Global Worries To Overshadow Domestic Positives

Benchmark indices ended positive amid day long choppy trading session led by buying amongst financials and auto shares. The Sensex closed at 25576.21 up 102 points or 0.40% while National Stock Exchange’s index, the Nifty-50 was at 7,649.90 - up 23 points or 0.30%. Markets, yesterday, made higher opening as IT bellwether Infosys appointed former SAP executive Vishal Sikka as the CEO and MD of the company. Sikka will take over from August 1, 2014. However afterwards volatility was observed throughout the day as key benchmark indices alternately swung between positive and negative zone. Moreover, reports on monsoon rains were 48% below average levels in the week to June 11, data from the weather office showed on Thursday, reflecting the late onset of the annual rains over the southern Kerala coast. On the other hand, the broader markets also edged up as - BSE Mid cap index was up 0.52% and Small cap indices surged to 0.36%.  The market breath at the BSE was positive with 1746 advances and 1356 declines. 

While the markets remained highly choppy on account of above mentioned factors, one positive news arrived in the evening. Rather this is one piece of news market participants haven't heard in months — growth going up and inflation going down. This is a perfect combination of right growth prospects. We are of the opinion that positive data on retail inflation and factory output, released yesterday, show the economy is clearly on the mend. While Consumer price inflation (CPI) eased to 8.28 % in May from a three-month high of 8.59 % in April aided by lower food prices, the industrial production (IIP) data for April 2014 rose 3.4 % year on year, revealing a pick-up in manufacturing, electricity and capital goods sectors.

Specifically, capital goods rose 15.7 %, basic goods grew 6.8 %, manufacturing increased 2.6 % and electricity climbed a whopping 11.9 % since April 2013. However, consumer goods show a contraction of negative 5 % over previous year.

For the past two years CPI had been rather sticky at around 10 % making it difficult for Reserve Bank of India (RBI) to cut interest rates even though economic growth fell below 5 %. These numbers will bring fresh cheer to the market which has been rallying in hope of an economic turnaround.

After a disastrous performance of UPA Government, newly appointed Prime Minister Narendra Modi has promised to break the spell of weak growth and high inflation. However, in the past we have consistently stated that if fears of El Nino come true, India may be staring at drought followed by higher inflation followed by tough monetary policy decisions. But these figures are likely to make a positive impact on Indian equities.

U.S. stocks retreated, with the Standard & Poor’s 500 Index falling the most in three weeks, as industrial and consumer-discretionary shares plunged after escalating violence in Iraq sent oil to an eight-month high while economic data missed estimates. The S&P 500 fell 0.7 percent to 1930.11, giving the index its longest losing streak in two months. The Dow Jones Industrial Average slid 109.69 points, or 0.7 percent, to 16,734.19.

Taking a cue from US markets and Iraq unrest, even Asian markets are trading in red. While Nikkei is down 0.80%, Shanghai Composite is also down marginally. Hang Seng is also trading on a flattish note. SGX Nifty is trading with a loss of 17 points (Down 0.22%).

As for the opening of the Indian equities, we feel though inflation and inflation and IIP numbers are a big positive, global factors would overshadow it. Hence expect a negative opening for Indian equities.