If FIIs continue with their liquidity flows, the markets should consolidate at current levels
This is the fourth consecutive week of gains, albeit just 0.38 pct this time and Nifty closing at 5,387. We had an 8 pct move from the low point on July 26 to the recent high on August 23 with minor corrections, which under normal circumstances would have been dubbed as a new bull market.
Looking for positive cues is like searching for a needle in a haystack. The truncated week was loaded with adverse news on the international front as well as a political imbroglio in the Indian parliament over the CAG report on coal blocks.
Liquidity flows and hope seems to be the only reason yet again for the markets holding against the barrage of negative news flows.
The logjam in parliament is expected to continue for a while, whereas the government is trying to bring the discussion to the public forum through the media. The Bharatiya Janata Party has also got itself into a position from where it would be difficult for them to backtrack. This would mean that no business would be conducted and important bills will be passed over to the next session.
An analysis of market movement from the first week of June till date proves that hope plays a major role in sentiment build-up. When it was clear that Pranab Mukherjee is the UPA candidate for presidential elections, the markets took it positively. An imminent change of guard in the finance ministry meant kick-starting of the overdue reform process and reversal of the hawkish provision of General Anti-Avoidance Rules (GAAR) which scared away foreign Investors.
The minor hiccup of Trinamool chief Mamata Banerjee and Samajwadi Party chief Mulayam Singh Yadav opposing the presidential nominee resulted in a small correction but Yadav's volte face within two days put the markets back on track. The upward move continued based on the intentions of Prime Minister Manmohan Singh who also took charge of the finance ministry.
Finally, when no concrete announcements came through post the presidential elections on July 19, the market was disappointed and tanked to levels of 5,043. With talk of Palaniappan Chidambaram taking over as finance minister made the rounds, a fresh set of hopes were built up and the markets started their current phase of the rally which continues, based on the hope that Chidambaram may be able to pull some tricks out of his hat. One needs to wait and watch whether this results in a pleasant surprise or despair.
International markets softened due to the extending euro zone crisis with its economy expected to contract 0.5 pct this quarter and Germany too getting affected by the slowdown. The next EU summit in October could set the stage for a Greek exit as they are unable to come anywhere close to the promised goal posts.
Manufacturing PMI in China fell to 47.8, the lowest since November, indicating that the slowdown bug is catching up with every major economy in the world. There were hopes of Fed easing, which receded towards the weekend.
The monsoon continued improving in the north with the all- India deficit reducing to 14 pct below the long-term average (LTA), but the tribulations of farmers continue. The July consumer price index declined to 9.86 pct due to lower prices of cereals and spices but this hardly brings cheer as India is staring at food inflation in double digits in the coming months.
Edible oil was about 17 pct higher and sugar about 9 pct and is expected to remain in the upward trajectory.
On the corporate front, Mahindra & Mahindra cut its forecast for tractors in view of sluggish monsoons which could exert pressure on the stock. Coal India is proposing to buy back shares -- primarily to ease government finances. The stock moved smartly but public shareholders haven't yet realised they would be at the wrong end of the stick. Maruti resumed its operations at the Manesar plant but the ghosts of the past will continue to haunt labour relations. The current quarter will bear the brunt of losses due to the shutdown. The expected petrol price hike next month could be another dampener for this company.
IFCI cracked about 16 pct after the government converted 9 billion rupees worth of debentures into equity, thus increasing their stake to 55 pct. This conversion at par will dilute earnings by about 50 pct. Bharti had a slew of downgrades from high profile broking houses which pulled it down to a multi-year low, settling at around 248 rupees. Infosys was a smart gainer this week along with other technology stocks as a U.S. court ruled in its favour in a long pending employee harassment case.
This week will have a few domestic data points to watch. Q1 June GDP data will be announced on Friday, which could confirm the worst fears and may be followed by more downgrades. Cement and auto companies will be announcing their monthly figures on Saturday which are expected to the tepid.
This is the settlement week for the futures and options segment. I don't expect much volatility as the 4-week upward move has made short-sellers cautious, hence the short positions are minimal. The rollovers would be an important pointer of the confidence traders have in this market continuing its upward movement.
If FIIs which poured in $175 mln (provisional) last week continue with their liquidity flows, the markets should consolidate at current levels and move to the next resistance closer to 5480/5500.
This should give an opportunity to lighten the portfolio as the fundamental reason to stay invested is receding day after day.