Keep an eye on the US’ mixed economy signals

Keep an eye on the US’ mixed economy signals

Riding high on strong economic numbers, Indian stock markets posted the best weekly returns in Asia on renewed buying interest. The gains on the US and other markets were the catalyst behind the rally, but India’s strong economic credentials added momentum to this. Economic data such as gross domestic product for the April-June quarter and weekly inflation numbers released on Friday scored well above estimates, triggering fresh buying. Global markets received a further boost late Friday when US?President George W. Bush and Federal Reserve (Fed) chairman Ben Bernanke reassured investors that they would do what was needed to shelter the economy from the turmoil in the markets.

This suggests that the Fed may cut rates when it meets on 18 September. But there is a lot to come before that.

A lot has been said and written about the effects of the subprime loans issue on the banking and financial services sector. But it is the weak performance of the retail sector that underlines the contagion of the subprime mortgage crisis. Last Thursday, Sears Holdings, America’s No. 2 retailer after Wal-Mart, said its second-quarter profit tumbled 40% because of lower sales and weaker operating results from Kmart and its domestic Sears operations. Wal-Mart had earlier disappointed with its numbers.

Together, these speak of the larger impact of the subprime crisis. The obvious interpretation is that the worst is not over yet, and the euphoria over a cut in Fed rates could be short-lived considering a time period of a quarter.

As far as the US economy is concerned, the economic signals so far are quite mixed and inconclusive. This week, the August non-farm payroll data scheduled for release on Friday will throw further light on what may happen on 18 September. It is widely expected that there may be softening in workforce numbers, which would be a prerequisite to a cut in the Fed funds rate from its current 5.25%, where it has been since June 2006.

Now, if the Fed opts to cut interest rates, it would definitely trigger a rally across the globe. But, sooner than later, this move will also give rise to the question of whether it reflects a slowdown in the US economy. This might trigger yet another sell-off led by Japan, and consequent issues such as the unwinding of yen carry trade that will then dominate sentiments. I’d recommend that investors look at these issues and not go overboard and make decisions based on the Fed’s rate cut.

The week ahead

From this week’s perspective, everything looks good and global markets are all set to extend (last week’s) gains on Monday, tracking US bourses. The Indian markets, too, would resume trading with an upward gap.

Since the US markets are closed on Monday due to Labour Day, the markets may show some divergent trends and some profit selling towards the end of the day in the absence of fresh leads. However, technically speaking, the rally should continue on Tuesday as well.

Investors should be cautious on Wednesday as there could be some profit selling in the afternoon session. On its way up, the Sensex is likely to witness resistance at 15,560 points. If the Sensex closes above this level, then the all-time high level of 15,868.85 will become an achievable target. On its way down, the Sensex may find strong resistance at 14,098, following which the next support will come around 14,718.

Stocks to watch

Technically, this week stocks of Housing Development Finance Corp. Ltd (HDFC), HDFC Bank Ltd and ABB look good on charts. HDFC, at its last close of Rs1,970, has the potential to move up to Rs2,050 with a stop-loss of Rs1,932. HDFC Bank, at the current market price of Rs1,170 may witness a short sharp rally with a target of Rs1,212 and stop-loss of Rs1,128. But ABB, at its current price of Rs1,124.20, is a good technical bet with a target of Rs1,240 in a time frame of two to three weeks—its short-term target is Rs1,186 with a stop-loss of Rs1,092.

From our last week’s recommendations, all the stocks met their target very easily. Maruti Udyog Ltd, recommended at Rs790, hit a high of Rs873 during the week, surpassing its target of Rs827, which was achieved on 27 August itself. Reliance Energy Ltd, recommended at 735 with a target of Rs772, hit a high of Rs795. And Oil and Natural Gas Corp. Ltd, recommended at Rs805 hit a high of Rs866 against its target of Rs852.

Vipul Verma is a Delhi-based investment adviser. Your ­comments, questions and reactions to this column are welcome at