The best word that can describe the global markets in the present scenario is ‘clueless’. Things have really been tough for all global markets. The problem of subprime mortgages, which is gradually transforming into a contagious phenomenon, has already started to take its toll. Sharp fall in the stocks of American Express and Master Card on US bourses on Friday bears testimony to the fact that if this problem is not contained, it could hurt the entire US economy.
Last week, American Home Mortgage Investment Corp., a subprime mortgage lender, announced plans to close most of its operations. This news sent shivers down the spine of investors, as it was the first big casualty after huge losses at two Bear Stearns hedge funds, which flagged off the crisis. Later on Friday, Bear Stearns said that credit markets were in their worst shape in two decades. And Standard and Poor lowered its outlook on Bear Stearns’s debt to “negative”, saying the biggest US underwriter of mortgage bonds may have problems, including with its hedge funds. These triggered a heavy sell off. The intensity of selling was such that New York Stock Exchange had to institute downside trading curbs at 3:29pm (11:59 IST) on Friday. To add to the market’s woes, lower than expected non-farm payroll data further jolted it. At close of the week, markets across the globe were clueless as to what will happen next. Asian markets, including India, are likely to show some resilience to such jitters. But they can’t remain insulated against its fallout.
What happened to Macquarie Bank, Australia’s largest investment bank, is a perfect example that the subprime mortgage crisis could well hurt other financial institutions as well. Macquarie Bank lost heavily on Australian bourses after it warned retail investors of losses of up to 25% in two of its funds amid fallout from the US subprime mortgage crisis.
However, none of the Indian financial institutions is likely to be affected directly by this crisis as they don’t have exposure to US subprime mortgages.
The Indian markets will mirror the mood in the US market when they open for trading on Monday. However, I feel that this time the reaction of Indian investors will not be as harsh as last week. The simple reason for this is that despite high volatility last week, the markets witnessed sporadic bouts of bargain buying in frontline stocks, which underlines the fact that there is still a lot of value left in Indian stocks.
Unlike in previous sharp falls, investors are taking this as an opportunity for cherrypicking. Importantly this week, some caution is likely to prevail ahead of the US Federal Reserve’s 7 August policy meeting. Markets across the globe are not pinning their hopes of a rate cut in this meeting, but the undertone of the policymaker and any favourable remarks by it could boost sentiments in the short term. Expectations are now growing for a likely cut in interest rates during the policy review meeting scheduled in October. Any indications in this regard could stem losses and may calm the nerves of the investors.
The Indian economy is already a strong contender for a rate cut, especially after the weekly inflation data, released on Friday, fell in line with expectations. This may coincide with the move of the Federal Reserve, and will be a positive trigger for the markets.
This week, in terms of supports and resistances, the BSE Sensex is likely to witness its first support at 14,896 points—any fall below this could steer the Sensex down to 14,689 points, which is a strong support. However, on its way up, the Sensex is likely to find the first resistance at 15,569 points. However, this time a close above 15,655 would be necessary for confirmation of upward trend.
Technically, this week, Punj Lloyd Ltd and Bank of Baroda Ltd look good on charts. Punj Lloyd, at its last closing price of Rs275, has a potential to touch Rs291 with a stop loss of Rs261. And Bank of Baroda, at the current market price of Rs295 can move up to Rs312 with a stop loss of Rs277. However, investors must note that the markets are likely to remain volatile and should consider exposure to the market only after it stabilizes.
From our last week’s technical calls, Tata Power Ltd, recommended at Rs700 easily met its target of Rs736 and scaled a high of Rs741 on NSE. Maruti Udyog Ltd also ruled very strong and interestingly, was the only auto stock that showed strength last week.
The stock hit a high of Rs860 against the recommended price of Rs830, but fell marginally short of our target of Rs865. State Bank of India was among the stars of last week and it hit its target of Rs1,555 on Monday itself. The stock touched a high of Rs1,652 during the week.
Interestingly, wild swings in the market did not impact the above-mentioned stocks.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org