Buoyancy returned to Indian markets as equities rallied across all major sectors, other than software, on fresh buying by funds and traders. There were liquidity concerns because of public issues by DLF Ltd and ICICI Bank Ltd. But fresh buying by funds in the secondary market eased such concerns. Also, heavy oversubscription of the ICICI Bank share sale was another comforting factor. Inflation, which has been haunting the markets for quite some time, has now fallen to an acceptable, and rather unexpected, level. On the domestic front, there are no big concerns on the horizon.
But the situation is just the reverse on the global front. The resurfacing of concern over subprime contagion is a new challenge that global stock markets may face in days to come. Friday’s sharp fall on Wall Street was on fears that trouble at two Bear Stearns hedge funds may signal bigger problems for credit markets. Inflation and rising interest rates were already worrying markets across the globe and rising US bond yields had triggered a fall on global bourses. If the subprime problem spreads to more hedge funds, it could rattle all major global markets. The US markets are already under pressure as the yield on the benchmark 10-year treasury note has been approaching the 5.25% level. This may put pressure on the interest rates in the US.
This week, the US Federal Reserve meeting is scheduled on Wednesday and Thursday. The Fed has held the target for overnight interest rates steady at 5.25% since last June. Although only minor changes are expected in the meeting, the Fed may decide to hike interest rates, creating problems for global stock markets as it would put pressure on all major economies to review their own interest rates. But going by recent US economic data, chances of upward revision of interest rates are remote.
Other important data that will be released in the US this week includes home sales data on Monday and new home sales data on Tuesday. The new home sales are likely to be lower, compared with May. This may not impact markets substantially, but any positive surprises will boost the US markets. On Wednesday, the US commerce department reports on durable goods orders for May. This data is also likely to show a fall of 1% after a 0.8% rise in April—this has already been factored in by the markets. On Thursday, the revised figures of the first quarter GDP will be made available. This number is likely to be revised upwards to 0.8% from 0.6%.
This week is going to be important for the domestic bourses as the derivatives contracts for June will expire on Thursday. Since the global markets are likely to be volatile and at present there are no major positive triggers on domestic bourses, the market will be quite volatile ahead of this expiry. The rollover thus far has been smooth and because of this, high open interest rates should not pose any problem. However, the creation of fresh short positions in the wake of uncertainty on global bourses could see some selling pressure building up. Also, the market may now start pondering over the earnings of the first quarter, as these will start arriving from the second week of July. The market’s expectations of first quarter earnings are not very encouraging. But given the strong growth in direct tax collections, the results may spring some positive surprises.
This week is also going to be driven by a lot of uncertainties. It will start on a negative note and equities may register a fall initially. But no big-ticket selling is likely as the technical indicators are still bullish. Unless selling becomes a global phenomenon, uncertainty-led selling will be temporary.
Purely on a technical basis, the charts show that the market will be back on track from Wednesday. Stocks such as HDFC Bank Ltd, Suzlon Energy Ltd and Unitech Ltd look good on charts. However, readers should note that since some initial weakness is expected this week, it would be better to consider these stocks only after the market consolidates. HDFC Bank, at its current market price of Rs1,101, has the potential to move up to Rs1,064, with a stop-loss of Rs1,064. Suzlon Energy is currently northbound, but is likely to see a lot of volatility; however, with a medium-term perspective, the stock is a good buy. The stock, which is currently trading at Rs1,378, has a short-term target of Rs1,424 and a medium-term target of Rs1,467 with a stop-loss of Rs1,337. Unitech, at the current rate of Rs524.50, has a potential to move up to Rs547 in the short-term, with a stop-loss of Rs492.
From our last week’s recommendation, Century Textiles & Industries Ltd, recommended at Rs604, touched a high of Rs672, gaining 11.26% during the week, well above its target. IVRCL Infrastructures & Projects Ltd, recommended at Rs335, touched a high of Rs379, gaining 13.13%. And Punjab National Bank Ltd, recommended at Rs488, hit a high of Rs532.40, gaining 9.1% during the week.
(Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org)