After A Sell-off, Expect Some Stability

Indian equity markets yesterday followed the global trend and as expected witnessed a significant gap down opening. It was a broad based selling across the sectors and the new Sensex breached all the crucial levels of support. However one noticeable factor towards the end of trading session was a sort of recovery made by the leading indices. What added to the volatility was the expiry of January contract.

After the volatile trading session yesterday, the February series may start on a positive but a flattish note. There are few factors that are indicating towards the same. First and the most important factor is positive cue from the US markets. the reports suggested that the U.S. economy expanded at a 3.2 % pace in the fourth quarter as Americans’ spending climbed the most in three years, laying the ground for further improvement in 2014.The annualized gain in gross domestic product matched the median forecast in a Bloomberg survey and followed a 4.1 percent advance in the prior three months. Growth in the second half of the year was the strongest since the six months ended in March 2012. Consumer spending, which accounts for almost 70 percent of the economy, rose 3.3 percent. Though the increase in consumer spending was slower than estimates, the recovery has been good. As for all of 2013, the economy expanded 1.9 percent after a 2.8 percent increase in the prior year.

We feel the growth in US Economy is positive for emerging markets in general and Indian in Specific. Rather we also feel that the cut in stimulus by USD 10 billion to USD 65 billion is also positive for the Indian equities. Especially in a scenario when the China growth engine is losing its steam. As the developed markets are showing growth, the long term prospects of emerging markets get brighter.

However the RBI Governor seems to have some other views. Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira. He called for greater cooperation among policy makers weeks before finance chiefs from the world’s top developed and emerging markets gather in Sydney. He further added that, developed countries might not like adjustments emerging markets take to cope with the outflows, without elaborating on specific measures. Apart from commenting on global markets he also stated that the policy of increasing cap of subsidized cylinder to 12 from the current levels of 9 is also misdirected.

As for the cues from global markets, the US markets closed on a positive note after the GDP growth data came out to be good. The DOW closed higher by 0.70% and even the S&P 500 gained more than 1%. The Asian markets however are trading either flat or in negative zone. The Nikkei which was a major loser yesterday is trading in positive zone with marginal gains of 0.15%.

As for the SGX Nifty, it is trading at a flat note with gains of 0.15%. We expect the markets to open on a flat note as even the December 2013 quarter results are not very encouraging. So, Expect a flat opening and a range a bound trade after that.