Despite weak global cues, Indian markets continued to march forward last week on hopes of bumper third quarter results and improved guidance for the fourth quarter. Hopes of a cut in interest rates further helped strengthen sentiments, as industry will likely benefit from such a move. Investors are hoping that even if the rate is reduced marginally by 25 basis points, it could give the market a major boost, primarily because it will indicate a shift in stance of Reserve Bank of India.
Close vigil: Bombay Stock Exchange. Since the data season has just began, there will be a lot of news driven movements on bourses.
The latest figures of India’s industrial output were though quite disappointing, showing a growth rate of 5.3% in November from a year earlier, well below market expectations and sharply lower than an upwardly revised annual growth of 12.0% in October. However, it failed to dent market sentiments, as investors remained hopeful of a turnaround within this quarter. Moreover, since this was considered yet another factor conducive to a possible cut in interest rates, its negative impact was not felt on the bourses. However, all is not well on the markets. The turmoil in the US has now started casting its shadow on global bourses, including in India. So far, Indian bourses have been resilient in the wake of concerns in the US economy because of hopes that more foreign money will find its way in India. However, with problems intensifying on the economic front in the US the heat will be felt on global bourses in days to come.
Most prominently, the news that Merrill Lynch and Co. Inc. is expected to suffer a loss of $15 billion from bad mortgage investments, almost twice its original estimate, rocked the bourses. Later, the profit warning by American Express Co. and news of mounting credit card defaults and a slowdown in consumer spending added to the market’s woes. Reports of a fall in consumer spending hit the stocks across all sectors with those of firms such as McDonald’s Corp. and Tiffany & Co. falling sharply on Friday.
Reports of Bank of America Corp. buying battered mortgage lender Countrywide Financial Corp. for $4 billion also failed to stem losses as the purchase was at a steep discount to the current market price of Countrywide Financial and though this may have averted a crisis at one of the largest mortgages companies in the US (Countrywide), it has shaken investor confidence badly.
This week is not going to be easy for global bourses as results by key financial institutions will be announced. Among the prominent players, Citigroup Inc. and Merrill Lynch will report their earnings on Tuesday and Thursday, respectively, and likely reveal more casualties from subprime mortgage crisis. If this happens, its impact will be large and will not be restricted just to the US—global bourses will also face the heat. Among others, General Electric Co., Intel Corp. and International Business Machines Corp. will also report their earnings this week.
The problems for US bourses do not end here as this week the market can look forward to a lot of data releases including reports on producer prices, consumer prices, retail sales, housing starts and business inventories. This week’s CPI (consumer price index) and PPI (producer price index) numbers will be watched very carefully. If the CPI numbers remain high, then it may trigger fresh rounds of selling on US and global bourses. Last week, Federal Reserve chairman Ben Bernanke gave a strong signal that the Fed would be very accommodative on interest rates at its next (29-30 January) meeting, and interest rate futures have started showing the possibility of a 50 basis points cut in interest rates. However, if the CPI numbers are high, then it may cloud chances of an aggressive rate cut and may lead to despair on bourses as concerns rise on the Fed’s ability to save the US economy from the impending crisis of recession. On the other hand, moderate CPI numbers may actually boost markets and give them a temporary push as these will further cement the views that the US benchmark rates may be lowered as per expectations. Going by expectations a rise of 0.2% is already discounted by market estimates. As far as retail sales are concerned, there is not much expected, as sales figures are likely to remain flat. Any positive surprise on this count can actually push the markets higher. Producer prices and retail sales data are due on Tuesday, while consumer price data is scheduled to be released Wednesday.
Back home, market sentiments have turned cautious now and going forward, the markets will face strong resistances. Since the data season has just began, there will be a lot of news driven movement on bourses, but the markets should start consolidating from now on. Since good corporate results are already factored in, the road ahead will not be all that smooth despite impressive numbers. Moreover, global sentiments will weigh on the Indian market. News related to a cut in interest rate could work as a major trigger as this has still not been factored into market movements. Any announcement of a cut in the balance banks need to keep with the central bank (cash reserve ratio) or lowering of interest rates could trigger a short rally on bourses. However, generally speaking, the markets will witness a fall and should correct a bit from current levels before moving up again.
Technically, the Sensex is likely to face its first resistance at 21,096 points, following which the next resistance is likely to come up at 21,211 points. If this resistance is broken, then the market could see a sharp short rally, which may stretch it up to 21,596 points. On its way down, the Sensex is likely to face its first support at 20,524 points, following which there is a major support at 20,296 points. If this support is broken, then there would be more fall, which may take the index down to 20,025 points and 19,866 points.
Technically, this week, I would suggest investors to take care before enlarging their commitment in view of a possible technical correction. However, purely technically, Oil and Natural Gas Corp. Ltd (ONGC), Tata Steel Ltd and HDFC Bank Ltd look good on our charts. ONGC at its last close of Rs1,306.90 has a potential to touch a target of Rs1,343, with a stop loss of Rs1,272. Tata Steel at its last close of Rs853.30 has a target of Rs898 with a stop loss of Rs811. While HDFC Bank, which closed at Rs1,762.35, has a target of Rs1,810, with a stop loss of Rs1,717.
From our last week’s recommendations, ABB Ltd touched a high of Rs1,525 but missed its target of Rs1,548. Deccan Aviation Ltd, recommended at Rs280, touched its target of Rs296 very easily and hit a high of Rs306, gaining 9.29% over its previous week’s close. However, Hindalco Industries Ltd hit its stop loss.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org