As the saying goes, it is often the darkest before the dawn. This seems to be an apt description of the current situation of world stock markets.
Going by the statistics, news and analysis, the economic situation in the US is a recipe for disaster. Consider this: oil prices are touching an all-time high, while the dollar is near its record low against the euro and a basket of currencies shown by the dollar index; domestic consumer spending is sinking as inflation is going up; February job cuts are steepest in the last five years. And, to add to it, the latest troubles at Thornburg Mortgage, Inc., a major mortgage lender there, has put its survival in question.
Taken together, it shows why the US economy—and much of the world—sees itself in a big mess that is only worsening week after week. Friday’s report from the US labour department showing that 63,000 non-farm jobs were lost in February—in contrast to the 25,000 new jobs that had been forecast—was probably the last straw, confirming that the US economy is in a recession. Little wonder then, that markets the world over—including in India, which witnessed one of the steepest falls in the world last week—fell on US recession worries.
Going by the latest numbers, it is now expected that the US Federal Reserve could soon take some quick actions to bring back some normalcy to the markets. It tried to do its bit on Friday by announcing measures to address heightened liquidity pressures in term-funding markets, which was a step in right direction. Now, it seems that the Fed could resort to an emergency interest rate cut to bail out the markets as soon as early this week, despite having its meeting scheduled for 18 March. This is, indeed, much needed and, if the Fed obliges, then there could be a sharp recovery on bourses on the hopes that there could be yet another follow-on rate cut at the 18 March meeting.
So, clearly, global markets will have to keep a very close eye on the next Fed action.
A second giant step to stablize the credit market would be some kind of a bail-out plan for bond insurers, which has been in the pipeline for quite some time now. Both these triggers are within sight, so to speak.
Moreover, there is no major data expected out of the US before Friday, when the Consumer Price Index for February will be released. A rise of 0.3% is already factored in, so unless the surge is sharper, this data might not affect market sentiments. Among other data, weekly unemployment claims, February retail sales data and February import and export prices are due on Thursday, which will also throw some light on the health of the US economy. If the inflation data is muted or within expectations, then this would raise hope of a higher interest rate cut by the Fed.
So, this may be the time for some solutions to emerge from the US, which means that investors should not worry too much about the current fall on Indian bourses. Any positive global cues could trigger fresh rounds of buying. But, so long as these triggers do not come, it would be better to exercise caution and remain on the sidelines.
On the home front, the inflation numbers continue to disappoint, as they eliminate any hopes of domestic interest rate cuts in the near-term. However, monthly auto and cement sales figures remained encouraging, and do not suggest any major issues with the domestic economy.
Last week, though, there were big concerns over the exposure of Indian banks in credit derivatives, after ICICI Bank Ltd incurred heavy losses, but this is unlike what is happening at US banks. There is no doubt that Indian banks may lose more money in coming months but, much of it is expected, so the reaction of investors to bank stocks appears rather harsh, perhaps induced by the 2008 Budget proposal to write off loans to marginal farmers to the tune of Rs60,000 crore.
This week, the markets will continue to move on global cues and, as usual, Monday is going to be tough on the bourses. However, unlike last week, lower levels will attract some bargain buying due to attractive valuations.
Technically speaking, on its way up, Sensex, the benchmark index of the Bombay Stock Exchange, has a strong resistance at 16,594 points, which will decide the trend on bourses. If the Sensex crosses this level with rising volumes and closes above it, then there could be more gains on stock exchanges, which may take the Sensex back to the levels of 17,200 points.
However, on its way down, the Sensex would first find support at 15,676 points, following which there could be more fall, and the Sensex may test the recent low of 15,332 points touched on 22 January. Below this level, the next support will come at 14,991 points.
Technically, this week, stocks such as State Bank of India, Shree Renuka Sugars Ltd and Reliance Industries Ltd look good on the charts. SBI, at its last close of Rs1,839.75 per share, has a target of Rs1,874 with a stop loss of Rs1,792. Shree Renuka, at its current price of Rs898 a share, has a target of Rs922 and a stop loss of Rs871. While Reliance, at its last closing of Rs2,248 a share, has a target of Rs2,320 with a stop loss of Rs2,291 a share.
From our last week’s recommendations, Tata Tea Ltd touched a high of Rs837, missing its target of Rs856, but it still qualifies to be a valid recommendation with previous week’s target and stop loss. Reliance triggered its stop loss, while Mahindra and Mahindra Ltd met its target of Rs720 a share.
Vipul Verma is a Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org