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Global cues and data on industrial production to rule sentiment

Global cues and data on industrial production to rule sentiment
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First Published: Mon, May 12 2008. 12 11 AM IST

Vipul Verma
Vipul Verma
Updated: Mon, May 12 2008. 12 11 AM IST
Vipul Verma
After four weeks of gains, Indian equities tumbled on all trading days last week, with the Bombay Stock Exchange’s benchmark Sensex index declining 863.05 points over the previous week. The losses were primarily triggered by global factors, such as surging crude prices, losses on US bourses and fresh concerns over domestic inflation.
US crude oil futures hit a record $126.25 (about Rs5,250) a barrel in post-settlement trading, before pulling back to $126.17. On the New York Mercantile Exchange, June crude settled at $125.96, up $2.27.
The prices almost panicked equity investors as fears of its devastating impact on global economies prompting them to book profits from the stock rally, which started from mid-March lows.
To add to it, huge losses at the world’s largest insurer, American International Group Inc., or AIG, raised doubts over the view that the credit crisis was ending. AIG wrote down assets linked to subprime mortgages and said it would need to raise $12.5 billion to boost its balance sheet. Earlier during the week, US’ largest trader of home loans, Fannie Mae, or Federal National Mortgage Association, posted big losses, which reinforced the doubts over the end of the credit crisis.
The American International Group tower in Hong Kong. The company, the world’s largest insurer, suffered huge losses in the last quarter and said it would need to raise $12.5 billion (Photo by: Scott Eells/ Bloomberg
However, crude oil is now the biggest factor, creating ripples in the economic world as the prices have risen almost $16 or 14.5% this month. Although the Indian consumer is not facing the heat due to administered prices of petroleum products at present, talks have begun over revising domestic oil prices since crude costs have soared. If that happens, it would further complicate India’s economic situation, which is struggling with high inflation.
The government has so far taken soft fiscal measures to check inflation, but the recent figures on inflation at 7.61% raised concerns, as it shows that these steps were not successful, though the rise in inflation is statistically marginal.
With the rising inflation, some hike in interest rates could be a possibility as that is the next logical step after a hike in the cash reserve ratio, or CRR, the percentage of funds commercial banks have to keep with the Reserve Bank of India. In case interest rates are hiked, stock markets may be negatively impacted, pushing them back to bearish territory.
Going forward, Indian markets will closely watch industrial output numbers for March that will be released by noon on Monday. Going by the forecast, the expansion is pegged around 6.2% year-on-year, which shows a slowdown in growth from the previous month, that could be well attributed to the tight monetary policy affecting demand.
If the number springs any surprise, there could be a relief rally on stock exchanges after five straight days of uninterrupted fall. Since the earnings season is almost over, with major corporate firms declaring results, the market clearly lacks triggers at this time, and global factors will continue to dominate sentiments.
The US economic agenda for this week is quite busy with a lot of key data scheduled to be released. To begin with, its commerce department will report April retail sales on Tuesday, which will highlight the impact of crude prices on consumer spending. Top retailer Wal-Mart Stores Inc. will report earnings on Tuesday. Since so far retailer earnings have been good, the market would hope Wall-Mart to do the same.
However, any negative surprise could trigger selling. Following Wall-Mart, department store Macy’s Inc. reports its quarterly results on Wednesday, ahead of rivals JC Penney Co. Inc. and Nordstrom Inc. on Thursday. All these numbers would be watched carefully for cues on consumer spending.
The US consumer price index (CPI), a key indicator of inflation, is set for release on Wednesday. The data will show whether higher food and fuel prices are trickling through the economy and sending the cost of other goods higher. The CPI data may also give clues over likely Federal Reserve action in its forthcoming meeting.
A rise of 0.3% is expected for CPI and it is already factored in, but any rise above this would be considered as negative. Weekly jobs data on Thursday will be a regular feature, and on Friday, the reports on April housing starts, which is forecast to dip to 940,000 units from March’s 947,000 units, will be released. The preliminary reading for May on the consumer sentiment index may also have a significant bearing on market performance.
Back home, markets are clearly looking for somepositive triggers as they are struggling only with negatives at this time. Technically,the market has a fair chance of bouncing back soon, though economic information such as the industrial output data for March might work as a catalyst.
The Sensex would now have a resistance at 17,146 points, which would decide its immediate trend. If the Sensex closes above this level with good volumes, then the gloomy sentiments may change in the short term, indicating upward momentum.
The next major resistance for the rising Sensex would come up at 17,408 points. If that is breached, it would signal more bullish sentiments. There would also be a deciding resistance at 17,740 points.
On its way down, the benchmark would find its first support at 16,592 points, following which there will be another support at 16,461. If this is broken, then there would be some danger for the Sensex as it may test support at 16,218 points, which is a critical support level.
This week Tata Tea Ltd, Wipro Ltd and Tata Power Ltd look good on charts. Tata Tea, at its last close of Rs905.85, has a potential to touch Rs935 with a stop loss of Rs878. Wipro, at its last close of Rs500.95, has a target of Rs517 and a stop loss at Rs486. Tata Power, at its last close of Rs1,352, has a target of Rs1,388 and stop loss at Rs1,322.
From our last week’s recommendations, Suzlon Energy Ltd touched a high of Rs296.40 and missed its target of Rs305, but it is still technically sound. Canara Bank Ltd touched a high of Rs251, which was slightly below its target of Rs256. However, Adlab Films Ltd touched a high of Rs789, comfortably beating its target of Rs781.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments,questions and reactions to thiscolumn are welcome atticker@livemint.com
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First Published: Mon, May 12 2008. 12 11 AM IST
More Topics: Equity | Investment | BSE | IIP | AIG |