In a sudden change of sentiments, the outlook of global stock markets turned gloomy on Friday with the US stock index Dow Industrial Average suffering its worst single-day fall of the past 15 months. Blame it on oil or the May unemployment rate in US, which surged to the most in 22 years. It is also clear that there is all round lack of conviction on the positives of the economy, and people are seeing red more prominently than black.
It is interesting that till Thursday, the outlook of the US economy was seen improving, and till the last week, it was believed, though without much conviction, that it might be coming out of woods. With a series of positive data, the condition was forecast to improve from the third quarter. However, Friday changed it all for the US and the world, at least for some time to come.
More than the non-farm payrolls report for May, which was disappointing, it was oil, which soared to an all-time high on Friday on a weaker dollar, fresh tensions between Israel and Iran, and a Morgan Stanley forecast that falling US crude oil stockpiles could push prices to $150 (Rs6,400) a barrel by 4 July, that did most of the damage.
Israel deputy prime minister Shaul Mofaz’s comments that an attack on Iran’s nuclear sites looked “unavoidable” triggered the oil spike. It was the most explicit threat yet against Tehran from prime minister Ehud Olmert’s government. If the rhetoric gathers momentum, we may have more of oil shocks this week.
The Indian scenario is no better as soaring inflation has raised fresh concerns over the options the central bank is left with to handle the current situation, which now seems to be getting worse every passing week.
With the recent hike in domestic fuel prices, inflation outlook looks grim. It might invoke some harsh measures by the Reserve Bank of India, or RBI, to control the damage. It would be a Herculean task to bring inflation back to an acceptable level.
To add to the woes, the pull back of money by foreign funds has become another big concern for investors. It is worth mentioning that foreign funds have remained net sellers in 2008 of $4.6 billion. With the slack season coming up, there would be a dearth of positive triggers, which may further add to the bleak scenario.
Also on the horizon are the possibilities of a tightening of monetary measures, including a possible hike in the cash reserve ratio, or the amount of money commercial banks need to park with RBI, followed by a hike in interest rates. This may go against the stock markets as industrial activity is slowing and the cascading impact of the fuel price hike is not yet factored in. So, unless the global scenario improves substantially, there will be uncertainty on bourses.
It will be a tough week for the US, as economic data will be seen more with a negative bias. Any positive news will be put to further confirmation, while negative news will be taken at face value, as sentiments are extremely negative on talks of stagflation.
Although it is premature to say that America is back to its bad old days of 1970s, when the economy was hit by stagflation, with negative sentiments now ruling, some very positive data are needed to change things. The agenda for the week has some important reports that will give vital cues on what the future may hold for the US economy.
Monthly pending home sales data will be released on Monday, which will be followed by weekly mortgage applications report on Wednesday. These data would be critical, as they may throw light on the status of housing in the US. Any positive data could mean the subprime mortgage crisis may be bottoming out. Also on Wednesday, the Federal Reserve’s beige book will provide a broader outlook of the US economic health by region. It will be a critical document that may have a significant bearing on the next meeting of the Fed, scheduled for 24-25 June.
Another important indicator this week will be the May retail sales, the data for which would be released on Thursday. This data too is critical, as after the May unemployment shooting up, it may throw light on likely impact on consumer spending. Also in the current situation, when oil is boiling, the dent it has made on consumer spending will be important to understand.
However, Friday would be the most important day of the week as the consumer price index report, which is the US’ most important gauge of inflation, will be out. The report will be in sharp focus as all eyes would be on inflation, to judge where the economy is headed. Going by expectations, a rise of 0.5% is already factored in. The data may also impact the decision to be taken in the forthcoming meeting of the Fed. Overall, it would be a tough week for equity markets with recovery expected towards the end.
As far as the Indian markets are concerned, expect mayhem on the bourses on Monday, as the impact of Friday’s market meltdown in the US would ensure a sharply lower opening, followed by more bouts of selling from funds and investors. However, since Indian equities have become relatively cheap and attractive, it is unlikely that there would be a prolonged bear effect, as bargain buying would emerge selectively after a correction of 6-7%.
Though it cannot be called a bottom, as the downward bias would remain even after that with reduced intensity, it would reduce substantially with bargain buying in select stocks. The markets would need some solid positive trigger to bounce back. If there is a bounce-back, the outlook for the remaining part of the week would improve.
Technically, the falling Sensex would come across its first support at 15,252 points, a moderate support. The next support would come at 14,677 points. If the Sensex closes below this level, then it would fall further, to 14,210 and 13,990 points. To my mind, this would be near the bottom as solid bargain buying is likely to emerge around this level.
Going by the numbers, the bottom of the market would technically be around 13,768 points. However, one need not panic on these numbers, as this is the broader outlook of the Sensex, which is not necessarily limited to this week.
More importantly, the support at 14,677 points would be most critical because if the Sensex bounces back from around this level, then it may improve the outlook of the market in the short run.
Since the markets are likely to fall on Monday, I would not recommend buying at this point. However, once the market stabilizes during the week, then technically Reliance Industries Ltd, Punj Lloyd Ltd and Tata Consultancy Services Ltd may look attractive.
From our previous week’s recommendations, Tata Tea Ltd touched a high of Rs890, but missed its target of Rs905 and triggered stop loss later, tracking the fall on bourses. Bharat Electronics Ltd touched a high of Rs1,210 and met its target of Rs1,202 comfortably. HDFC Bank Ltd interestingly touched a high of Rs1,562 on the Bombay Stock Exchange on 2 June, which was well above its target of Rs1,409. But on the National Stock Exchange, its high was Rs1,380.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org