to India’s lofty equities, foreign funds can be expected to find their way out of Indian equities and towards China’s stock markets’’.

True, some attribute the slowdown to excessive rainfall in some parts of the country. We were also positive about strong demand during the festive season in autos. And we said the rural recovery is good news for FMCG growth. Nevertheless, my colleague Anubhav Sahu warned that “what makes the Indian market vulnerable to a wider military escalation is valuations’’ and “Q2 FY25 earnings would be more crucial for the justification of the Indian market’s valuation as it would test some pockets of stress (like slowing consumption)’’.

For your listening pleasure this weekend, the most appropriate song would obviously be ‘Who let the dogs out’.

Cheers,
Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:


Stocks

Juniper Hotels, Weekly tactical pick—defence electronics player, Craftsman Automation, RITES, Cantabil Retail, India’s semiconductor push—putting all the chips on the table, Crompton Consumer, What does Advent Group’s equity infusion mean for Apollo Hospital stock?, Aditya Birla Capital

Markets

Buy the dip or buy the breakout?

Amid heightened volatility and uncertainty, mutual funds see surge in Index and ETF filings

How markets responded to the Fed’s interest rate cuts

GIFT City-based IIBX struggles with gold derivatives as volumes fail to pick up

Financial Times

Retail investors can sustain China’s market bounce

New titans of Wall Street: How trading firms stole a march on big banks

The Federal Reserve’s insurance policy

Private equity puts the L back in LBO

Is nuclear energy the zero-carbon answer to powering AI?

Companies and sectors

Swiggy IPO shines the spotlight on Quick Commerce opportunity

Has the outlook for steel companies turned brighter?

Coromandel’s backward integration to yield tangible earnings benefits

Dieselgate, domestic woes drive Volkswagen's India retreat

Banks have a new-found love for industries. Sign of a reviving economy?

Stressed power plants get a fresh lease of life

Assets and risks grow apace in the NBFC space

Non-banks turn to money markets as funding channels dry up after RBI nudge

Economy & Policy

Monsoon Watch

Average salary highest in Ladakh, lowest in Punjab

Local manufacturing — Can India beat China at its own game?

Has the stock market made Indian households rich, post pandemic?

Pro Economic Tracker

Core sector production shrinks for the first time since February 2021

The Middle East crisis widens the corridor of uncertainty for IMEC

Need to reduce India’s high logistics cost

Geopolitics & geoeconomics

The shifting sands of the Middle East

The PRC’s 75th anniversary—great disorder under heaven

The Eastern Window: At 75, China is anxious to match US power in the next 25 years

Political Rhetoric vs Strategic Realities: India-Bangladesh relationship is in a state of churn

Personal Finance

Gold prices on the rise, are mining stocks worth a look?

Don’t forget the failures in the investment journey

Tech & Startups

Startup Street | Most active VC investors: The old order changethIndian PSUs, banks tap private cloud for cost efficiency and data security in  Gen AI experimentation

Others

India’s pharma sector and regulators have both failed consumers

Toxic work culture: how to stop product mis-selling in banks