After five consecutive weeks of decline till the previous week and some stability last week, the markets finally staged a substantial recovery this week. Firm trend in most global markets and expectations of sustained domestic economic and corporate performance aided the pull back.

Markets opened the week on a positive note on Monday and the frontline indices gained over a per cent each. The uptrend was supported by heavyweights like ONGC, Reliance Industries and Infosys.

Tuesday saw some correction after three days of gains, mostly on profit booking. Banking and engineering stocks came under pressure and the indices closed with losses of nearly 1.75 per cent each.

The uptrend resumed on Wednesday and the Sensex closed above 10000 for the first time in two weeks, helped by technology stocks and Reliance Industries.

Global markets were very firm on Thursday and the domestic indices surged further. Most sectors ended with gains and the indices added more than 2.5 per cent each.

Markets remained weak for most part of the session on Friday before surging ahead towards the end of the day. Substantial gains in ONGC and Reliance Industries helped the indices to close more than a per cent each higher. The Nifty managed to close above 3000 after a gap of more than two weeks.

The Sensex added 516 points or 5.22 per cent during the week and the Nifty gained 153 points or 5.3 per cent over the week.

The week belonged to mid-caps and small caps as they substantially outperformed the large caps. Consensus view that the smaller stocks have been beaten down considerably more attracted buying interest. Even on Tuesday when the large caps corrected, smaller stocks managed to close with only marginal losses.

The CNX Mid-Cap 100 index closed the week higher by 276 points, or 7.46 per cent. The small-cap index on the BSE gained more than 13 per cent for the week.

Domestic economic and regulatory action

• The corporate sector is quite confident about sustaining and even improving profitability this year, if the advance tax figures are any indication. First instalment advance tax receipts from the corporate have shown a very healthy rise this year. Even the oil sector companies are understood to have made advance payments on hopes of reporting modest profits this year, helped by the price hike and oil bonds.

  Advance collections from personal income tax have also seen a substantial jump this year, indicating sustained rise in income levels. This should ease any concerns over a slowdown in private consumption because of rising interest rates. Higher interest rates may not dampen demand for consumer durables and retail credit including home loans, as long as income levels continue to rise.

  Overall direct tax collections so far during this financial year have increased more than 75 per cent from the same period of previous year. This should be good news for the government and the finance minister remains confident of reducing fiscal deficit to 3.8 per cent from over 4 per cent during the previous year. Improvement in the fiscal situation should make overseas investors more confident and would help sustain investment flows into the country.

• As expected, the market correction has affected many large IPO's, which were scheduled to hit the markets. Almost all of them, including the most high profile one from DLF, have been postponed and merchant bankers are now reworking their pricing and other strategies. Disastrous listing of the recently concluded IPO's, most of which were highly overpriced, has dampened the new issues market considerably.

  Though DLF and its merchant bankers remain confident of an early launch of its IPO, it is speculated that the issue would be delayed by at least a couple of months. Most of the real estate stocks have declined substantially from their peaks and it would have been very difficult to pull off a large issue at rather steep valuations.

  Though the draft prospectus for another high profile IPO by Tech Mahindra has been filed with SEBI, it is likely that the issue would be launched only after the market stabilises.

  The market decline has also sharply reduced the number of FCCB / GDR issues. There have been only a limited number of overseas equity issue announcements since the middle of May. Most of the previously announced issues have been postponed. Some companies have even cancelled preferential allotments announced earlier as stock prices have fallen much below the announced issue prices.

  Such delays in launch of overseas and domestic issues are unlikely to have any major impact on overall performance of the corporate sector. Many of these issues were aimed at mopping up resources when the market conditions were extremely bullish and not to finance specific projects or urgent capacity expansions. Companies who need resources urgently would anyway go ahead with their issues at much more reasonable valuations.

• Inflation rose above 5 per cent for the first time in a year as the impact of the recent fuel price hike reflected in prices. Wholesale price inflation for the week ended 10 June increased to 5.24 per cent from 4.72 per cent reported for the previous week. Prices of primary food articles continued to go up during the week and the government has announced a number of measures to bring down prices of these items.

Industry developments

• Analysts are divided on the outlook for metal stocks as international commodity prices have also been volatile recently. Metal stocks were among the worst hit in the market decline, but some analysts are sceptical about them even at lower valuations.

  Steel prices have gone up this year on sustained demand from major consuming countries like the US and China. Though Chinese steel capacity has gone up considerably over the last few years, sustained growth in demand has prevented a glut. Chinese manufacturers have recently agreed to a nearly 20 per cent rise in iron ore contract prices for the current year, indicating robust domestic steel demand in China.

  However, some analysts believe that rising interest rates would slow down investments in large projects, which may slow down demand growth for steel. They expect US steel inventories to rise later in the year, which would dampen prices.

  If the Mittal-Arcelor merger goes through, manufacturers may have a better say in steel prices. But in the event of a genuine slow down in global demand, industry consolidation may not be of much help in supporting prices.

  Non-ferrous metal stocks have been considerably more volatile than steel stocks over the last month. International prices of copper, zinc and aluminium have corrected substantially from their record highs seen earlier this year. Unlike steel companies who have not yet announced price cuts, domestic manufacturers of non-ferrous have already effected a few rounds of price cuts.

  The rally in non-ferrous metals was mostly on projections of capacity constraints, both current and projected. Some analysts are now questioning forecasts of a sustained rise in demand for non-ferrous metals leading to severe capacity constraints. Once again rising interest rates is the culprit, which may lead to a global economic slow down and hence lower demand for metals.

  However, current non-ferrous metal prices are substantially higher than last year and nobody is anticipating a steep fall from these levels. Even if current prices sustain, non-ferrous companies would report a substantial improvement in their performance for the current year. But, much of this has already been discounted into current stock prices and further upsides would depend on commodity price movements.

US markets, global economy and oil

• US markets were volatile during the week, as investors remained uncertain about the extent of economic slowdown and rise in inflation. After remaining subdued during the first couple of days on mixed economic signals and news flows, US indices rallied on Wednesday. Part of the gains was given up on Thursday as doubts about a slowdown re-emerged. Markets remained subdued on Friday, despite some excitement on corporate mergers, on fresh inflation fears.

  For the week the Dow index declined close to one quarter of a per cent while S&P 500 closed with losses of over 0.5 per cent. Technology stocks were more volatile and the NASDAQ index lost 0.4 per cent over the week.

• Crude oil prices were weak during the early part of the week on positive signs of a peaceful settlement to the Iranian nuclear dispute. Prices remained below $70 per barrel till Tuesday before recovering. The US government stepped up its pressure on Iran and urged the Iranian government to respond fast to a settlement proposal.

  Prices went past $70 by Wednesday and continued the up trend on Thursday as well. Near month futures on the NYMEX gained more than a per cent for the week to close at $70.84 per barrel on Friday.

• Oil prices could double or even triple from current levels in the event of any military action against Iran, according to a senior Saudi Arabian official. Apart from a near total stoppage of Iranian oil exports, military conflict in the region would restrict exports from other countries as well. Military action against Iran could also trigger militant attacks on oil installations in the Middle East.

  Though major consuming countries like the US can manage a shortfall in Iranian exports from their strategic reserves, it is the peripheral impact on exports from other countries, which would drive up prices. Substantial increase in oil prices would push up global inflation and force further increases in interest rates.

  Diplomatic efforts have so far shown positive results and Iran has been offered a settlement package, which offers incentives for diluting its nuclear programme. The Iranian government has called the peace move a 'step forward' and has asked for time to study the proposal in detail. It is expected that negotiations would start early next month. Statements by the US this week asking Iran to respond without delay are seen more as a pressure tactic. However, the US government has not yet ruled out the military option either.
  

*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.