Key stock indices fell on broad-based selling after briefly consolidating in the initial part of last week.
The decline was triggered by global factors, including weaker-than-expected Chinese imports data, speculation of a further hike in Chinese interest rates after inflation surged to a 25-month high, a surge in the dollar index and new signs of trouble in the European debt crisis. It all started after China raised bank reserve requirements, boosted yields on new government bills and passed rules to curb inflows of money. Continuing uncertainty over Ireland’s growing debt woes, which could slow a European economic recovery, also weighed heavily on global market sentiment. A fall in US treasury bonds lifted the dollar after the Federal Reserve’s first purchase in its second round of monetary easing failed to ignite further demand for bonds. The rising dollar phenomenon, however, seems temporary because the Fed’s plan to inject $600 billion (Rs26.7 trillion) in new stimulus spending is expected to eventually weaken the greenback.
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Although global equity markets witnessed a sharp fall, commodity markets saw a virtual rout. Silver slumped 6%, sugar dived 12% followed by copper, oil and grains all dropping 3%. Gold had its largest one-day drop since 1 July, just days after reaching a record high $1,424 an ounce. It fell on Friday to $1,368.
A big reason for the massive selloff in commodities was the unwinding of leveraged commodity positions late in the week, fuelled by a series of big increases in exchange margins that raised the cost of holding an open long trade.
Raw sugar prices slumped from a 30-year high after the ICE exchange hiked sugar margin requirements by 65% to their highest since 1997. The sugar market lost a fifth of its value in a 16%, two-day decline that was the biggest since 1991. Back home, the bigger-than-expected slump in industrial output growth in September was an unexpected blow. But while it raised concerns over the strength of industrial activity, it also appeared to signal an end to the rate hike cycle after six increases in key policy rates by the Reserve Bank of India.
This week, India and other Asian markets seem set to resume trading at lower levels on jitters over a hike in Chinese interest rates. The concerns may subside eventually as the markets come to terms with the inevitable, which may bring on a bout of consolidation. However, consolidation would not mean an end to negative sentiment.
The global economic calendar is heavy with data ranging from manufacturing to leading indicators to retail sales, and, perhaps most importantly—inflation, which will once again be watched closely. The US producer price index and consumer price index would be the most critical data. October retail sales due on Monday and a separate report on September inventories would be two other crucial economic indicators besides the weekly jobless claims data. A meeting on Thursday between US President Barack Obama and congressional leaders to discuss policy, including tax cuts, would be closely monitored.
Technically, the markets are still looking weak, signalling more losses in the offing. Interestingly, Indian indices could make a comeback on Monday in the afternoon session after a weak start, amid volatility and sharp intraday gains. If it happens, Tuesday may bring on further gains. But this should not be seen as resumption of an uptrend as downward pressure look set to persist. On its way down, the Nifty would find its first support at 5,983 points, which is likely to be a good support level. The Nifty should rebound from this level. If it falls below this, the next support level would come at 5,933 points and very strong support at 5,856 points.
On its way up, the Nifty should come across its first resistance at 6,120 points followed by 6,183, which is likely to be a strong resistance level. If this level goes, the next resistance would come at 6,248 points which, if crossed, would mean an end to negative sentiment.
Among individual stocks this week,Housing Development Finance Corp. Ltd, or HDFC, Cairn India Ltd andGAIL (India) Ltd look good on the charts. HDFC, at its last week’s close of Rs716.05, has a target of Rs729 and a stop-loss of Rs699. Cairn India, at its last closing level of Rs331.60, has a target of Rs343 and a stop-loss of Rs318 while GAIL, at its last week’s close of Rs485.60, has a target of Rs497 and a stop-loss of Rs466.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org