European economic data that was way above expectations boosted investor sentiment on global stock markets last week. Purchasing managers’ indexes showed private sector business activity accelerating in the continent in July, surprising economists who had expected a slowdown. Further data indicated third-quarter euro zone growth of around 0.6-0.7%, double the 0.3% forecast. German business sentiment rose in July to its highest level in three years. Britain’s economy grew at twice the expected pace in the second quarter, propelled by a sharp pick-up in services and the biggest rise in construction in almost 50 years. The results of European bank stress tests, which came in late Friday, were again better than expected, showing only seven European banks failed a health check and were ordered to raise their capital by €3.5 billion (Rs21,175 crore). It had been widely expected that European banks would require anywhere between €20 billion and €90 billion in capital. Although the robust data cheered investors, it also brought fears of monetary tightening and a likely rollback of economic stimulus.
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News from the US was mixed. Economic indicators remained weak while corporate earnings were buoyant. Federal Reserve chief Ben Bernanke’s assessment that US economic prospects were “unusually uncertain” provided a dampener. US markets, however, are on the verge of a breakout on the upside on strong earnings growth. Investors would also focus this week on the Federal Reserve’s Beige book of economic conditions, US housing data, durable goods orders, jobless claims, the final reading of July consumer sentiment and the first reading of second quarter gross domestic product.
Back home, the derivative contracts for July are set to expire on Thursday, which may add to market volatility. The Reserve Bank of India’s review of monetary policy on Tuesday, when it is expected to raise policy rates, would be the most critical event of the week. The markets have factored in an increase of 25 basis points (one basis point is one-hundredth of a percentage point) and are likely to ignore the event if the rate rise is in line with expectations. Investors will also take their cues from corporate earnings.
Technically, the markets are likely to move up further. In terms of the Bombay Stock Exchange (BSE) Sensex, the benchmark faces moderate resistance on its way up at 18,213 points. If it closes above this level on good trading volumes, this would be the first sign of strength on the markets. The next resistance level for the Sensex would come at 18,372, which if crossed may accelerate northward momentum. The next and important resistance level for the Sensex is at 18,654, which is likely to see consolidation and some profit selling. On its way down, the Sensex would see its first and key support at 18,004. This is a critical support and if broken could signal some declines. The next important support would come at 17,851.
In terms of the S&P CNX Nifty, the first resistance is at 5,468, which is a moderate level and if broken would push the index to 5.498. If this level is crossed, the Nifty could aim as high as 5,576 points, which will be a very strong resistance level and likely to lead to consolidation and profit selling.
On the downside, the first support is at 5,404 points, which is a moderate level, followed by critical support at 5,347 points.
Among individual stocks, Yes Bank Ltd, Dr Reddy’s Laboratories Ltd and Grasim Industries Ltd look good on the charts. Yes Bank, at its last close of Rs301.85, has a target of Rs313 and a stop-loss of Rs290. Dr Reddy’s, at its last close of Rs1,365, has a target of Rs1,392 and a stop-loss of Rs1,329, while Grasim, at its last close of Rs1,827, has a target of Rs1,864 and a stop-loss of Rs1,788.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at email@example.com