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Dubai debt default issues unlikely to impact others

Dubai debt default issues unlikely to impact others
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First Published: Sun, Nov 29 2009. 10 24 PM IST

Updated: Sun, Nov 29 2009. 10 24 PM IST
Once bitten, twice shy. That’s the true state of global stock markets currently. The possibility of debt default by a Dubai state-owned conglomerate rattled the global bourses, as investors feared that the global economic crisis has not ended yet. This is not a stand-alone case of fear psychosis of investors, as on every bad data related to the US economy and bad news about European banks they have reacted with such scepticism.
However, since the intensity of all such events was different, so was the investors’ reaction. In the case of the Dubai debt default fears, the first reaction was a bit exaggerated as markets across the globe, which were mainly driven by the weak dollar and strong liquidity, were waiting for a technical correction. This event gave the market reason for the much-needed correction, and equities across Asia and Europe witnessed a knee-jerk reaction.
But following the events unfolded so far in Dubai, it is clear that a) this is not the reflection of a continuance of the global economic crisis and b) it is specific to Dubai, and some companies and banks that have exposure to these projects are the main sufferers and not entire economies. This led to a rebound on the bourses as Europe recovered smartly on Friday led by banks, which had fallen sharply on Thursday. The US caught up with the rest of the world on Friday, when it resumed trading after a holiday on Thursday, but it clearly showed no signs of panic. So assuming that the Dubai issue does not worsen further, it is becoming clear that the ripples from it will not have a spiralling impact on global economies and the issues related to macroeconomic perspective would be back in focus.
But there is a strong rider to the Dubai angle mentioned so far. These interpretations are based on the facts and figures available currently. If more cracks appear in the financial health of Dubai and the debt repayment delay leads to spiralling of financial problems for the economy, there would be a serious impact on global bourses as foreign investors who have been investing very heavily in risky assets would start to withdraw or at best slow or stop their investments. This would be the end of the bullish phase on the bourses in the medium term. So, this is the time for some caution with an eye on news coming from Dubai.
Economically, this week is very important as there is a lot of critical data due in India as well as in the US. In India, monthly vehicle sales numbers will be watched carefully, and if the growth story continues, then it would trigger fresh buying in auto stocks. These have been waiting for triggers for some time and positive sales figures could provide momentum. However, any fall would be seen with scepticism and as the sign of cooling off of demand. Similarly, data related to cement dispatches in November will also throw light on economic activity. These data are broadly expected to be good and should spell positive for the cement and associated sectors. On Monday, second quarter gross domestic product growth figures will be released.
A better performance than the expected 6.3% would be a positive trigger for Indian bourses. On 1 December, the ABN Amro Manufacturing PMI (Purchasing Managers Index) for November would be released. This number, an important indication of economic activity, is likely to be around 55.5—any positive surprises would be well received in the market.
The US has a very busy economic calendar this week. Friday’s employment report for November will be the main event, with job losses expected to decrease from October. It is expected to show the US economy shed 130,000 jobs in November, easing from the 190,000 that were lost in October. Investors will also get an early view of how retailers fared during Black Friday— often the busiest shopping day of the year. Jobs data and consumer spending are the two main pivots around which the recovery of the US economy depends, and if these numbers throw positive surprises, there could be an extended rally on US bourses. Also expected next week are separate reports from the Institute for Supply Management on the manufacturing and services sectors. Other important data on tap include pending home sales for October, car sales for November, weekly initial jobless claims and factory orders for October. This, along with leads from Dubai, will set the course for the rest of December for US and global bourses.
Technically, the Indian bourses are likely to recover in the initial part of the week. A strong recovery in late trades on Indian bourses was the first indication of bottoming out in the immediate term. Moreover, the recovery came on good volumes. So, the technical outlook has turned positive. Though the Sensex and Nifty closed a tad below the 50-day simple moving average, the strong momentum seen on Friday supersedes the simple moving average interpretation and may not impact the undertone. In terms of support and resistance, the Nifty on its way up has a resistance at 4,986 points, which is a minor resistance, and could open above this level on Monday. Following this level, the next resistance is likely to come at 5,066 points. This is likely to be a strong resistance. However, if the Nifty manages to close above this level with good volumes, then this resistance would weaken and give way to more gains. Moving up, the Nifty would then face stiff resistance at 5,138 points, which will force some consolidation or even profit booking. However, if this level is also crossed, the sentiment would turn firmly bullish. On its way down, the Nifty has its first support at 4,891 points. This is a minor one and may not offer enough support for a falling Nifty. However, there would be strong support at 4,802 points, which if broken would spell an extended bear run on the bourses.
For the Sensex, the first resistance is likely to come at 16,806 points, which is a minor resistance level. If this level goes, the next resistance would come at 17,304 points, which is a moderate resistance, followed by a strong resistance at 17,334 points, which is likely to trigger some profit selling. However, if this level goes, there would be a rally on the bourses. On its way down, the Sensex has support at 16,499, which is a moderate support level. However, there is a strong support at 16,196, which if broken would be a bearish signal for the market.
Among individual stocks, Praj Industries Ltd, Jindal SAW Ltd and LIC Housing Finance Ltd look good on the technical charts. Praj Industries, at its last close of Rs85.25, has a target of Rs92 and a stop-loss of Rs79. Jindal SAW, at its last close of Rs873.40, has a target of Rs904 and a stop-loss of 841, while LIC Housing Finance, at its last close of Rs856.55, has a target of Rs878 and a stop-loss of Rs832.
From my previous week’s recommendations, Axis Bank Ltd, Mahindra and Mahindra Ltd and Housing Development Finance Corp. Ltd all met their targets.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Nov 29 2009. 10 24 PM IST