Crude oil prices have slipped from the record high of last month and some positive signals are emanating from the US economy — just about enough to say that perhaps the mood in the global equity markets has started turning a tad positive.
Soaring high: Traders work at the crude oil options pit at the New York Mercantile Exchange.
The latest economic data from the US suggests that the world’s largest economy grew faster than initially measured in the first quarter as demand for foreign goods fell and commercial building activity picked up. And the core personal consumption expenditures price index, the Federal Reserve’s preferred measure of inflation, moderated in April from the previous month. These two bits of news are positive for the US economy which, along with other upbeat news on employment and consumer spending, seems to suggest that talks of a recession in the US economy may have been hastily overdone and things may be starting to look up just a bit. And that buoyancy may be strengthened if oil prices continue to soften in coming weeks.
These are indeed positive signals for the US and the world. Moreover, a sell-off in the US benchmark 10-year treasury notes also sufficiently indicates that money could flow out of safe-haven government bonds and find its way into stock markets as most valuations have become cheap and thereby attractive. So on a macro level, the situation is becoming favourable for stock markets, and even though oil prices are a concern, the bet is that increased surveillance of the oil markets by the federal regulator, the Commodity Futures Trading Commission, will temper the speculation in crude oil prices, and may also take out some of the edge from high crude prices.
And even though inflation continues to remain the biggest worry globally as as a direct fallout of the steady climb in oil prices in the last two years, most markets will soon realise that high fuel cost is something they will have to live with at least for some time.
The Indian scenario, however, seems to be lagging the broader global scenario and chances are it will catch up with global trends once there is some clarity on pending issues in India such as an expected hike in state-administered domestic petroleum product prices, including that of petrol, diesel, cooking gas and kerosene. Since the speculation on the quantum of the hike and other possible measures taken by the government to compensate oil companies runs into several combinations, there is a fair amount of confusion in the market.
Once this issue gets sorted out, the markets will catch up with the global trend. Of course, there is also some concern in the market about the possibility of a further tightening of money supply by the Reserve Bank of India. There is also speculation over a possible hike in interest rates. However, I do not see interest rates going up immediately as the implications are likely to be deep and damming. But there could be another hike in cash reserve ratio (CRR), the amount of funds the commercial banks need to keep with the Reserve Bank, before any such speculated interest rate hike.
On the economic front, India’s economy expanded 8.8% in the March quarter from a year earlier, beating expectations for 8.2% growth, and the finance minister reiterated that growth in fiscal 2008-09 would be not less than 8.5%. However, annual inflation at 8.1% for the week ended 17 May, its highest in more than three-and-a-half years, dampened sentiment.
This week, the Indian economic calendar is busy with the trade deficit numbers scheduled for release on Monday (the previous figure was $6.89 billion). Later in the week, watch out for data related to forex reserves, bank loans growth and money supply. As always, a regular dose of inflation data will also be monitored very closely for clues on the central bank’s monetary policy.
The US economy also has a very busy economic agenda, which is very crucial and may offer further pointers on the health of the US economy. The Institute for Supply Management’s manufacturing index is due on Monday and the non-manufacturing index will be released on Wednesday.
Among other data, April’s construction spending is due on Monday, April’s factory orders on Tuesday, the May ADP employment report on Wednesday, and the weekly jobless claims on Thursday. Most importantly, the monthly job report will be released on Friday. This report is very crucial as it might throw light on the impact on the economy from higher oil prices and the credit crisis. As per expectations, a drop of 55,000 jobs and an unemployment rate of 5.1% is factored in. Lesser-than-expected job losses may trigger buying on hopes that the economy isn’t in as dire a shape, with fears of a recession receding. So overall, it would be an interesting week on global bourses.
Back home, the market is passing through a phase of uncertainty for all the reasons peculiar to the Indian economy. Purely technically, this week a bounce-back is expected. The indices should close the week with gains. Though there will be some amount of volatility in reaction to the inevitable petroleum price hike, it may not dampen the stock markets. On its way up, the Sensex, the benchmark index of the Bombay Stock Exchange, is likely to witness its first resistance at 16,631 points, which if broken would be the first positive signal for the Sensex. The index would then test its next resistance at 16,868 points, which is a moderate resistance. However, there will be a crucial resistance at 17,051 points, which would decide the immediate trend in the market.
Any close above this level would be considered a bullish signal and the next resistance would come up at 17,333 points. On its way down, the Sensex will find good support around 16,216 points, which is a strong support level and may decide the immediate trend. Any close below this level would mean more losses as the Sensex would then test its next support at 15,865 points, which would be a moderate support, followed by a strong support at 15,532 points.
This week, technically, stocks such as Tata Tea Ltd, HDFC Bank Ltd and Bharat Electronics Ltd look good on the charts. Tata Tea, at its last close of Rs862.50, has a target of Rs905 with stop-loss at Rs828. HDFC Bank at its last close of Rs1,368.70 has a target of Rs1,409 and a stop-loss of Rs1,321. Bharat Electronics at its last close of Rs1,152.40 has a target of Rs1,202 and a stop-loss of Rs1,119.
From our last week’s recommendations, ABB Ltd touched a high of Rs1,037 and easily met its target of Rs1,031. Housing Development Finance Corp. Ltd touched a high of Rs2,699 but missed its target of Rs2,720 and later triggered its stop-loss. JSW Steel Ltd was the star performer of last week, gaining over 12% during the week. Needless to say, it crossed its target by a comfortable margin.
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