Amid soaring crude oil prices, equities plunged across the globe on concerns over oil’s spiraling impact on economies due to mounting inflationary pressures.
India, which is already fighting high rates of inflation and a slowing of industrial output, has very limited soft options left to combat the price rise, and harsh measures such as a hike in interest rates may hurt the economy further. Similarly, in the US and other major economies, inflation is becoming more lethal with the continued rise in crude prices.
So, as of now, crude prices have taken the centrestage and the Indian market’s outlook now depends on oil prices, at least in the short term. So far, while the markets have absorbed the global crude shock, any further rise in the commodity’s price will leave its mark on the world as economic activity has already started slowing.
India, where consumers are largely insulated from soaring crude prices due to administered petroleum product pricing, may have to increase the prices of petrol and diesel to offset massive losses to oil companies. This is likely to fuel inflation further, which may invoke tightening of monetary measures.
Another hike in the cash reserve ratio (CRR), or the percentage of cash commercial banks need to keep with the central bank, by the Reserve Bank of India (RBI) is now on the cards, while a hike in interest rates will substantially depend on the quantum of increase in fuel product prices.
As a result, my outlook of the Indian economy and stock markets is very uncertain with a downward bias, especially in a scenario where there are no positive triggers.
From a data point of view, we will get a heavy dose of domestic data on Friday, when the fourth quarter gross domestic product (GDP) growth figure, which was previously 8.40%, will be released. Other than quarterly GDP, data on GDP growth for 2007-08 (previously 8.7%), weekly inflation (previously 7.82%), monthly fiscal deficit for the month of March (previously 1.05%) and India’s forex reserves (previously $314.08 billion) will also be released.
With most major corporate financial results already out, the ones remaining are unlikely to provide any significant leads this week. So the Indian markets will keenly watch the Union government’s announcements on petroleum products and monetary policy.
The US markets are closed on Monday for the Memorial Day holiday, so action would be limited on global bourses. Since there are no major economic events scheduled in the first half of the week, any volatility would be more news driven.
However, Thursday will be an important day in the US as other than the report on weekly jobless claims, the second reading of US first-quarter GDP will be out.
The first GDP reading showed the US economy grew at a slightly stronger pace than forecast. If the same sentiments are echoed in the second reading, it would be a definite positive for the US economy and stock markets.
There are other critical data lined up for Friday with the market getting a feel of price increases when the US commerce department reports personal income and spending data for April.
This will also include the core PCE (Personal Consumption Expenditures) Price Index, which is the US Federal Reserve’s preferred measure of inflation. Though these numbers are exclusively for food and energy prices, they throw light on the general economic trend.
Since the core PCE Price Index is forecast to have risen slower than the previous month, it will be interesting to see if it then exceeds expectations. This data may also throw some light on the interest rates outlook of the Fed in its forthcoming meeting in June. The consumerconfidence for May will be watched carefully on Tuesday for more cues on economy.
Technically, the markets are now at crossroads due to divergent trends and mixed signals. However, there is nothing to panic, because as long as the Sensex is trading above 16,217 points, there is not much to worry.
But, a close below this level could signal more selling. However, the sentiment on bourses will improve only if the Sensex closes above 17,061 points. So, there is no confirmed trend on the bourses though it has a downward bias.
On its way up, the Sensex would find its first resistance at 17,061 points, following which the next resistance would come up at 17,266 points. If the Sensex crosses this hurdle, then the next resistance will be placed at 17,480 points. However, a close above 17,266 points could be considered as short-term trend reversal.
On its way down, there is a moderate support at 16,466 points, which, if holds, will be a positive signal for the markets. However, if this level is broken, then the next crucial support will be placed at 16,266 points, which will be a very critical level to watch as a close below this level would mean more declines, which may take the Sensex down to 15,592 points.
This week, ABB Ltd, Housing Development Finance Corp. Ltd (HDFC), and JSW Steel Ltd look good on charts. ABB, at its last close of Rs1,009.85 a share, has a target of Rs1,031 and a stop loss at Rs988. HDFC, at its last close of Rs2,674.90 a share, has a target of Rs2,720 and a stop loss of Rs2,628, while JSW, at its last close of Rs1,075.80 a share, has a target of Rs1,112 and a stop loss of Rs1,038.
From our last week’s recommendations, Adlabs Films Ltd, recommended at Rs676 a share, touched a high of Rs734, which was well above its target price of Rs702. Kotak Mahindra Bank Ltd touched a high of Rs779 but missed its target price of Rs800. The stock later hit its stop loss. Siemens India Ltd almost touched its target price of Rs602 by hitting a high of Rs599.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments and questions are welcome at firstname.lastname@example.org