Equities fell sharply led by a selloff on global bourses. This followed a string of events, including a fall on Chinese bourses in the initial part of the week and, later in the week, a sharp fall on Wall Street after the US treasury yields surged above 5%, raising fears that global inflation would force borrowing costs to rise.
It all started with a hike in interest rates by the European Central Bank to curb inflation. This was followed by a surprise interest rate hike in New Zealand and led to a rise in bond yields. The final blow came in the form of Federal Reserve chairman Ben Bernanke’s warning of inflation risk, and data from the US which clearly indicated that there may not be any rate cut in the country.
Fears of inflation eased after US bourses staged smart recovery on Friday as the 10-year note’s yield retreated to around 5.11%, from a high of 5.25% that it had touched earlier in the week. Oil prices also fell on Friday, and this helped major US stock indexes rebound. Bond yields in the US and Europe have been on the rise since the beginning of this year, and this has been the main cause of worry. As long as bond yields remain on the rise, the stock markets will remain jittery. Once bond yields settle, even if it is at higher rates, buoyancy will return to the stock markets.
Given the buoyancy in global economies, fears of inflation look overhyped: the inflation is largely on account of stronger-than-expected economic growth. In some ways, the recent hike in interest rates may not be detrimental to the rally on global bourses, but any confusion over which way interest rates are headed and continued warnings of inflation may definitely dampen the party. European and US bond yields will also be watched carefully. Any surge in US yields beyond 5.25% would mean a fresh selloff on global bourses.
This week, there is a lot of important economic data that is scheduled to be released. The first will come on Wednesday when the Federal Reserve releases its Beige Book summary of regional economic conditions. Strategists and investors will look for any change in language about interest rates in this. Investors will also wait for data on US retail sales in May on Wednesday, May producer prices on Thursday, and May consumer prices, May industrial production and June consumer sentiment on Friday. Data on inflation in the US is also due out on Friday. All this information is critical and may help decide the trend on global bourses. That would mean that the trend on global bourses (till the data is out) is likely to remain range-bound with some downward bias.
On the domestic front, too, there is enough data to look forward to. All eyes will be on industrial production data for April which will be released on Tuesday. This data may highlight the impact of interest rate hikes on industrial activity. Growth in industrial output will surely boost the stock markets, while any negative signs may trigger some negative sentiments. I believe that the negative impact, if at all there is any, will be limited as inflation is already down significantly and interest rates have more or less stabilized. On Friday, the Indian markets will wait for their regular dose of data on inflation.
Technically, this week, markets are likely to be volatile on an intraday basis, but may gain initially tracking US bourses in weekend trading. The upside would largely depend on global factors, but going by technical charts, the Sensex is likely to remain stronger this time than its global peers. On the upside, the rising Sensex is likely to witness resistance at 14,360 points, which will decide the trend on bourses in the short term. Any decisive close above this level will place the index back in bullish zone as the next resistance could come in the region of 14,684. Since this level is very close to the all-time high level of 14,723.88, it may not pose any significant threat to the rising Sensex and all eyes will be set on the all-time high level mentioned above. On the downside, the Sensex is likely to witness strong support at 14,010 points; a close below this would be a bearish signal and the market could slip further from this level. The next big support level is expected around 13,722, following which there will be a strong support at 13,600.
This week’s technical picks are HDFC Bank Ltd, Reliance Communication Ltd and GMR Infrastructure Ltd. HDFC Bank, at Friday’s close of Rs1,091, has a potential to touch Rs1,135 with a stop-loss of Rs1,056. Reliance Communication at its last close of Rs514.40 has a good potential to move up to Rs534 with a stop-loss of Rs502. GMR Infrastructure closed at Rs508 on Friday and can move up to Rs524 with a stop-loss of Rs485. From our last week’s technical recommendation, Mahindra and Mahindra Ltd, touched a high of Rs784 on Monday itself, which was very close to its target of Rs788. Tata Steel Ltd touched a high of Rs646.90, against the target of Rs662. However the stock triggered its stop-loss level of Rs605 later in the week. United Phosphorus Ltd also opened on a positive note, but failed to reach its target of Rs320.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org