One step forward and two steps back would be the apt way to describe markets these days.
The sentiment on the bourses is very negative with bad news amplified while any positive news—there is some of that—is getting overlooked. It is just the opposite of what it has been like in recent months when signs of trouble were being ignored.
Multiple worries: Investors watching a screen of falling stock prices at the Bombay Stock Exchange on 8 July, when the Sensex slipped by 475 points. The Sensex closed at 13,469.85 on Friday, down 456 points
This phenomenon is not just limited to India. There is no doubt that soaring crude prices and fresh concerns over the stability of Fannie Mae and Freddie Mac, the US government-sponsored home finance companies, have the capacity to drown markets in a sea of despair.
However, let’s not forget that the earnings season has also started and major results so far in the US, including that of Alcoa Inc. and General Electric Co. have been good. The results of Alcoa exceeded market expectations by a wide margin while GE’s results were in line with estimates.
Even Infosys Technologies Ltd’s numbers and revenue guidance were slightly good—though in dollar terms the outlook was muted.
This week, we have big numbers in the US from the likes of Citigroup Inc., Google Inc., Intel Corp. and Microsoft Corp. to name a few, which will have a bearing on market sentiments. Anything positive from these companies will improve market sentiment. It would be wise to follow the US markets for leads on Indian bourses as there is a lot of US action that, indirectly, will get reflected in Mumbai markets as well.
The major concern this week will still be be the financial health of the big two US mortgage firms. Fannie Mae and Freddie Mac, considered pillars of the US housing sector with assets of $843 billion (Rs36 trillion) and $802 billion, respectively, as of March, are in neck-deep trouble.
There are wide-spread rumours in the market on bailout plans for Fannie Mae and and Freddie Mac. US treasury secretary Henry Paulson offered no hint of any imminent government bailout, simply saying on Friday that his major aim was to back Fannie Mae and Freddie Mac “in their current form”. However, later, there were reports that the US government was considering taking over the two if their funding problems get worse. Markets will keenly watch any development on the two companies. And, a bailout plan may become the most crucial news for the markets this week.
The impact of worsening of credit crisis in the US is evident on other financial players as well. Citigroup cut its estimates and price targets on several US banks, including JPMorgan Chase and Co. and Bank of America Corp., on higher assumed losses on credit card, home equity, residential construction, and a sustained weak capital markets environment. Lehman Brothers Holdings Inc. lost around 28% of its market value in the last two trading sessions on discredited rumours of customers pulling back their exposure to the investment bank. And, US banking regulators took over mortgage lender IndyMac Bancorp Inc., making it the second largest bank failure in the US history and the fifth bank to close this year.
The credit crisis in the US, which is deepening week after week in new forms, is showing no signs of let up and not much is expected on this front this week, except the bailout plan of Fannie Mae and Freddie Mac.
However on economic front, the US economy is showing some stability. Last week’s drop in the number of people filing for unemployment benefits or jobless claims and an unexpected rise in US consumer confidence in June were some comforting news for the US economy. However, this week, the US Producer Price Index (PPI) for June on Tuesday, followed by June Consumer Price Index (CPI) on Wednesday, would be watched carefully for clues on inflation. Since inflation is one of the biggest dangers for the US economy, it will have a significant impact on US monetary policy and thus would be a critical event to watch. The PPI is likely to show a modest growth of 1.3% and the CPI is expected to rise 0.7%; any major deviation from these numbers could swing the market. Among other key events, industrial production and capacity utilization as well as housing starts will also be under the lens for cues on the US economy.
Apart from economic numbers, US Federal chief Ben Bernanke’s semi-annual testimony on monetary policy would be watched very carefully. He will testify on Tuesday before the senate banking committee, and on Wednesday, before the House financial services committee. His comments on general economy, monetary policy and Fannie Mae and Freddie Mac would be very critical to markets and investors would try to read between the lines on Bernanke’s comments.
Oil, which has made every economy dance to its tunes, will also rule the bourses this week. The latest surge of oil to $147 shook the global markets, including those in India, and rattled investor confidence. Everyone in the stock market seems to be getting ready for levels of $150-155 in coming weeks.
If oil continues to boil, then we may have an yet another hike in interest rates and other monetary tightening measures as inflation has not yet started showing any signs of let up, which may affect the industry and consumer demand.
In light of recent numbers showing a significant drop in industrial output and manufacturing output, any further hike in interest rates might be very negative for the stock markets in India.
To add to all this, the current political turmoil and uncertainties ahead of the confidence vote of the government in parliament may keep the sentiments at bay.
There is no certainty yet on the survival of the Congress-led government, which would also cast its shadow on the Indian bourses.
On the Indian economic front, there is not much on tap except bank loan growth, money supply data and the weekly inflation data. Inflation, which is now edging close to 12%, remains a key data point to watch.
Moreover, investment patterns of foreign investors would also be a key indicator for the Indian bourses.
Technically, the markets are poised for further fall and on the way south, they will test their first support at 13,332. This being a moderate support, it may break under selling pressure and the next—and an important level—is 13,039, if this level breaks, then the Sensex would test its recent low level of 12,819 and may go below this level to find its next support level at 12,316, which as of now would be a solid support for a falling market. One should first watch out for support at 13,039.
On its way up, the Sensex would test its first resistance at 13,793 points. The next resistance will come at 14,052, followed by a strong resistance at 14,532.
This week, since the markets are expected to fall in the initial part of the week, it would be better to wait and watch and let the market stabilize before taking a fresh call on investments.
However, technically, stocks such as Reliance Communications Ltd, Allahabad Bank and Sterlite Industries Ltd, look good on charts. Reliance Communications, at its last close of Rs437.90 a share, has a target of Rs454 and a stop loss of Rs412. Allahabad Bank, at its last close of Rs56.90 a share, has a target of Rs62 and a stop loss at Rs59.50, while Sterlite Industries, at its last close of Rs661.15 a share, has a target of Rs677 and a stop loss of Rs625. However, I would still advise readers to wait for the storm to pass before making fresh calls. From last week’s recommendations, Tata Power Ltd hit a high of Rs1,130 a share, but failed to hit its target of Rs1,146. Reliance Industries Ltd rose to Rs2,120 a share but missed its target of Rs2,147. Century Textiles and Industries Ltd, recommended at Rs501.80 a share, touched a high of Rs525 though it missed its target of Rs529 by a whisker.
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