Markets On Losing Streak, Metals Tank 7%

The markets are again back on the losing streak. The week saw coal politics, Decline in Oil prices, GDP figures of India and US. Overall the world indices have decline by about 2% on various concerns.

The US indices remained flat ahead of the Ben Bernanke’s crucial speech in Jackson Hole due today. The speech is expected to give details of the health of the US economy and future implementation of monetary policy. The US GDP data published in the week showed that the US economy expanded by 1.7% during second quarter of the year.

European markets which remained lower between 1-1.5% in the week, are expecting bond buying program to be announced by ECB Chairman, Mario Draghi. During the week, data showed that the German business sentiment has fallen most from March 2010 indicating troubles ahead in Europe.

Among the Asian markets sentiment remained weak ahead of the Jackson Hole. The business sentiment was also hurt as Macquarie report said that there is growing interest among Western companies to manufacture closer to their home markets. This however is a bad news for Asian markets and logistics companies. Asian markets remained subdued due to the drop in the commodity prices.

The Indian indices were reeling under pressure as the week saw the GDP figures announced. During the period of April to June 2012, the GDP of the country grew by 5.5% which is little above the market expectations of 5.3%. The positive surprise in GDP figures was seen in sectors like Insurance, Finance, Construction, Real estate, utilities, etc. however mining, agriculture, hotel, transport, communication, etc were laggards in the growth. Though the GDP figures are better than expected one should note that these figures are less than the potential that Indian has i.e. 8%. The investment cycle in the country has slowed down due issues like policy paralysis and higher interest rates.

There is growing concern about the higher interest rates in the investor and business community. The ICICI chairman KV Kamath said that the RBI should cut the key policy rate by 100 basis points to spurt the growth. The RBI however has said that the rate cut at this time may be deteriorating as it may have a good impact in the short term, but in the long term it could worsen the economy.

Meanwhile the finance ministry is preparing a plan to avoid the rating downgrade by the credit rating agencies. According the news sources, the finance ministry may approve some harsh decisions which will lift the investor sentiment in the country.

On the political front, the parliament could not see the normalized operations due the CAG report on alleged coal scam. The CAG has further said that on aggressive pricing, losses may touch as high as Rs 18 lakh crore. The opposition is demanding the resignation of PM. The ruling party is however wishing to discuss the coal block allocation mechanism with the parliament which was adjourned for all five days in the week. CAG has further slammed state owned ONGC for not prioritizing the oil discovery and production. The CAG also said that ONGC showcases healthy reserve replacement ratio but its production continues to remain static.

Hit by the CAG reports many companies in the metal sector tanked heavily. Metal index lost over 7% in the week. The realty index was also down over 5% as the reports indicated that the growth in the Realty industry is at six year low. Capital goods index was down 5%. Auto index has also hit the bottom due to the poor monsoon which will hit the auto numbers. The only indices that saw gains were that of FMCG and HC. Many brokerage houses are bullish on these two indices due to the consumption nature of the businesses.

During the week the rupee has again declined against the major currencies.  Rupee is again on brink to touch Rs 56 per dollar mark.  Crude oil prices also softened as the Hurricane Isaac spared the US Gulf Coast oil production.  

On the equities front, Hero Motorcorp is currently facing the heat of downgrade as the stock has tumbled 8% during the week. Sensex company Sterlite tanked 15% due the weak outlook for the mining and metals. Besides Sterlite, Jindal Steel, Tata Steel and Hindalco were also down between 6-8%. The CAG hit Reliance Power lost 10% during the week. Adani Enterprises also lost 11%.

United Breweries on the other had gained 12% on the report of its amalgamation with Scottish and Newcastle India. Pipavav Defense gained 12% as it issued new shares to its promoters. Glenmark Pharma also hit new high on the buoyant investor sentiment.

Shares of Jain Irrigation were down 15% as Columbia Acorn International offloaded some of its stake via open market transaction. Shares of Mahindra were also down 8% as the BT group sold its stake in the company.  

The BSE is moving 74 stocks to ‘T’ category by next week due to which volatility was seen in select companies that includes large cap stocks like Wockhardt.

Overall the market’s losing streak has indicated that the high valuation is not sustainable.  We at Dalal street investment journal expect the markets to take cues from the Ben Bernanke’s speech due in Jackson Hole today. Our technical call would be range-bound trades in the next week.