A Positive Open Following An Upgrade

After moving up for five days in a row, the markets took a breather of sorts yesterday. The benchmark indices which were cruising towards new life-time highs came down by more than a percent to close in the negative on the first full trading day of the new Samvat. What needs to be seen is, whether the markets are actually paused for a breather, or, are they done with the festive exuberance.

After a weak manufacturing PMI, it was the turn of the Services PMI to disappoint. It contracted for a fourth straight month in October to 47.1 against 44.6 in September when it was at its lowest level since March 2009. The Services PMI is quite a significant factor, considering that the services sector occupies the largest share in the Indian economy. Yesterdays market action was more to do with this economic data point. But, remember the market will always be on the lookout for newer triggers.

News flows, positive or negative are the most critical drivers of markets on a daily basis. How effective is the PMI reading, which comes out on a monthly basis in gauging the longer term overall trend of manufacturing or services is just another thing. The fact remains that every month the number comes in, the markets will react. So even if these numbers come to be better for November, the market mood will automatically switch to one of optimism.

One of the most significant development which the markets will latch on to this morning is, an upgrade by the multinational investment banking entity Goldman Sachs of Indian equities. Goldmans’ view is, external account pressures will soon ease for India and it foresees a stable earnings outlook due to a possible political change. This is the most interesting twist to the tale. Talking of fundamentals or valuations with respect to the markets can be understood. But betting straight on a political change is quite a vocal thing to do. Nevertheless, an upgrade to the ‘marketweight’ rating for Indian equities from Goldman will replant the lost optimism back into the markets today.

The European Commissions cutting of the growth forecast for the region and its expectations about persistence of high unemployment there pulled down stocks from five year highs. The statement casts doubt on the ECs future course of action with reference to interest rates. Worried investors now have twin reasons on their plate. On one hand is the Euro zone growth uncertainty and on the other is the awaited US action on the tapering front. Stocks in the region will remain volatile and depressed following both these.

Meanwhile, the US markets for some reason were found trading based on the Euro zone growth forecast that was thrown in. Stocks ended down yesterday following the same set of worries as were haunting the European markets. They even missed out the better-than-expected reading that came out on the US services sector to end the day in red.

Asian markets are trading mixes today. While Japan is down marginally (Nikkei down 0.20%), China is slightly up (Shanghai Composite up 0.10%). Taiwan, Korea, Malaysia and Hong Kong are trading on the borderlines with a negative bias while Singapore and Indonesia are only marginally in the green. The SGX Nifty is trading down 15 points.

The Indian markets are likely to follow the Goldman upgrade this morning, shrugging aside any worries on the weaker PMI readings. You could see the markets open in the green and trade with a positive bias today. Exuberance is likely to be back on the street – rational or irrational, the markets will certainly look out for some more upside before the economic reality strikes back. Not that we are overly pessimistic on that front, but it always pays to be cautious unless you have concrete proof of an economic turnaround.