Negative Sentiments Rule The Roost

Ever since Prime Minister Manhmohan Singh has taken over the finance portfolio of India, everything seems to be turning around. Positive confidence-reinforcing announcements about the action to be taken have pleased domestic and foreign investors, the rupee has gained strength and the FII inflows in the BSE and NSE have become incessant. Slowly, the government has started testing the patience of the market, almost like a stress test. However, policy inaction has seen no difference over time and it’s almost a month since Manmohan Singh has taken the finance chair. In fact, these policy delays have been severely leaving the economy stagnant. The promising nature of the Indian economy is slowing turning into a perception.

Since the last two days, the rupee has been losing all its little gained strength and is now trading at a level of 56.3755 to the dollar. The markets yesterday followed the rupee thoroughly by reaching the bottom in the middle of the session when the rupee crossed the 56.50 mark. The Sensex dropped 72.03 points, closing at 16,846.05, lower by 0.43 per cent while the Nifty dropped 18.60 points, closing at 5,109.60, lower by 0.36 per cent. What also affected the markets was the exclusion of 51 stocks from the NSE F&O segment. Up to 45 of these 51 stocks saw a decline in the range of 2 and 10 per cent. These included Balrampur Chini, VIP Industries, Lanco Infratech, Tata Coffee, TTK Prestige, Videocon Industries, among others. This has been taken into action after the revised eligibility criteria for stocks in the derivatives segment. Changes have been made in the minimum median quarter sigma order size and minimum market-wise position limit.

Worldwide, the markets remained flat after seeing some volatility during the day. The U.S. markets ended flat to negative with Dow Jones, S&P 500 and NASDAQ changing by 0.47 per cent, -0.03 per cent and -0.31 per cent respectively. Overall the sentiment in the U.S. was weak as the dollar traded at a level of 0.3 per cent from an eight-week low against the yen. This has been highlighting the deepening American crisis which was seen prominently in the Q1FY13 results in the U.S. Further, data on the U.S. GDP is due to release tomorrow. All eyes are on this data which would define the fate of the Indian markets on Monday. The Federal Reserve is also likely to opt for quantitative easing (QE) by the end of August, say sources.

The European markets closed a tad higher yesterday because of the positive sentiment created through a statement made by ECB’s council member Ewald Nowotny. He said there were arguments in favour of granting a banking license to the ESM (European Stability Mechanism), Europe’s permanent rescue fund. This would leverage the position of ESM and allow it to buy bonds to support the highly indebted countries. It would leverage the position of the body without the requirement of governments to inject more money. On this news, the DAX and CAC rallied by 0.25 per cent and 0.23 per cent respectively.

The little seen positivity in these markets has been due to the speculation of central banks and governments taking new and different steps to spur growth in the economies. Data was released on the new home sales in the U.S. which showed that purchases fell by 8.4 per cent to 3,50,000 (annualised). This has been the weakest figure witnessed since January and has sparked speculation over new steps to initiate growth. Next week the Federal Reserve, ECB and the BoE are to meet within a time frame of 24 hours. This would spark volatility in the markets worldwide over the likely steps that the central banks may take.

The Asian markets today have opened flat with news that China is not likely to take any further steps, according to IMF sources, to boost the economy. On the domestic front, the rupee fell for the fourth successive session, increasing worries and spoiling market sentiment for today’s opening as well. Hopes for reforms had shot the rupee up and shored foreign investors on every single day since June 29, 2012. Since the last two days though the net FII inflows have been in the negative and the rupee is seen falling.

The Indian markets are likely to open flat today and remain flat to negative throughout the day. Europe has been seeing mixed cues with optimism seeping in through the ESM mechanism while negative cues in the U.K., Spain, Greece and Germany are seen to be building up. The Office for National Statistics, London, released data on the GDP of U.K. which showed a decline of 0.7 per cent in Q2, the highest decline since 2009. It shows the need for further stimulus and not just action on credit easing programs and emergency bond purchases.

The Spanish 10-year bond soared higher yet again by 9 bps, reaching 7.71 per cent, pacing towards the 8 per cent mark yesterday. On the Greek front, Citi raised its bet on the exit of Greece from the euro zone to 90 per cent, thereby further dampening the mood. With the entire region in trouble, Germany, the relatively outperforming and robust economy, saw business confidence fall more than expected and to its lowest in two years. Due to these factors, the European markets may open negative today, thus making the Indian markets negative mid-session.