Markets Weekahead: Volatility to continue

July 12, 2015

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

A man looks at a screen displaying news of markets update inside the Bombay Stock Exchange (BSE) building in Mumbai, India, June 29, 2015. REUTERS/Danish SiddiquiGlobal uncertainty related to China’s market meltdown and the Greek debt crisis kept markets volatile for the entire week and the Nifty ended down 1.5 percent to close at 8,360. However, the magnitude of fall in Indian bourses was limited compared to European and other Asian markets as the Greek referendum turned out to be a non-event for domestic markets, where participants seem convinced on the decoupling theory.

Also, with China in trouble, it was believed that India would be the favoured destination of investors by default. Chinese markets, which had earlier lost nearly one-third of their value due to issues with margin financing, recovered 15 percent after its securities regulator artificially sucked out supply by banning shareholders with stakes of more than 5 percent from selling shares for the next six months.

Metals crashed globally on slowdown fears in China as the country accounts for more than 30 percent of global consumption. Precious metals followed suit. The crash in global commodity prices would force Indian producers to reduce prices, and export demand is also expected to be affected as surplus production by China would lead to aggressive dumping at low prices in various markets.

Looking at the intensity of the situation, the Indian government has stepped in with a proposal to make it mandatory for all public sector undertakings (PSUs) to source at least 35 percent of their steel requirements from domestic suppliers. If implemented, it will be the fourth major policy action to help the ailing steel sector over the last four months. Given rock-bottom valuations on account of the cyclical nature of the industry, it’s time for cherry picking in this sector.

In addition to weakness in metal stocks, companies having exposure to China in terms of revenue contribution also took a beating. Tata Motors fell on concerns of demand for the Jaguar Land Rover as China is its biggest market.

India’s industrial production grew by 2.7 percent in May 2015 against expectations of 4.4 percent, led by a sharp fall in capital goods and consumer goods data. This was despite better-than-expected core sector output. The key point to be noted is that the capital goods index, which has been an outperformer on expectation of a rebound in capital expenditure, may witness some pullback.

TCS kicked off the June quarter earnings season with results slightly below market expectations. With weak numbers already priced in for most companies, the IT earnings season may not create much hoopla as stocks have already corrected. Needless to say, if they manage to beat expectations, we could see them recover some of the losses.

Markets have entered the earnings season on a cautious note as weak demand outlook by most corporates have spooked investors. The focus will be on revenue guidance from company managements for the remaining part of the year and next year. The key results that will be declared in the coming week are from IndusInd Bank, Zee Entertainment, Mindtree, ACC, Kotak Bank, Asian Paints and CRISIL.

Among the global economic data expected this week is China’s Q2 GDP, to be released on July 15. The market is expecting GDP to fall to 6.8 percent from 7 percent, and a sharper-than-expected decline could result in panic, leading to another bout of selling.An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China, July 10, 2015. REUTERS/Aly Song

Markets will also focus on Greece, with Athens offering to meet most of the demands made by creditors in exchange for a bailout of 53.5 billion euros ($59.4 billion). The EU summit on July 12 will be the last chance for both sides to reach an agreement. Failure to strike a deal could lead to a sharp sell-off in risky assets.

Overall, markets are expected to remain volatile. The Nifty has managed to hold on to the 8,350 mark so far. If the outcome in Greece is positive, we could see Nifty touch 8,500 yet again. On the other hand, if the Nifty breaks 8,250, we could see a fall to 8,000 levels again soon.

The weak IIP numbers have raised expectations of an interest rate cut by the RBI. One needs to see whether inflation data to be released next week supports the same.

We could be fooling ourselves with the decoupling theory in this connected world. Though the crash in commodity prices and uncertainty in global markets could prop up India as the favoured alternative destination, such a move does not happen overnight. The immediate investor reaction is of a “risk off” and we could witness that over the next few weeks.

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