Bloodbath at PSX, as investors foresee massive interest rate hike

KARACHI: The Pakistan stocks witnessed a bloodbath on Thursday, as the market already initiated the pricing in expectations of beyond 100bps increase in the upcoming monetary policy announcement this month.

Cutoffs in the recent T-Bills auction to increase to 10.79 per cent for three-month paper, 11.50 per cent for six-month and 11.51 per cent for 12-month papers, which are 204bps to 276bps higher than the current policy rate.

The Pakistan Stock Exchange KSE-100 shares Index shed 4.71 per cent, or 2,134.99 points, to close at 43,234.15 points. The KSE-30 shares Index lost 4.99 per cent, or 877.9 points, to close at 16,697.96 points.

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As many as 365 scrips were active, of which only 16 advanced, 338 declined and 11 remained unchanged. The ready market volumes stood at 386.75 million shares, compared with the turnover of 241.06 million shares in the last trading session.

The cutoff yields for the three-month papers jumped 228bps to 10.8 per cent, compared with the last auction held on November 17, 2021, taking three-month yields to the 19-month high. “The sharp spike in the cutoff yield was higher than the market expectation by around 100bps, as yields on the secondary market for the three-month was around 9.7 per cent,” an analyst at Sherman Securities said.

This is the first time that yield gap between policy rate and short-term papers is higher suggesting another 200bps hike in the key policy rate is around the corner, which will surely slow down the GDP growth. However, all depends on the government borrowing requirements, as it seems that higher yields will propel the government to decrease aggressive borrowing in the future, while keeping the policy rate slightly lower.

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“As far as [the] government borrowing is concerned, we believe the decline in [the] global oil prices and new measures from the International Monetary Fund (IMF) will keep [the] borrowings in check for the time being.”

As far as the impact on the stock market is concerned, the sectors may absorb financing costs given a better earnings outlook. However, uncertainty on the rate hike will induce volatility in the market and keep investors at bay.

The benchmark KSE-100 shares Index declined 2.4 per cent in November 2021, trimming CY21 gains to 3 per cent. Moreover, consistent rupee depreciation against the greenback took the dollar-based losses for November 2021 to 4 per cent, while CY21 losses in the dollar terms extended to 6.4 per cent.

The MSCI-related outflows also reflected during the month, as Pakistan was reclassified from the MSCI Emerging Markets to the MSCI Frontier Markets; thus, out of the total net foreign outflow of $364 million in the 11 months of CY21, $141 million pertained to the month of November 2021 alone.

An analyst at JS Global Capital said woes on the external account of the country were expected to keep the investors hesitant from fresh buying for at least the remainder of CY21.

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“[The] recent reportedly provisional import bill number of $7.7 billion that may lead to a trade deficit to balloon to $4.5 billion for November 2021 would further mount a burden on the country’s external account.”

So far, the State Bank of Pakistan (SBP) has already witnessed a more than $3.5 billion decline in its foreign exchange reserves from its high in August 2021.

“Following expanding trade deficit, the continuation of the rupee depreciation cannot be ruled out, which would perpetuate pressures on inflation.”

By now, the higher CPI of 11.5 per cent for November 2021 has led to cutoffs in the recent T-Bills auction to increase to 10.79 per cent for three-month paper, 11.50 per cent for six-month and 11.51 per cent for the 12-month papers, which are 204bps to 276bps higher than the current policy rate.

International commodities have taken the much-needed breather; and analysts believe the dip in the international oil prices is anticipated to ease inflationary pressure.

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“Going forward, we may witness heightened foreign activity and inflows at the bourse. However, outbreak of the new Covid variant ‘Omicron’ globally and in Pakistan could potentially put pressure on the KSE-100 index,” an analyst at Arif Habib Limited said.

The monetary policy meeting scheduled for December 14, will be a key event for the market, as another hike in the policy rate appears unavoidable, which may build pressure on leveraged companies, while the banks could stay in the limelight.