Markets Weekahead: Range-bound with positive bias; metal stocks to correct

May 14, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

It was a topsy-turvy week for the markets with key indices plunging below respective psychological barriers yet again only to recover on Friday on frenzy buying.

There were a host of factors to swing markets on both sides. The fear of Chinese liquidity tightening outweighed better- than-expected IIP data on Thursday while the results of the 2011 assembly polls provided relief to the Congress-led UPA coalition.

This helped alleviate fears of political uncertainty after the ruling party’s image was stained by a slew of corruption scandals.

The trend seems to be clear that voters are assertive on local development and the voter turnout confirms higher political awareness and responsibility.

On the global front, China’s central bank announced yet another hike of 50 bps in the reserve requirement ratio, the eighth since October taking it to a record 21 pct. This spooked the markets globally as it may have ramifications in global recovery.

The commodity market has taken its part of the brunt on monetary tightening across the globe. Metals, bullion, energy have seen  multi-month lows and would have reciprocal impact on the stock market albeit with a time lag.

In India, while metal producers like Hindalco, Hindustan Zinc, Hindustan Copper, Sterlite, Binani, etc would continue to observe pressure, user industries like consumer durables, capital goods & engineering, automobiles, etc would get some respite on margins.

OMCs saw profit taking after the expected meeting of the ministerial panel on May 11 to consider raising fuel prices got deferred. It is now likely to take place sometime next week.

However, they got 200 billion rupees  subsidy but a tad lower than they demanded from the government. Mamata Banerjee’s thumping victory in West Bengal could again raise fears whether she would create a political roadblock against a fuel price hike. We prefer gas companies with stellar performance over OMCs.

The worst-hit sectors like realty and banking sector saw massive short covering and similarly Nifty also noticed large scale shedding of open interest during the rally. The fresh put writing at 5400, 5500 levels offer underlying support while 5680-5700 would act as strong resistance.

Hence, we are expecting the range-bound move to continue for some more time with a short-term positive bias. Therefore we see maximum trading opportunities emerging in large caps at lower levels.

On the other hand, FMCG continues to ride on defensive buying and buoyed by the higher-than-expected HUL performance. ITC, HUL, Jyothi, Godrej, etc are showing strength and we continue to be positive on these scrips — especially ITC. IT has seen a short buildup and is likely to remain weak among the sectors amid lack of fresh triggers.

As expected, Future Ventures India got a weak listing but managed to hold at lower levels due to promoter buying. On the macro front, WPI data for the month of April is due on Monday. The coming week has some key results from large cap universe, namely SBI, Bajaj Auto, ITC, L&T and Divi’s Labs but we don’t expect much of volatility.

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