Truncated but action-packed week

October 2, 2011

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

Markets displayed a spell of volatility in derivatives expiry week as the Nifty continued to remain below the psychological 5,000 mark. Continued uncertainty on the European economic situation, likely muted-to-weak Q2 Sept corporate earnings and weak global stocks weighed on market sentiment.

Rollovers from September to October series were below expectation with only 50 pct positions getting rolled into the next series as compared to 62 pct last month.

Earlier in the week, talk of cuts in stamp duty and lower transaction costs to broaden participation in the market boosted sentiment. However, gains were short-lived as selling on the FII front kept markets nervous.

Metal stocks slumped after HSBC’s China manufacturing sector data showed the manufacturing sector continued to stagnate in China in Sept 2011 amid weak domestic and overseas demand. Mining stocks were weak after the cabinet approved a new mining bill that calls for coal miners to share a maximum 26 percent of their profits with local communities and for other miners to share an amount equivalent to royalties.

The government announced that it will increase the borrowing target for FY12, revising it to 3,950 bln rupees considering stable 4.6 pct fiscal deficit. As an immediate reaction to the hike in borrowing, yields from government bonds jumped 8 bps. The government’s new borrowing program may lead to crowding out of private borrowers who tap the markets in the second half of the year.

We expect sentiment in the bond market to remain bearish in the near term and the additional borrowing will spike bond yields. The 10-year benchmark yield is expected to breach 8.50 pct and trade in a range of 8.25-8.55 pct.

The coming week is a truncated one as financial markets are closed on Thursday on account of Dussehra. Automobile numbers announced on Oct 1 showed a reversal of the sales slide except for Maruti which was expected to be weak due to labour unrest at their plants. The positive trend for others was aided by the launch of new models.

Cement counters will be in focus as companies start unveiling their monthly dispatch data for September 2011. Cement sales would show an uptick on withdrawal of monsoon but we still believe the prices can’t sustain due to capacity/demand mismatch.

Stock-specific action is expected as market positions itself for the Q2 results season from the second week of October. Infosys will kick-start earnings season on Oct 12.

For the manufacturing sector, pressure on margins and interest costs burden seems to be more or less factored in by the markets. However, any specific comments by company managements related to business situations will have a bearing on sentiment.

Nifty still remains cautious in the short run and we expect a broad range of 4750/4800 to 5200/5250. However, in the longer term, post the initial risk aversion phase, I expect liquidity to find its way into emerging markets with relatively better performing economies, such as India. This trickle could convert into a flood much earlier than any of us would expect as there would be a dearth of markets or asset classes with a potential of giving better returns than the equity markets.

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