India Markets Weekahead: Get ready for a fire sale

June 7, 2015

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

The Nifty had one of its worst weeks in recent times with the index falling nearly 3.8 percent for the week to close at 8,114. The trigger was the hawkish commentary from RBI Governor Raghuram Rajan, who indicated that the central bank’s repo rate cut on June 2 was front-loaded.

Brokers trade on computer terminals at a stock brokerage firm in MumbaiThe RBI’s lower growth forecast coupled with the possibility of a weak monsoon also dented market sentiment. Increase in global bond yields coupled with weak corporate earnings contributed further to this weakness. Even the better-than-expected manufacturing PMI for May 2015 at 52.6 was ignored by the markets.

Volatility has been very high since last month, with the Nifty oscillating in the 300-point range on a weekly basis in May, which has now increased to 400 points this month. While this could unnerve even a seasoned trader, the algorithmic trading systems thrive on such volatility. FIIs continued to be net sellers to the tune of $350 million during the week.

The Maggi noodles scare may have long term implications for the food and beverages sector, which would be under the scanner of authorities and the media. The effect may be felt by marquee names such as HUL, Dabur, Britannia, ITC and GSK Consumer on their food portfolios. However, India being a strategic market for Nestle, I strongly feel they would take serious corrective measures to overcome this debacle and possibly come out stronger.

A similar case was witnessed in Cadbury’s Dairy Milk chocolate a decade ago, but the company managed to reinvent itself and has grown multifold since then.

As expected, May 2015 automobile numbers came in weak due to muted demand. Bajaj Auto, Hero MotoCorp and Tata Packets of Nestle's Maggi instant noodles are seen on display at a grocery store in MumbaiMotors slumped more than 4 percent each for the week. This proves that the excellent growth numbers of Bajaj Auto in April 2015 was a blip. Maruti, however, was an exception on the back of higher exports resulting in a 14 percent growth. One needs to check demand in the taxi segment, which could have led to this divergence. The weak demand environment is expected to aggravate on the back of monsoon concerns.  Overall, the sector looks weak for the next few months.

Overnight on Friday, the U.S. jobs data came in better than expected.  On Monday markets are expected to react to this along with the outcome of the OPEC meet on Friday, where the oil-producer group decided to keep production unchanged. Lower shale gas production as well as rigs data, which fell for the 26th straight week, initially led a rally in oil, but OPEC’s decision led to a weekly loss.  Analysts, however, feel that $60 could become the new normal for oil.

Markets will also closely watch developments in Greece, which said it plans to bundle its June loan repayments into one of around 1.6 billion euros, due by the end of the month. Greece was expected to default, hence this is on expected lines, but authorities are trying to defer the inevitable. A ‘Grexit’ could lead to short term weakness in the European markets as questions would arise about the future of other weaker economies in the euro zone.

A broker monitors share prices while trading at a brokerage firm in MumbaiFor the coming week, data to watch out for include current account deficit, trade balance, IIP (April) and CPI (May). The progress of monsoon will also be keenly watched as it has already hit the Kerala coast. On the currency front, pressure on the rupee continues on the back of rising global bond yields. I expect it to remain range-bound in the near term with 64.50-65 (against the dollar) as a strong resistance.

Overall, I expect markets to consolidate at these levels for the next few days as the Nifty at 8,000-8,050 provides a good support. We could even see a feeble rally to 8,200-8,250 but I would suggest booking out of long positions as the markets may not sustain gains over a medium term.

The monsoon’s progress would play a key role in determining sentiment and uncertainty could continue for the next few weeks. The end of June or early July could provide opportunities to investors as a fall below 8,000 for the Nifty could lead to a fire sale, which would be the right time for rebuilding long-term portfolios.

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