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WTI Crude Oil Goes Negative, Facebook Buys Stake in Reliance Jio, RBI Receives Poor Response for First TLTRO 2.0 Auction

Professor of Financial Economics and Part-time Value Investor, Transfin.
Apr 26, 2020 12:20 PM 9 min read
Editorial

Government allows some shops to open from Saturday. Banks continue to park sky high amounts in RBI’s reverse repo window. RBI receives poor response for first TLTRO 2.0 auction. Franklin Templeton Mutual Fund shuts down six of its open-ended debt funds. Facebook invests $5.7bn in Reliance Jio for c. 10% stake. Streaming giant Netflix reports 15.77m new subscribers, most of them from outside the US. As oil prices plunge, the cost of storing oil shoots up.US WTI crude trades below $0 for the first time ever. Global markets, stocks and Brent crude climb down.US FDA approves first at-home COVID-19 test kit.

 

 

INDIA IN LOCKDOWN

Government allows some shops to open from Saturday.

Partial Reprieve

The Government said on Saturday that all shops in rural areas, except those in malls, could open for business. In urban areas, all standalone and neighbourhood shops and those in residential complexes are allowed to open but not those in markets, market complexes and shopping malls. The order was clarified in a midnight statement by the Ministry of Home Affairs.

 

Sale of alcohol will continue to be prohibited and ecommerce platforms can sell only essential goods for now. All shops in areas identified as COVID-19 hotspots will remain shut. [The Hindu]

 

Delhi Airport readies to reopen, to implement new rules for passengers and staff.

Chimes of Change

Delhi Airport expects to resume operations after May 3rd, but it won't be business as usual for its staff and for passengers. They will have to contend with new rules and norms to ensure the safety of everybody. Mandatory face masks for all travellers and crew, no queues for security clearance, restricted use of in-flight lavatories and a stop on all in-flight meals - these are some restrictions that would be on the table. [HT]

 

MONETARY POLICY

Banks have rushed to deposit excess money with RBI under reverse repo window.

Let Them Have Loans

The RBI has called out banks for parking huge amounts of money at its reverse repo window even as the reverse repo rate has been consistently slashed. The Central Bank is reportedly willing to impose a cap on reverse repo rate to ensure that liquidity translates to credit. [BS]

 

But will this be enough to make banks lend more?

 

Are Banks Overusing the Reverse Repo Window?

Bank lending has plunged in recent weeks. On February 20th, banks had deposited ₹39,983cr ($5.27bn) with the RBI under the reverse repo window. By April 12th, this had exploded to ₹7,01,69cr ($9.25bn), an increase of 1,655%. [Livemint]

 

This means there is less money with banks to loan out to companies and consumers.

 

Banks continue to park sky high amounts in RBI’s reverse repo window.

Why Spend When You Can Save

The RBI may want banks to lend more and not overuse the reverse repo window. But banks seem to be content with parking funds with the Central Bank, where they deem they are safer in these uncertain times when lending to corporates and individuals might lead to an uptick in bad loans down the lane.

 

The past week, daily infusion by banks via reverse repo reached over ₹7Lcr ($92.6bn), close to record highs. This has continued even as the banking regulator has warned it may cap the reverse repo rate to disincentivise the window. [ET Markets]

 

Don’t know what the fuss surrounding reverse repo rate is all about? Here’s an explainer for you. [TRANSFIN.]

 

RBI receives poor response for first TLTRO 2.0 auction.

Operation Glass Half Full

The RBI this week conducted the first auction under its Targeted Long-Term Repo Operations (TLTRO) 2.0, which had been announced on April 17th. The ₹50,000cr ($6.57bn) window’s first auction, however, received a poor response. Only ₹12,850cr ($1.69bn) of the ₹25,000cr ($3.28bn) auctioned today received bids, implying a bid to cover ratio of 0.5.

 

This could mean that banks have turned more risk-averse and unwilling to pile on cheap funds offered by the Central Bank and lend during these uncertain times. [ET Markets]

 

COMPANIES

Franklin Templeton Mutual Fund shuts down six of its open-ended debt funds.

Templeton Run

Franklin Templeton Mutual Fund has decided to shut six of its open-ended debt funds, effective April 23rd, citing lack of liquidity in the debt market and unprecedented redemptions in these yield-oriented schemes in the wake of the coronavirus outbreak and the subsequent slump in the Indian economy.

 

The six yield-oriented schemes in which investments have been stopped are India Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund and Income Opportunities Fund

 

Together these managed assets worth ₹26,000cr ($3,453m). [Moneycontrol]

 

Meanwhile, mutual fund industry body Association of Mutual Funds in India (AMFI) assured investors that majority of Fixed Income Mutual Funds AUM is invested in superior credit quality securities and schemes that have appropriate liquidity to ensure normal operations. [Moneycontrol]

 

Ripples of Worry

The closure of funds has fueled worries of a renewed wave of withdrawals from similar products and that Indian credit markets could be pushed back into turmoil just as they were starting to show some signs of improvement. [Bloomberg via ET Wealth]

 

Facebook invests $5.7bn in Reliance Jio for c. 10% stake.

Dance of the Giants

Jio Platforms, a wholly-owned subsidiary of Reliance Industries Limited, today announced the signing of binding agreements with Facebook for an investment of ₹43,574cr ($5.7bn), valuing the platform at a pre-money valuation of $65.95bn. Facebook’s investment gives it around 10% stake in the company, making it the largest minority shareholder. [The Verge]

 

Read Reliance's media release about the deal here

 

"One focus of our collaboration with Jio will be creating new ways for people and businesses to operate more effectively in the growing digital economy,” said Chief Revenue Officer David Fischer and VP for India Ajit Mohan.

 

The development ties up with the recent news that Reliance Jio and tech giant Facebook are reportedly in talks to build a ‘super app’ of sorts.

 

Streaming giant reports 15.77m new subscribers, most of them from outside the US.

Netflix and COVID-19

Netflix reported Q1/20 numbers on Tuesday with an imposing 15.77m quarterly net subscriber additions. The sharp uptick in net adds was largely attributed to worldwide home confinement measures (and stay at home = more video streaming).

    

Revenues grew an impressive 27.6% YoY to $5.77bn but were largely in-line with estimates despite stronger-than-expected subscriber progression. This was entirely due to the strength of the US Dollar, which pressured reported revenue from international markets. (Note that of the 15.77mn net adds, only 2.31mn came from US & Canada.) [CNBC]

 

At least 328 companies have applied for a loan moratorium.

Company Talk

As per data compiled by rating agency Icra Ltd., at least 328 firms have applied for a loan moratorium granted by the RBI as a relief measure on March 27th. This list of companies includes large ones like JSW Steel Ltd, Tata Power Ltd and Piramal Enterprises Ltd. [Livemint]

 

CRUDE OIL

US WTI crude trades below $0 for the first time ever. Global markets, stocks and Brent crude climb down.

All Fall Down

Oil prices fell sharply in the past 12 or so hours. A Futures contract for West Texas Intermediate (WTI) crude, the main US oil benchmark, fell more than $50 a barrel to end the day at $30 below zero, meaning WTI crude oil prices went negative for the first time since trading began.

 

While the sharp decline in the price can largely be explained by the slump in the WTI May Futures contract (set to expire on April 21st), the fall of over 300% nonetheless reflects the fastest and furthest fall in oil prices since records began in 1946.

 

The oil crash hit global markets and stocks. Brent crude also climbed downwards to the low $20s. [Reuters]

 

Red Alert

An argument could be made that part of the reason for WTI's free fall is the United States Oil Fund (USO). Exchange-Traded Products (ETFs) like USO are not created to take physical delivery of the oil contracts they hold, so in a long squeeze, the fund’s managers have to dump oil. Here's more on that. [Forbes]

 

Cut the Clutter

What do negative oil prices mean? Why did US oil fall below zero? And how does OPEC+ feature in all this? Head to this article to have all your questions answered. [TRANSFIN.]

 

As oil prices plunge, the cost of storing oil shoots up.

Oil for One, One for Oil

Over the past week the price of US WTI crude oil plunged to negative territory and Brent crude dived down too. As oil prices climb down, the price of finding a place to store oil has automatically shot up. And massive oil tankers at sea are happily providing services here – to store oil and to transport oil to storage facilities on land. And they’re happily price gouging too. In February, such tankers, which can hold as much as 2m barrels per vessel, charged $25,000 a day. Now, those prices have shot up to almost $300,000 in some cases. [Moneycontrol]

 

China stocks up on crude oil as prices collapse.

Gather Oil While the Prices Fall

China, the world’s biggest energy consumer, is building up stockpiles of crude oil as global prices plunge due to the coronavirus outbreak.

 

Imports rose 4.5% in March over a year earlier even as demand fell in the wake of the coronavirus pandemic and the following lockdown. For the first quarter of the year imports were up 5%.

 

As global prices fell, Chinese importers sent 84 tankers to Saudi Arabia in mid-March, each able to carry 2m barrels of crude, according to news reports that cited the China Shipbuilding Industry Association. [AP]

 

A CURE FOR COVID

Coronavirus drug reportedly fails first trial.

The Cure Next Door

Around the world, more than 40 teams of scientists are working around the clock to develop a vaccine for the coronavirus. Weeks into the pandemic’s lethal spread around the world, the prospects of mustering a vaccine cure – which, if successful on time and mass-produced and easily available, would be a gamechanger in the world’s fight against this virus – are a welcome allure.

 

One such drug that many banked their hopes on was remdesivir, which was being researched upon by US firm Gilead Sciences. However, the first clinical trials of the drug reportedly failed in combating COVID-19. Draft documents of the trial were published online by the World Health Organisation – before being deleted after the international organisation clarified that the report had been mistakenly uploaded. [BBC News]

 

Extra Crunch

Scientists are racing against a time to develop a COVID-19 vaccine. Here’s an explainer about what’s at stake and what history tells us about vaccine development. [TRANSFIN.]

 

US FDA approves first at-home COVID-19 test kit.

Stay at Home, Test at Home

The US Food and Drug Administration (FDA) has announced that it has approved the first at-home COVID-19 test kit. It was developed by LabCorp, a US company, and costs $119 in the States. [The Hindu]

FIN.

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