Negative Streak To Continue

The Indian markets may open negative today due to the mixed cues globally in continuation of the negative sentiments seen on Friday due to the recent aid deal for Greece and strong indicators from Germany. A further liquidity injection is also expected in the European markets leading to some optimism after last week’s trading. 

On Friday, July 20, the markets remained in the red throughout the trading hours and closed in the negative by 0.7 per cent. The same day all the major markets worldwide closed in the negative. Moreover, the Asian markets have opened negative and are trading lower in the range of 1.23 and 2.46 per cent. This indicates the weak economic sentiment being carried forward into this week as well.

The global effect plus internal situations like inflationary pressures may add to the worries of investors. There is an increasing fear of a hike in diesel prices. Food inflation is also seen rising steadily due to delayed monsoons. The cumulative effect of these factors adds to the pressure on the RBI and the government to prepare for curbing another hike in inflation figures. C Rangarajan, PM’s economic advisory council’s chief, has also been pushing for quicker actions on the decontrol of diesel and on increasing the inflow of the FDIs. The decontrol is seen to be necessary in order to reduce the fiscal deficit in India which had reached 5.76 per cent in FY12, thus demanding control measures.

After the opening though, the Q1 results of major companies are likely to define the further trend of the markets for the day, along with news from Europe in terms of policy measures. The stocks will also bet on policy boosting measures taken by the government.

The Q2 earnings announced by companies in the U.S. have been, so far, better than what analysts had expected. The sales figures are seen growing mildly though they are the weakest since the slowdown seen in 2009. The bottomline of the companies has been relatively better off. This trend mainly signifies a hold on hiring and expanding till the demand rebounds. This took a toll on the markets of the U.S. and made them slide by 0.93 to 1.37 per cent. The dollar too ended up at a two-week low on fears of a double dip recession hitting the economy.

Europe saw mixed indicators with strength shown in Germany as the Bund traded close to a zero per cent premium with increasing worries on the Spanish side. The Spanish index on Friday closed nearly 6 per cent lower after the Spanish 10-year bond yields were seen above the 7 per cent mark, trading at 7.03 per cent. This put Spain in the league of Portugal, Ireland and Greece. The Asian markets have been significantly affected due to a weaker Chinese economy, with the slowest growth witnessed in three years. This sluggish growth is not expected to compensate for the recessionary trend seen in the euro zone. On the back of this, even the IMF cut global growth forecasts to 3.5 per cent last week.

Oil has been weaker this time due to tension in the Middle East. There was a bombing in Syria and an attack on Israeli tourists in Bulgaria, thereby reducing oil prices which had been seen rising once again after the recent weakness. It is currently trading at USD 106.2 per barrel. In terms of currency though, the rupee fell on Friday amidst global risk aversion, thus increasing the need for policy reforms. There are concerns about India missing the fiscal deficit target of 5.1 per cent and this could be the key driver for the downfall of the currency.

The overall trend in FII and DII flows remaind as seen in the earlier week with FII's netting inflows while DII's drawing money out of the markets.

In conclusion, we expect the markets to remain volatile and be defined by a number of factors that include key policy reforms, monsoon worries, inflationary pressures, global indicators and domestic company results. On a cumulative basis, the factors seem to point to an overall negative sentiment in the markets.