The indices opened the week on a strong note, continuing the momentum from previous weeks. The Sensex crossed the 9000 mark for the first time ever on Monday and the Nifty went past the 2700 mark, as the frontline stocks received good buying interest.

Markets corrected on Tuesday, in line with the trend across most global markets. Many frontline stocks in the engineering, auto, technology and FMCG sectors declined on profit booking.

The volatility started on Wednesday after the indices recorded new lifetime highs in early trades. The indices declined substantially later in the day with the Sensex losing more than 260 points from the highs of the day. Both frontline indices closed with losses of nearly 2 per cent each.

The recovery on Thursday was equally fast as both Sensex and Nifty regained all their losses from the previous day. After some volatility in early trades, the indices surged ahead in the afternoon and closed with gains of nearly 2 per cent each. The momentum continued during early part of Friday as both indices went on to record new lifetime highs. However, they gave up almost all of their gains in an afternoon sell-off.

The Sensex added 73 points or 0.82 per cent during the week and the Nifty went up by 15 points or 0.56 per cent over the week.

Mid-caps were more subdued during the week as trading interest is still lacking. However, less volatility when compared to the frontline stocks helped the mid-cap index to outperform the main indices during the week. The movement of the mid-cap index was more or less in line with the trend in larger indices, but they escaped the sharp rallies and declines to some extent. The CNX Mid-Cap 100 index gained 55 points or 1.43 per cent during the week.

Domestic economic and regulatory action

• Second quarter GDP growth has come in at a very robust 8 per cent as against 6.7 per cent during the same quarter of the previous year. Together with a first quarter growth of 8.1 per cent, the growth rates for the first half of the current financial year is comfortably above 8 per cent as compared to around 7 per cent during the same period of previous year.

  Most economists and think-tanks had forecast lower growth during the quarter as infrastructure output growth was weak during the quarter. The agriculture sector was also believed to have been affected by flooding in many parts of the country.

  These forecasts were not out of place as the agriculture sector reported a 2-per cent growth, mostly on account of a low base. Mining output declined by more than a per cent during the quarter. Other segments of the infrastructure index like electricity posted lower growth of over 3 per cent as compared to 9 per cent during the same quarter of previous year.

  Manufacturing, which had posted double digit growth rates during the first quarter, has slowed to a more modest but still very creditable 9.2 per cent during the second quarter. Together with the slower growth in infrastructure, this has led to a marginal decline in industrial growth during the first half to 7.5 per cent as compared to 7.7 per cent during the same period of previous year.

  The services sector once again came to the rescue and helped overall growth rates. The best performing sectors were financial services, construction and other allied services. These segments notched up a combined growth of nearly 10 per cent as against around 8 per cent during the first quarter. Other services like trade, communications and hospitality reported a marginally lower 12 per cent growth as compared to nearly 12.5 during the first quarter.

  As agriculture growth is expected to gather pace during the next two quarters, the economy should be able to maintain its growth at these levels. The marginal decline in manufacturing was mostly because of high base effect and is not very worrying.

  The only concern is a possible impact of lower infrastructure output during the second quarter on other sectors in the remaining two quarters. Infrastructure growth itself would revive during the remaining quarters. The slowdown was mostly due to the Bombay High oil field accident, coal shortages affecting power generation and adverse weather conditions.

• Robust economic growth during the first half of the year seems to have encouraged the prime minister to set an ambitious target of 10 per cent after the next couple of years. The prime minister expects the economy to grow at 7.5 per cent for the current year, a rate which he believes is sustainable for the next two or three years.

  The economy cannot maintain the current rate and aspire for better days unless more structural reforms are carried out. The prime minister himself would agree that his government has not lived up to expectations, given the reformist credentials of his core team. Even with strident opposition from his Left allies and the still-socialist sections within the ruling party, the fact remains that the government could have accomplished much more in the last one-and-half years it has been in power.

• Higher plan expenditure has led to a further worsening of the fiscal deficit this year. For the first seven months of the current financial year, fiscal deficit was at over Rs92,000 crore - more than 60 per cent of budget estimates for the current year.

  However, revenue collections have improved as compared to last year which has led to an improvement in revenue deficit. Revenues are expected to remain strong for the rest of the year which should help the government to at least maintain the current levels of deficit, if not improve them.

  The heartening fact is that the government has kept non-plan expenditure under control so far this year. Non-plan spending on current and capital accounts as well as interest payments have come down as a percentage of budget estimates during the period. Whether these gains would be frittered away in the year-end spending frenzy of various government departments remains to be seen.

• Wholesale price inflation for the week ended 19 November rose marginally to 4.32 per cent from 4.2 per cent for the previous week. Prices of textiles and other manufactured goods as well as select food items went up during the week. Cement and industrial fuels were cheaper during the week.

US markets, global economy and oil

• US markets closed marginally lower for the week after gaining for the last five consecutive weeks. Strong economic data brought back worries about the Fed continuing with its interest rate hikes which affected market sentiment. Though consumer spending at the beginning of the holiday season was strong, investors are worried about the impact of higher discounts on margins of retailers.

  The Dow lost half a per cent during the week while the S&P 500 closed one-third of a per cent lower. Technology stocks recovered from their early week decline and helped the NASDAQ index to close one-third of a per cent higher. This was the seventh consecutive week of gains for the NASDAQ.

• US GDP growth for the third quarter ended September was revised upwards by as much as 50 basis points from 3.8 per cent to 4.3 per cent annualised. Both consumer and business spending remained robust during the quarter. While consumer spending growth for the quarter was at 4.2 per cent, business spending rose by as much as 8.8 per cent.

  Despite the continued growth, inflation levels remain low in the US. Core inflation, excluding the prices of energy and food products which are considered more volatile and hence excluded for analysing price trends, for the September quarter came in at a lower than expected 1.2 per cent.

  However, corporate profitability has declined during the quarter mostly due to hurricane damages. It is also believed that companies are absorbing part of higher input costs which has helped in keeping final inflation figures under check. Corporate profitability during the third quarter declined nearly 4 per cent as against a growth of over 5 per cent in the previous quarter.

  After a gap of two months, job additions in the US bounced back to the levels seen during the second quarter. The US economy added 215,000 new jobs during the month of November. Income levels of industrial workers went up by more than 3 per cent during the month which is good news for retailers.

• The US Fed chairman has once again warned the government about rising budget deficits. He believes that a further deterioration in the fiscal condition would lead to painful adjustments later. Despite promises by the government to bring down the budget deficit, it is expected to rise to more than 3.5 per cent of GDP by the end of the year.

  The US Fed is not as concerned about current account deficit, which it believes would ease gradually if the economy continues to perform well. The US current account deficit is above 6 per cent of the GDP. Continued investment flows into the US have kept the deficit from deteriorating further. However, the Fed has cautioned that at some point foreign investment flows would slow down thereby increasing the pressure on the deficit.

• The European Central Bank hiked short term interest rates by 25 basis points to 2.25 per cent annualised. The increase is the first in five years and came as soon as economic growth outlook for major European countries have turned better. However, the ECB has made it clear that it is not planning a series of small hikes on the lines of the US Fed.
  
• Crude prices declined earlier in the week on rising stocks of fuel in the US. Data showing strong economic growth in most major countries led to expectations of rising energy demand and crude recovered later this week. Fresh forecast of colder weather in the northern hemisphere led to further buying and the commodity closed the week with gains of a per cent from the previous week's closing levels. January futures on the NYMEX closed the week at $59.32 per barrel.

*Disclaimer: The author may have positions in the stocks mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.