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Dollar index holds the key

Dollar index holds the key
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First Published: Sun, Aug 15 2010. 08 43 PM IST
Updated: Sun, Aug 15 2010. 08 43 PM IST
Defying weakness in global equity markets, Indian indices ended last week higher on relentless purchases by foreign funds that have been big buyers of Indian stocks this year. Better-than-expected corporate earnings helped the Nifty and the Sensex regain the key 5,400 and 18,000 point levels, respectively. Globally, the sentiment was mixed; despite talk of a slowdown in global economic growth, the European Union produced some promising numbers. As per data released on Friday, European economic growth accelerated sharply in the second quarter of 2010 as Germany’s best performance since the reunification more than made up for the struggles of Spain, Ireland and recession-ravaged Greece. A forecast-beating surge in German gross domestic product (GDP) growth combined with a solid if less impressive rise in France to push the aggregate GDP growth rate of the 16-country euro zone to 1.0% from the previous quarter and past that of the US. To add to it, French budget minister raised the outlook for the French economy and hoped year-end growth could top the upper band of the government’s expectations of 1.4%.
The US had some more disappointments with economic numbers last week, including the consumer price index, jobs and retail sales. China, too, announced lower-than-expected, though still impressive, industrial output data for July and a fall in imports. India’s Index of Industrial Production data for July failed to impress; it was short of expectations and reconfirmed worries about some slowing in the pace of Indian economic growth.
Unless global economic powers consistently produce steadily improving numbers, the world economic recovery can never be on a firm footing. However, for stock markets, what’s more worrisome is a rebound of the dollar, which strengthened sharply against major currencies. The dollar index, which closed at 82.92, could restrain foreign fund investment, which may trigger a sell-off on Indian markets. At this point of time the dollar index does not pose a major threat, but its rise beyond 85 could unsettle the markets.
This week in the US, the results of retailers including Wal-Mart Stores Inc. would be crucial. Though the broader outlook is negative, any positive surprises could actually swing the US markets into a short rally. Apart from retailers’ earnings, key economic data include numbers related to industrial production, housing starts, jobless claims and the government’s producer price index.
In India, no major economic indicators are due this week and the markets would continue to take their cues from the US and other major global bourses. The dollar index would hold the key to foreign institutional investors’ pace of investing and a rise in the index would increase the chances of some selling by them.
Technically, the markets are in a positive territory and are likely to start higher on Monday. On its way up, the Nifty would test its first resistance at between 5,487 and 5,499 points. If it breaks past this band on generous volumes, there could be a short rally, which would take the Nifty to 5,543, another moderate resistance level. This level would attract some profit selling, but it may not be the termination point of the rally. If the Nifty crosses this level, the next resistance would come at 5,591, which is likely to be strong.
On the downside, the first support for the Nifty is at 5,412 points, which is a minor level. If the Nifty falls below this level, it will have strong support at 5,356. Any fall below this level would be very bearish.
Among individual stocks this week, Reliance Industries Ltd (RIL), JSW Steel Ltd and Federal Bank Ltd look good on the charts. RIL, at its last close of Rs979, has a target of Rs1,008 and a stop-loss of Rs951. JSW Steel, at its last close of Rs1,113.85, has a target of Rs1,152 and a stop-loss of Rs1,073. Federal Bank, at its last close of Rs330.20, has a target of Rs341 and a stop-loss of Rs315.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column
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First Published: Sun, Aug 15 2010. 08 43 PM IST