Markets Weekahead: Short on cues, high on sentiment

August 16, 2015

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

The Nifty closed the week slightly lower at 8,518 but markets were volatile and threatened to break 8,350 levels before a spirited rally. Hopes of a rate cut by the Reserve Bank of India (RBI) ahead of its September monetary policy review and chances of a special parliament session for the Goods and Services Tax (GST) bill turned sentiment positive even as global cues remained weak.

Brokers trade on computer terminals at a stock brokerage firm in MumbaiChina’s sudden decision to devalue the yuan followed by a spate of weak economic data sparked speculation of a currency war to save local currency from losing competitiveness. The rupee, which has been stable for a while, also crossed the important psychological barrier of 65. However, later in the week, an assurance from the Chinese central bank of no further depreciation assuaged nervous traders. This coupled with better domestic macroeconomic data helped the markets bounce back with a vengeance.

The consumer price index (CPI) fell sharply in July to its lowest in seven months, while the index of industrial production (IIP) climbed to a four-month high. Wholesale prices fell 4.05 percent in July, the ninth straight decline and the lowest rate in four decades. I would be a bit wary of the better-than-expected IIP data. Consumer durables showed a huge jump due to a low base – a degrowth of 23.3 percent in June 2014.

Trade deficit inched higher at $12.81 billion in July from $10.83 billion the previous month, and the China factor playing out could further exert pressure on our exports.
Indian exports have been contracting for the last eight months. There is a fear of the Chinese dumping goods despite duty barriers.

There is also a possibility of the current account deficit rising, thereby exerting further pressure on the rupee. A weak rupee will have implications on corporates with dollar denominated debt in their balance sheets. However, I expect the RBI to intervene actively to reduce rupee volatility.
A money lender counts rupee currency notes at his shop in Ahmedabad, May 6, 2015. REUTERS/Amit Dave/Files

As for the markets, the coming week has limited triggers since corporate results are already out and the monsoon session of parliament has ended. Global cues along with rupee movement will be closely watched. There has been talk of a pre-policy rate decision, but I do not expect RBI Governor Raghuram Rajan to play to the gallery. Any negative comments from Rajan could puncture the rally. Developments on the GST front will be closely watched, especially the possibility of a special parliament session.

Key global events in the week ahead include U.S. manufacturing, housing, CPI and homes sales data among others. Also, the U.S. Federal Reserve will release minutes from its July 28-29 meeting that may shed light over the timing of the first interest rate increase since 2006. The August 20 deadline for Greece to make a $3.6 billion payment to the European Central Bank will be closely watched.

The unexpected moves by China have unnerved global funds and strategists, who would rather wait and watch before making fresh commitments in other emerging markets, especially India.

Though the Nifty has found premature support at 8,350, any gains from here on will be dependent on expectations on the rate cut front and developments on the GST bill. The Nifty range of 8,200 to 8,600 still holds and it is getting more difficult to break this range; markets have made multiple attempts to get past it in the past three-four months.

I stick to my view of lightening positions at the higher end of the band. However, the markets seem to provide an opportunity to traders due to the extreme volatility and mood swings we have been seeing for a while now.

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