Much along expected lines, Indian equities and key indices rallied to their best weekly gains in the last five months.
The rally on the bourses was well supported by fund buying, but retail investors remained cautious due to mixed global cues.
Close watch: File photos of US Federal Reserve chairman Ben Bernanke and treasury secretary Henry Paulson. The markets will keep a close eye on Bernanke and Paulson’s testimony before the Senate on 3 April. This could give necessary cues on the state of the US economy and the outlook for interest rates.
Early gains on US exchanges triggered buying across the global bourses and all major emerging markets posted gains. However, US bourses, which triggered the rally, ended the week with losses with the Dow Jones Industrial Average down 1.2% and the Standard and Poor’s 500 index down 1.1%. The Nasdaq ended up 0.1%.
Though on the global front there was not much to talk about fundamental factors, Indian inflation numbers were quite disappointing and raised concern over the health of the Indian economy in the wake of slowing industrial growth.
Inflation hit a 13-and-a-half-month high of 6.68%, which clearly means some more monetary tightening could be in the offing to fight surging inflation.
The finance minister hinted at this by saying that India could give up a bit of growth to bring down inflation. This is bad news for the Indian economy. However, investors need not lose heart as this could well be a temporary phase, which can be tackled with not much difficulty.
On the positive side, the surge in inflation is due to high demand and sagging supply, a plus from the macroeconomic perspective. The question of whether inflation will dent sentiments on bourses going forward is a bit tricky. I think the markets would like to see a couple of weeks’ data to ascertain inflation’s impact on bourses in a broader time frame. The chances of the market reacting too much to domestic inflation numbers are not much.
The focus will soon shift to corporate results, which will start pouring in from the second week of April. All eyes will be on the fourth quarter results and revenue guidance for subsequent quarters as investors would like to reassure themselves that the economic slowdown has not dented corporate performance.
Tax collection numbers indicate, to an extent, what lies ahead, but because the sentiments on the exchanges are negative, investors are likely to seek positive assurance from these numbers.
Inflation figures, which will be released at the end of the week, will be watched carefully for their impact on the economy.
Globally, the economic atmosphere is again turning pessimistic, though there is nothing alarming as such. Friday’s fall on the US bourses, which was triggered by department store operator JC Penny Co. Inc.’s dismal outlook for year 2008, was further accelerated by the fresh opinion of analysts that the worst may not be over yet for the banking sector, with a leading brokerage predicting first quarter loss for Citigroup Inc. This is reinforced by reports that shareholders of Swiss bank UBS AG are gearing up for a possible vote on another capital injection.
However, recent actions taken by the US Federal Reserve will also bear fruit in the coming days and could counter growing pessimism about the economy in that country. This week is going to be very important in the US, as there is a lot of data to be looked at carefully.
To begin with, the March Chicago PMI (purchasing managers’ index) is due on Monday, which will be followed by the ISM (Institute for Supply Management) report on US manufacturing conditions on Tuesday.
The ISM report on the service sector is scheduled for Thursday. Data on factory orders for February and revised durable goods orders for February are due on Wednesday.
However, markets will eagerly await the jobs report on Friday; all indications are that the report will show that US employers cut payrolls for a third straight month during March.
Apart from the regular dose of data, the markets will also keep a close eye on Federal Reserve chairman Ben Bernanke and treasury secretary Henry Paulson’s testimony before the Senate on 3 April. This could give necessary cues on the state of the US economy and the outlook for interest rates.
Moreover, there could be some earnings revision and announcements before the beginning of the earnings season, which may also cast their shadow on bourses. Since these revisions are likely to be downward, they may prove to be a dampner for US stocks and this could have a spill over effect on global equity.
It appears that the US bourses will struggle to keep their northbound momentum alive. However, India is likely to show some resilience and may perform better as compared to other key markets. Broadly speaking, the trend and the momentum here are positive, but it would be difficult to maintain this momentum if the global bourses witness yet another round of selling.
Still, even if the markets fall, the chances of a big sell-off are very limited as the earnings season is about to begin and markets are hoping for positive surprises from these numbers.
In terms of resistances and supports, the rising Sensex would test its first resistance at 16,542 points, which is a moderate resistance and if broken could lead the Sensex to 17,255 points, which would be a key resistance level.
If this level is also breached, then the Sensex would be firmly in bull territory, which could take it to between 17,572 and 17,938 points.
On its way down, the Sensex would face its first meaningful support at 16,142 points, following which the next support would come at 15,861 points. If this support is broken, then the sentiments would turn negative and the index will struggle to maintain the 15,661 point level.
This is a key support level and if broken could take the Sensex down to the level of between 15,339 and 14,928 points.
Technically this week, Bharti Airtel Ltd, Century Textiles and Industries Ltd and Tata Tea Ltd look good. Bharti Airtel at its last close of Rs828.05 has a target of Rs859 with a stop-loss of Rs797. Century Textiles, at its last close of Rs743.65 has a target of Rs768 with a stop-loss of Rs719. Tata Tea at the current market price of Rs834 has a target of Rs868 and a stop-loss of Rs806.
From our last week’s recommendations, Larsen and Toubro Ltd hit a high of Rs3,180, which was well above its target of Rs2,920. Punjab National Bank Ltd hit a high of Rs534, which was also well above its target of Rs486. HDFC Bank Ltd touched a high of Rs1,467 against the target of Rs1,312, gaining 15.33% over its previous week’s close.
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