As expected, global bourses bounced back from their previous week’s sharply lower levels on bargain buying by funds and traders.
There was temporary relief from the US Fed’s decision to cut discount rates and it helped that no more big casualties were reported on the subprime front. Moreover, surprisingly strong data on home sales and durable goods orders in the US on Friday gave sagging global markets another lease of life, which helped major American indices including the Dow, Nasdaq and S&P 500 post one of the best weekly returns of the past few months. Also during the same day, the Fed clarified that the system will consider accepting investment-grade asset-backed commercial paper as collateral at its discount window. As the Dow closed with hefty gains, it paved the way for strong opening on Asian bourses today.
The situation in India remains more or less the same as the dilemma continued over the current political stand-off. But it seems that the markets are aware of their basic character of instability and confusion, so sooner than later, this political storm shall pass and markets will recognize its intrinsic worth. Looking ahead, there are some positive triggers in global markets, which will push up the markets including India initially during the week. But concerns over the subprime crisis and its impact of credit markets will continue to dominate sentiments as the current calm in the credit market does not mean the end of the crisis.
As per the latest reports, four of Asia’s biggest banks, including the commercial but state-run Bank of China, revealed bigger-than-expected exposure to US subprime loans. This in itself could be a warning signal of a bigger crisis in the making. So far, the subprime casualties have not engulfed Asia. But if it happens, the situation could be bad. However, to ease off the situation further in subprime, the US Fed is widely expected to take further steps and lower the interest rates. If this happens, positive sentiments would strengthen and markets across the globe would rally. This week, the US bourses as usual will direct the global markets, as this is a data-heavy week that will give an insight into the US economy and its credentials. The first important set of data on existing home sales will come on Monday, the S&P/Case-Shiller Home Price Index on Tuesday, along with the Conference Board’s August consumer confidence index and weekly store sales.
The minutes from the Fed’s policy meeting on 7 August are also due on Tuesday. This may be important as it may highlight the central bank’s stand before its surprise cut in the discount rate on 17 August and its statement later saying “tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.”
Weekly data on US mortgage applications will be released on Wednesday, while the American government’s preliminary report on second-quarter GDP is due on Thursday, along with weekly data on initial jobless claims. All these data are critical and will give cues over what lies ahead for global markets. Back home, markets would track political developments, which may impact sentiment. Also, the monthly expiry of derivative contracts may ensure volatility though, since the rollover is currently on and is quite strong, it shouldn’t pose too many problems.
Technically, the markets are all set to rise, and as per one key technical study, the BSE Sensex may witness a rally if it crosses 14,553 points, which is the first key resistance level. If the Sensex crosses this level, then there could be sharp gains on the bourses, which might take the Sensex to 14,955 points or a rally of 400 points. The level of 14,950 would be a critical resistance level and should be watched carefully. If this level is also breached, then you may see further gains, which may take the Sensex to 15,193 points, which is a strong resistance point.
On the downside, the Sensex would come across its first support at 14,150 points, following which the next support will come at 13,988 points. However, there is a very strong support placed at 13,778 points in the worst scenario.
This week on our technical radar are Reliance Energy Ltd, ONGC Ltd and Maruti Udyog Ltd. Reliance Energy at its last close of Rs735 has a potential to move up to Rs772 with a stop-loss of Rs699. ONGC at its last close of Rs805 can hit levels like Rs852 with a stop-loss of Rs776. And Maruti can gain up to Rs827 from its current close of Rs790 with a stop-loss of Rs754. From my last week’s recommendations, ICICI Bank Ltd almost met its target of Rs878 on Monday itself, touching Rs877 on BSE. Reliance Capital Ltd, recommended at Rs1,004, touched a high of Rs1,099, which was well above its target of Rs1,064. GMR Infrastructure Ltd also hit its target of Rs805 very easily on Monday itself.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org