Indian equities bounced back and ended with handsome gains on positive global cues. But there was nothing to cheer as far as the domestic economy is concerned, and a rise in the inflation rate to a three-and-a-half-year high of 7.83% for the week ended May 3 was a rather discomforting factor for the markets. However, since the high rate of inflation is already factored in, there was no panic on the bourses. With inflation inching towards 8%, there are increasing concerns over a hike in interest rates.
Market trigger: Sentiments are expected to be positive with news that billionaire investor Carl Icahn has launched a campaign to replace Yahoo’s board of directors, renewing hopes of a Yahoo-Microsoft deal.
As of now, this is the only fear in the market related to inflation, because if the interest rates are hiked, it would affect the markets negatively, especially given that industrial output is already sinking. Moreover, given that there are no positive triggers and soaring crude prices are increasingly becoming a cause of concern globally, some caution could creep into Indian markets also.
June crude rose $2.17 to settle at $126.29 per barrel after hitting an intra-day record high of $127.82 on Friday. Crude oil, which is the key factor contributing to high rates of inflation globally, got a further boost after Goldman Sachs, the most active investment bank in energy markets, forecast that crude would reach $141 per barrel due to thin supply. If the rally in crude prices continues unabated, then there could be trouble on the bourses. Also, the weakening of the dollar is another concern for global economies.
Interestingly, however, US bourses, amid all the worrying macroeconomic factors, led the global rally, with the Dow Jones Industrial Average gaining 1.9%, the Standard and Poor’s 500 Index 2.7% and the Nasdaq Composite Index 3.4%. From an economic point of view, the week had some pleasant surprises and some disappointments, but overall, equities gained on hopes of the US economy coming of the woods soon. Among the positive surprises last week, lower-than- expected growth in the consumer price index boosted sentiments, easing concerns about inflation. Another surprise was the increase in US housing starts by 8.2% in April and an increase in building permit applications. Record crude prices and a drop in US consumer confidence data were the disappointing factors.
In the Indian economy, there are no critical economic events scheduled for this week. The country’s fiscal deficit for March is out today, but this is not likely to have any impact on the markets as the fiscal deficit is already in line with expectations. But Friday would be a busy day for the Indian economy as far as data is concerned. Besides the regular dose of weekly inflation, other key data include India’s foreign exchange reserves, M3 money supply and bank loan growth. On 24 May, the hike in cash reserve ratio to 8.25% will come into effect.
The US economy too would witness yet another hectic week as far as economic data is concerned, with the focus now shifting to the producer price index (PPI). Given the danger of inflation, the US PPI will be keenly watched on Tuesday. Overall, PPI for April is projected to increase 0.4% as per estimates. It is worth mentioning here that in March, PPI jumped 1.1% against expectations.
However, any such surge this week could prove negative for the markets, as there is already some discomfort in the economy over the likely action of the Federal Reserve related to interest rates in the US due to rising inflationary pressures.
Following the PPI data, all eyes would be on the minutes of the Fed’s last policy-setting meeting, due to be released on Wednesday.
This would be a crucial document, which would, after taking view of the PPI data, throw significant light on what might happen in the next meeting of the Fed, scheduled in June.
Investors would read between the lines on the Fed’s view on inflation, which is a tough call for the it in the given economic situation in the US, which, on the one hand, has a dwindling economy seeking more sops to sustain the recovery and, on the other, rising inflationary pressures due to surging oil prices.
Already, Fed fund futures are indicating almost certain chances of the Fed keeping the rates stable at the current level. But that would not be a negative trigger as the US economy has started showing some resilience; any cut in interest rates would be a positive trigger.
Later on Friday, existing home sales for April would be announced. These are expected to slip to an annual rate of 4.85 million units from 4.93 million the previous month. If the figures are lower than that, it would dampen market sentiments.
Other than the economic data, renewed hopes of a Yahoo-Microsoft deal could take centre stage. Billionaire investor Carl Icahn launched a campaign to replace Yahoo’s board of directors, who would then reopen talks with Microsoft, which has raised hopes of some headway in the mega deal. Besides, more merger and acquisition deals in the information technology space could keep the sentiments positive.
Back home, the trend on the bourses may remain positive despite concerns over rising inflation and soaring global crude prices, as there is renewed buying interest. Technically, the picture looks even better with good chances of gains in key indices and stock prices.
The Bombay Stock Exchange Sensex on its way up would test its first resistance at 17,747 points, which if broken could mean more gains on as the next major resistance would be then placed at 18,320 points.
Though there would be some moderate resistance in between also, that would not impact the trend. So, essentially, the level of 18,320 would decide where the markets would head next. If the Sensex closes above this level, it would be an extremely bullish signal, which could also mean a sustained rally on bourses. Purely technically, this is looking quite possible now. On its way down, the Sensex may test its first critical support at 17,134 points, which if broken could dampen sentiments in the short run, as the next major support would then come at 16,559 points. However, there would be moderate support at 17,089 and 16,790 points.
This week on our technical radar are stocks like Adlabs Films Ltd, Kotak Mahindra Bank Ltd and Siemens India Ltd. Adlabs Films at its last close of Rs676 has a target of Rs702 and a stop-loss of Rs640. Kotak Mahindra Bank at its last close of Rs771.05 has a target of Rs800 with a stop-loss of Rs744. And Siemens India at its last close of Rs582.40 has a target of Rs602 and a stop-loss of Rs565.
From our last week’s recommendations, Tata Tea Ltd touched a high of Rs955, which was well above its target of Rs935. Tata Power Ltd, recommended at Rs1,352, touched a high of Rs1,457, well above its target of Rs1,388. Wipro Ltd almost touched its target of Rs517, by touching a high of Rs515.85.
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