Defying uncertainty on global bourses, Indian equities posted handsome gains last week on fresh buying by funds and traders, ahead of the start of the earnings season. As expected, the week started with Indian markets witnessing cautious trading amid intraday falls. But equities managed to hold their ground, thanks to selective buying by funds driven by stock-specific news.
Concerns remained over the outcome of the federal open market committee meeting in the US on Wednesday and Thursday. But sentiment got a boost after the federal reserve decided to maintain its benchmark interest rates at current levels. Also, domestic wholesale inflation numbers, which fell to a 14-month low of 4.03%, raised hopes of a cut in interest rates, although this is not immediately expected. At close, the BSE Sensex remained just a whisker away from its all-time high levels and is likely to scale past its peak on continued buying during the week.
Interest rate cues
Internationally, the markets may not get enough support as this week will see a lot of action on the interest rates front. All eyes are now on China. The country’s central bank could raise borrowing costs further to cool the economy. This may have a negative impact on China’s stocks, which could spill over to other economies. However, Indian bourses are not likely to be impacted much as investors are in buying mode ahead of the earnings season. The UK will also be under the lens. The Bank of England may hike interest rates for the fifth time in less than a year on Thursday in an attempt to bring above-target inflation back in line. The data related to manufacturing growth in Britain, to be released on Monday, will also be watched.
As far as the US economy is concerned, important numbers such as non-farm payroll data, which is expected on Friday, will be watched carefully. The last release of non-farm payroll data was quite encouraging—the number of these jobs grew by 157,000 in May. The June numbers are expected to be around 120,000. However, they could be more than expected as there has been no recent announcement of a major layoff. Also, with signs that manufacturing is picking up, the numbers could be even higher, which will be a big boost for the US bourses, and consequently, for global bourses.
Other US data that will be released this week includes a pair of reports from the Institute for Supply Management. The group has a report on manufacturing activity in June coming on Monday, and another on the services sector, due on Thursday. Although these numbers are less critical, they may prove to be a trigger if they continue to point upwards.
On the downside, the US economy is still reeling under the pressure of subprime debts as the problem has devastated some hedge funds. The main concern now is about what lies ahead as tightening lending standards and persistent inflationary pressures could lead to general credit tightening, which could have a contagion impact on other sectors and spread over to the general economy. That the US stock markets have so far not succumbed to the subprime pressure is no solace as this could be a problem waiting to explode. Stocks remained highly volatile on Friday due to reports of a probe into two Bear Stearns Companies Inc. hedge funds heavily invested in subprime mortgages as its potential fallout could spread throughout the banking industry.
Back home, markets are likely to resume on a positive note and scale a new peak this week. Economic data fully supports this view, which is backed by technical analysis also. Technical analysis of the Sensex suggests that the rising index will only find a minor resistance at its all-time high level and this level is likely to be breached easily. The next target for the Sensex will be 14,878 points, following which the Sensex will look forward to 15,000 mark. Interestingly, 15,000 will only be a psychological resistance as the next resistance level is likely to come at 15,127. On the downside, the Sensex may witness support at 14,422, and the next, and the most important support level, will come around 14,227.
Technically, Adlabs Films Ltd, Bombay Rayon Fashions Ltd, and Punj Lloyd Ltd look good. Adlabs Films, at the last close of Rs562, has a potential to move up to Rs599 with a stop-loss of Rs541. Bombay Rayon Fashions, with a current price of Rs250, may hit Rs274 with a stop-loss of Rs236, while Punj Lloyd can move up to Rs282 from the current price of Rs259.
From our last week’s recommendations, Suzlon Energy Ltd hit a high of around Rs1,545 from the last week’s close of Rs1,378, gaining 12.12% in just one week. HDFC Bank Ltd, recommended at Rs1,101, hit a high of Rs1,148 during the last week and is poised to rise further this week. However, Unitech Ltd registered a fall.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org