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Guessing game on interest rates to continue this week

Guessing game on interest rates to continue this week
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First Published: Sun, Dec 20 2009. 09 53 PM IST

Updated: Sun, Dec 20 2009. 09 53 PM IST
After Dubai’s debt crisis, West Asia is once again in the focus as new geopolitical concerns in the region have the potential to rock global stock markets. There were concerns last week following reports that Iranian troops had entered Iraqi territory and raised the Iranian flag at an oilfield, the ownership of which is disputed by Iran. Iraq demanded that Iran immediately withdraw its soldiers from the oilfield, but Iran denied any incursion. The immediate fallout of the incident was that the dollar index shot up on Friday, leading to a decline in equities across Europe and the US, and a spurt in oil prices. Although oil prices cooled off a bit and the dollar index came off its highs, concerns remained over the crisis, which Iraq and Iran have pledged to resolve diplomatically. If the tension escalates, investors would rush to the safety offered by the dollar, which would be negative for equity markets. A strong US dollar forces investors, who have bet on a decline in the greenback, to cover their short dollar positions by selling equities or other assets. This argument is only valid for the short term. However, such tensions could trigger a technical correction.
Economic indicators remained positive across the US and Europe, well supported by financial numbers of heavyweights such as Oracle Corp. and Research in Motion Ltd, maker of the BlackBerry phone. A reassurance from Federal Reserve chief Ben Bernanke that US interest rates will remain low was also a big positive for the US and world markets. The Chinese market was the big drag last week as it fell 4.1% following tough new proposals by banking regulators and tighter curbs on buying of government land.
Keeping low: Last week’s downtrend in the markets may continue for some time this week as well. Abhikit Bhatalekar/Mint
The US has a busy economic calendar this week. Investors will pay special attention to a final reading of third-quarter gross domestic product on Tuesday. A report on existing home sales is due on Tuesday and one on new home sales is due on Wednesday. Other key indicators due for release include data on consumer sentiment and personal spending before the US markets close early on Thursday on the eve of Christmas.
Back home, there are no major economic events due this week, although the guessing game about an interest rate hike will continue. A marginal hike of 25 basis points (a quarter of a percentage point) in key interest rates or an increase in the cash reserve ratio—the proportion of deposits that banks need to hold in reserve with the central bank —should have been discounted by the markets long ago. Third-quarter company results, which would start flowing in early next month, would throw light on the state of the Indian economy and the strength of its recovery.
Technically, the downtrend witnessed last week could extend to the initial part of this week as well, as key technical indicators are pointing south. Since benchmark indices have fallen below critical levels, there could be some pressure on the downside. The decline is not expected to be steep and there would be bargain hunting on dips.
In terms of the Bombay Stock Exchange’s Sensex, on its way up, the first resistance is at 16,902, which is a crucial level, and if broken, could trigger buying. It will be followed by resistance at 17,042 points, which could force some consolidation. The Sensex faces its next resistance level at 17,272 points, which would decide the trend in the short term. On its way down, the first, moderate support for the index will come at 16,678, followed by strong support at 16,517 and 16,390.
In terms of the S&P CNX Nifty, the first resistance is at 5,021 points, followed by 5,073 and 5,156. On the downside, the index will find support at 4,951 points and 4,920 points, and it will have very strong support at 4,878 points.
Among individual stocks, JSW Steel Ltd, Sesa Goa Ltd and Hindustan Zinc Ltd look good on the charts. JSW Steel, at its last close of Rs977.70, has a target of Rs1,008 and stop-loss of Rs949. Sesa Goa, at its last close of Rs366.1, has a target of Rs379 and stop-loss of Rs354. Hindustan Zinc, at its last close of Rs1,165.4, has target of Rs1,193 and stop-loss of Rs1,136.
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, Dec 20 2009. 09 53 PM IST