Markets likely to react to the Bear Stearns story

Markets likely to react to the Bear Stearns story
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First Published: Sun, Mar 16 2008. 11 28 PM IST

Updated: Sun, Mar 16 2008. 11 28 PM IST
The roller-coaster ride continued on both global and domestic bourses last week on alternate bouts of buying and selling by funds and traders. Indian bourses closed sharply higher on Friday, led by funds that bought stocks in late trades. However, global sentiments took a U-turn after Indian markets closed and US markets witnessed a sharp fall on Friday, which will have an impact on Asian markets when they open Monday.
On Friday, US markets suffered a setback when Bear Stearns Cos., the fifth largest US investment bank, said its cash position had unravelled in the previous 24 hours. This bit of news rattled investors, who hammered finance stocks fearing a more severe fall due to worsening of the credit crisis in coming weeks. Needless to mention, the Bear Stearns stock slumped 45.9% on the same day. Sentiments on US bourses are badly affected as the survival of the investment bank is at stake, and analysts expect more news on Bear Stearns this week. There is a lot of speculation about the bank, which will report earnings this week. More significantly, since the date of release of its earnings has been moved up to Monday from Thursday, market players fear that the firm could make more disclosures. The Bear Stearns saga is also likely to have many twists and turns, as there are possibilities that it might be taken over, possibly by JPMorgan Chase and Co. All eyes will be on the earnings of other key investment banks, Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc., which report earnings on Tuesday, while Morgan Stanley will release its numbers on Wednesday.
Most importantly, however, this is a crucial week for not just the US markets but for global markets, too, as the meeting of the US Federal Reserve is scheduled on 18 March. US interest rate futures suggest that there is more than 50% chance that the Fed will cut its benchmark fed funds rate target by 100 basis points, or one percentage point. How much the Fed will oblige is to be seen, but there are apprehensions whether whatever it does will be sufficient to revive the sagging US economy, which appears to be in recession already.
The Fed’s actions so far have yielded moderate returns only because of adverse economic conditions in the US and a progressive worsening of the credit crisis. On 11 March, the Fed, along with other central banks, announced it would pump in $200 billion (about Rs8.1 trillion) in fresh funds into the system. The impact of this big news lasted for only a day, marked by the steepest single-day gain in the US markets in more than five years. But before the euphoria could build, worries about the US economy resurfaced and the markets were headed south by the end of the week. As far as Fed action is concerned, the chances of a 100 basis points cut have risen after February’s Consumer Price Index, a key gauge for inflation, remained unchanged, against expectations of a moderate rise.
However, the inflation check will be put to the test again this week, when the US Producer Price Index is released on Tuesday. If this data also justifies softening of inflationary pressures, it will be a big positive for the US economy. Besides the Fed action, the Street will watch key data such as industrial production and capacity utilization due on Monday, and February housing starts on Tuesday.
This week, the dollar will also be in focus as last week it plunged to a record low against the euro and fell below 99 yen for the first time in at least 12 years. This is yet another explosive situation as it may invoke measures to tackle the situation by the European Central Bank and Japan. Moreover, rising crude prices is another concern which the world is struggling to deal with.
Back home, the markets have started consolidating, but that positive momentum will be put to test once again on Monday, when the markets will catch up with the Bear Stearns story. Though the markets are likely to react to this development and fall, the chances of a very big fall are limited, as investors would like to wait and watch for the outcome of the Fed meeting for its decision on interest rates.
If the Fed decides to cut rates by 100 basis points, then it may change sentiments on the bourses, albeit temporarily. Since the pressure is also building in the domestic economy for the government and the central bank to do something to revive growth, expectations could start building following the Fed meeting for softening of some monetary measures, not necessarily a cut in interest rates. However, inflation will remain a key factor to watch for any kind of insight into monetary measures.
As far as markets are concerned, technically, the rising Sensex is likely to face resistance at 15,965 points, following which the next resistance will come around 16,162 points, which is a moderate resistance level. However, there will be a strong resistance at 16,789 points, which could decide the trend on the bourses. On its way down, the Sensex could test its first support at 15,480 points, following which the next support is expected around 15,219. However, if the Sensex closes below this level, then there could be further trouble as the benchmark index has its next support at 14,696 points.
This week, stocks such as Sterlite Industries Ltd, Steel Authority of India Ltd (SAIL) and GMR Infrastructure Ltd look good on the charts. Sterlite at its last close of Rs776.20 has a target of Rs804 and a stop-loss of Rs747. SAIL at the current market price of Rs202 has a target of Rs214 with a stop-loss at Rs188. GMR Infrastructure at its last close of Rs152.45 has a target of Rs166 and a stop-loss of Rs142.
From our last week’s recommendations, State Bank of India touched a high of Rs1,960, which was well above its target of Rs1,874. Reliance Industries Ltd also met its target of Rs2,320 comfortably, touching a high of Rs2,428 during the week. However, Shree Renuka Sugars Ltd was the cracker of sorts, as the stock gained around 35% in a single day. Needless to say, the stock hit its target of Rs922 very comfortably.
Vipul Verma is a Delhi- based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Mar 16 2008. 11 28 PM IST