A Week Of Uncertainty

This week witnessed a series of mixed news, worldwide, thereby resulting in an overall flat reaction in Indian markets till Thursday once the Foreign Ministry of Mauritius said that India had assured the country that its economic interest would not be harmed. The Sensex, on Thursday, reached its highest closing in three months, ending at 17,538.67. This dried out on Friday and the markets ended lower by 17.55 points and closed at 17,521.12 because of global economic worries after China, the euro zone and Britain took measures to boost their economy.

* Closing values of Thursday

Globally, there seemed to be disappointment over data from the U.S. and China. The U.S data showed clear signs of lack of strength with the services industry expanding at a slower pace in the month of June 2012. At the same time, the private U.S. employment data offered some hope with jobless claims falling by the most in two months. The ADP National Employment Records showed an increase in employment to 1,76,000 new workers being added in June 2012. The government data is expected to be out later today. This will throw more light on the economic state of the U.S.

On Thursday, the ECB slashed key rates in order to boost the economy. It lowered its benchmark rate by 25 basis points to an all-time low of 0.75 per cent. The ECB also reduced deposit rates, a floor for the money market, to zero from 0.25 per cent. Even after this, the markets did not seem satisfied and the euro dropped, ending at a level barely above its lowest since June 1 of USD 1.23638. This was mainly due to the comments by Mario Draghi, the president of the European Central Bank wherein he talked about the indecisiveness on LTRO (Long Term Refinancing Option), among other things. He also confirmed the fact that credit flows continue to remain weak and that the LTRO options are complex and would take time to show effects.

Following this, even the bond yields shot up with the 10 year rate for Italy at 6.06 per cent and the Spanish 10 year rate at 6.74 per cent. The European indices saw a decline yesterday and today. Shortly before that, the Bank of England announced that it would maintain its main interest rate at the record low of 0.50 per cent. It also said it would increase its QE stimulus policy by GBP 50 billion to boost the double dip recession-hit Britain economy.

Oil had started to gain strength because of the ECB meet over the weekend and touched a week’s high of USD 100.32 after it had fallen to an 18-month low of below USD 90 per barrel. It has started to subtle down after the European situation saw no positivity and is now trading at USD 98.99 per barrel.

The official Chinese Purchasing Managers’ Index (PMI) data was released on Sunday and it fell to 50.2, hitting a seven-month low. Though the data was above expectations after HSBC’s PMI forecasts, it was still disappointing considering a figure of above 50 indicates growth. This data was followed by an unexpected rate cut by China, the second in a month. The People’s Bank of China lowered its 1 year yuan deposit rate by 25 bps to 3 per cent and its 1 year lending rate by 31 bps to 6 per cent. To boost lending, the central banks also eased rules for commercial banks allowing lending rates to be set 70 per cent of the benchmark rates. This limit was 80 per cent earlier.

All these factors appeared later into the week and its effects were seen in the markets on Friday. Over the week, there was a series of positive sentiment spreading announcements from the PM over the week which maintained the inflow of foreign funds. The PM assured growth for the slowing economy, promised reforms and addressed long standing issues.

The currency too witnessed some easing when the rupee gradually gained strength, reaching a month and a half high on Tuesday on dollar inflows. Draft rules on GAAR, NDF unwinding and the increased foreign investor limits have all helped ease currency pressures. It closed at the 54 level on both Tuesday and Wednesday but lost value on global worries shortly after that.

While the FIIs seem to be keen on investing in India equities, the over USD 10 billion debt auction of government securities and corporate debt on Wednesday got a muted response due to a three-year lock in clause and on account of July 4 being a holiday in the U.S. The auction of Rs 28,500 crore worth of government bond limits received bids only for Rs 20,946 crore. On the corporate front, only Rs 19,777 crore of corporate bond limits were sold of the Rs 31,387 crore auctioned. The highest bids received looked more like the lowest bids, with government securities being 0.010 bps and 0.005 bps for corporate debt.

To ensure flow of foreign funds, the government has also been making moves to negotiate terms on the retail FDI front and the plan to invest in India by the furniture giant IKEA has been welcomed by both the government and the markets.

The monsoon has been delayed in India and has made up for only two-thirds of the expected rainfall. Agriculture Minister Sharad Pawar on Tuesday said he expected the monsoons to get back on track as there was plenty of opportunity to cover up for lost proportions. If the monsoon doesn’t pick up in the coming weeks and if the rainfall deficit widens, policy inaction will witness further lengthening and delays. It would also lead to inflationary pressures further adding to worries.

While the Sensex rose by 0.69 per cent over the week, the sectors that saw growth were realty which grew by 5.97 per cent and consumer durables rising by 5.21 per cent. Over speculation of a possible interest rate cut, interest rate-sensitive sectors have gained during this week. Real estate, banks and auto are among the beneficiaries of this supposition. Though auto didn’t see much of a rise due to the disappointing monthly sales figures posted for June 2012.

The power stocks have still been seeing gains from last week’s 26 per cent hike in Delhi power prices and due to the 20-30 per cent fall in coal prices. Coal demand has seen a reduction over time and this is putting downward pressure on the prices.

The IT industry has been under pressure over the last few months over weak global demand and dependence on the U.S. and Europe for most of their revenues. The situation in the sector has not improved and the sector index continues to trade in the negative. 

Among stocks, Dish TV gained 11.18 per cent after it announced a price hike. This hike would increase the Average Revenue Per Customer (ARPU) for the firm. Tata Sky and Airtel Digital have also announce a hike of approximately 11 per cent in tariffs. This week, Voltas became the number one player in the air-conditioning market, according to a latest survey. The firm tripped LG of its position and became the leader with 18.32 per cent of volumes. On the back of this news, the share prices yielded a return of 9.13 per cent over the week.

TTK Prestige gained 8.21 per cent over the week over news that it is now looking to acquire a company in Europe to mark a global presence and tap the overseas markets. At present, 4 per cent of the firm’s revenues come from exports and the management has an intention to expand that. Among the losers stood Jindal Steel & Power losing roughly 3 per cent after it suspended work at the company’s Bolivian iron ore mines. This week, with a moderate outlook on IT, TCS witnessed selling and ended lower by 2.45 per cent. Other big IT stocks too saw the slump.

We expect the market to remain volatile over the next week with global uncertainty dominating most activity. The IIP (Index of Industrial Production) data would be released on Thursday and we would see some clarity about the domestic situation. IT majors Infosys and TCS are announcing their results on the same day. The market direction for the month will mainly depend on the results posted by companies and investors need to gain an overall understanding of the dynamics before taking decisions.