India Markets Weekahead: Caution advised in a trader’s market

February 1, 2015

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The market movement on Friday can best be described as a slip between the cup and the lip. The Nifty was being cheered on towards 9,000 when it peaked at 8,996.60 and reversed sharply to close at 8,809, down more than 2 percent from the day’s high.

The week had been volatile but the ferocity of the fall on Friday is attributed to unwinding for funding the Coal India “Offer for Sale” (OFS), which would be followed by a few other big-ticket offerings. Though the share sale was termed successful, nearly 40 percent of the offering was picked up by the Life Insurance Corporation of India (LIC), which has been the “investor of last resort” for most PSU offerings. This also brings forth a question on whether we are overestimating the interest in PSU paper.

The Modi-Obama bonhomie had a sentimental impact during the initial part of the week. Nuclear breakthrough and defence co-operation was the high point of the trip. This was followed by the directive from the finance ministry to follow the Vodafone template while dealing with such cases, which is seen as a big booster for foreign companies embroiled in tax disputes. This could be a big step towards easing of doing business by international majors who were shying away due to tax disputes faced by their peers.

Corporate results were mixed, thus reactions were limited to specific stocks. In the banking sector, ICICI Bank and Bank of Baroda disappointed, while IT majors HCL Tech and Tech Mahindra gave the market a positive surprise. Discretionary consumption continues to suffer, reiterated by Asian Paints.

U.S. economic growth slowed down in the last quarter to below 3 percent, while Greece continues to hold the European Union on the edge as the government refused to work with the “troika” of the European Union, European Central Bank and International Monetary Fund. The euro zone continues to totter as analysts wonder whether ECB’s recently announced quantitative easing would be able to reverse the deflationary spiral. Meanwhile, Russia suddenly cut its benchmark interest rates.

Closer home, the GDP for 2014 was revised upwards to 6.9 percent against 4.7 percent estimated earlier due to change in the base year as well as the methodology, bringing it in line with global standards. It would be interesting to see the 2015 revised figures and one still wonders why this growth is not percolating down to the grassroots.

The RBI’s monetary policy review is scheduled for February 3, where I don’t expect any change in rate, especially after the surprise cut we saw earlier in January. The commentary would continue to be dovish with riders. Auto companies would start unveiling their monthly numbers from Monday, and HSBC’s Manufacturing PMI is also expected on the same day.

We generally have a pre-budget rally in February but after witnessing a stupendous 11 percent gain from the beginning of the year, a pre-budget rally may expand the bubble of expectation. It will be interesting to see how the finance minister balances the budget, as the country needs a huge dose of public spending to generate employment and kick-start the economy at a time when revenue prospects are still dim. The Delhi elections will also have a bearing on the markets, at least in the short term.

I would advise caution for investors as it continues to remain a trader’s market. Corrections as well as bounce-backs could be steep. International developments would keep pressure on markets but the government will continue to provide goodies to balance it. A move above 9,000 for the Nifty would give another leg to the current rally and we are on safe ground as long as we don’t break 8,400 on the lower side.

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