The week was very eventful for the markets as rising pessimism over terror attacks in Mumbai and sharp decline in global equity markets was countered by spectacular first quarter numbers from Infosys and expectations of a repeat performance from other large companies.

The week started on an optimistic note as the indices surged nearly 2 per cent each, led by frontline technology and oil stocks. All the tech stocks ended with strong gains while ONGC added 4.5 per cent.

There was modest profit booking on Tuesday as auto stocks declined after Hero Honda announced poor results for the first quarter. The terror attacks in Mumbai happened after the markets closed, but the sentiment had turned very negative – especially since global markets were weak.

But Infosys came up with an incredible rescue act in the form of very good quarterly numbers and higher guidance which beat all analyst expectations. Technology stocks soared and the indices closed with gains of nearly 3 per cent each.

Part of the gains was given up on Thursday as oil prices rallied and global markets slipped. There was no respite for global equity markets on Friday as well as oil prices touched record highs and Bank of Japan raised interest rates.

The Sensex gained 169 points or 1.61 per cent during the week and the Nifty added 47 points or 1.53 per cent over the week.

Mid-caps and small caps remained subdued this week as well though some gains were seen in select stocks on expectations of good results. The CNX Mid-Cap 100 index closed the week lower by 6 points, or 0.15 per cent.

Domestic economic and regulatory action

• The economy has made a good start for the current financial year with industrial growth for the first two months coming in at 9.8 per cent as compared to 9.5 per cent for the same period of previous year. After expanding 9.5 per cent for April, industrial growth increased to 10 per cent in May.

  Though the growth rate for May was lower than 10.8 per cent reported for the same month of previous year, the 11.3 per cent growth in manufacturing is very encouraging. Electricity generation and mining can pick up later in the year to keep industrial growth at around 10 per cent.

  Monsoons have picked up after giving some cause for worry in June. If rains stay on course for the rest of the monsoon period, agriculture can be expected to repeat last year's performance. Prospects are bright for the Indian economy to expand at above 8 per cent this year as well.

• Exports during the first quarter of the current year have increased at a very encouraging 32.4 per cent. Imports for the same period increased by only 24.48 per cent and non-oil import growth is much lower. This should lead to further improvement in the current account situation, a major worrying factor for foreign investors in the last few quarters.

  Exports for the month of June rose sharply by 40.17 per cent while imports were higher 23.98 per cent. Capital goods, refined petroleum products, textiles, chemicals etc were the best performers for the month. Oil imports went up by 55.59 per cent while non-oil import growth was much lower at 9.82 per cent.

• The dark clouds on the economic horizon are run-away oil prices and the spectre of rising inflation and interest rates. Wider conflict in the Middle East could push up crude prices closer to the $100 per barrel mark, despite indications of a slowdown in demand growth in major markets like the US.

  But the government may find it politically very difficult to go in for another round of fuel price hikes. The left parties and left leaning allies of the government would definitely resist such moves and they would be much more aggressive now after their success in stalling PSU disinvestment.

  Hence the central government would be forced to look at bringing down duties on petroleum products, as PSU oil companies cannot bear the additional burden without seriously cutting back their investment plans. Such a move from the central government would force the state government also to follow suit and reduce state level taxes on petroleum.

  Any decline in government revenues would worsen the fiscal situation, but the impact may not be that bad as revenue receipts remain buoyant. On the positive side, the decline in revenues would hopefully force the central and state governments to control wasteful expenditure.

  Though the RBI has maintained its inflation target at between 5 and 5.5 per cent for the current year, we would be very lucky if we can end the year within that range. Though the sharp rise in prices of primary food products has been arrested for the time being, further rises later in the year can be expected as income growth remains strong and would push up consumption further.

  Some analysts believe that the RBI would leave interest rates unchanged at its next review meeting scheduled for the last week of this month. A sharp slowdown in credit growth during the first quarter and tighter liquidity conditions prevailing now may prompt the RBI to maintain status quo. However, the possibility of a pre-emptive rate hike by the RBI in anticipation of higher fuel costs also cannot be ruled out.

• Wholesale price inflation for the week ended 01 July increased to 4.96 per cent from 4.84 per cent reported for the previous week. Prices of manufactured goods, including steel, textiles and chemicals, were higher during the week.

US markets, global economy and oil

• US markets saw one of their worst weekly losses in more than a year this week. Tensions in the Middle East, rising oil prices, decline in retail sales and uninspiring corporate results all affected the markets this week. Influential brokerages came out with downgrades on key sectors like technology and retail as investors reduced their equity exposure and moved to safer assets.

  After remaining relatively stable during the early part of the week, the indices started tumbling on Wednesday. The slide continued on Thursday and Friday on concerns of a decline in profitability for technology companies and average results from large companies like GE.

  The Dow lost 3.2 per cent during the week while the S&P 500 gave up 2.3 per cent. Technology stocks were once again the worse off and the NASDAQ slipped 4.4 per cent over the week.

• After leaving interest rates unchanged in their previous meeting, the board of Bank of Japan decided to hike rates from zero per cent to 0.25 per cent this week. The overnight lending rate has been increased by 30 basis points from 0.1 per cent to 0.4 per cent.

  BoJ had maintained zero interest rates since 1999, except for a brief period in 2000, to help push up economic growth. The Japanese economy has been experiencing deflationary conditions for nearly a decade now and it is still not clear if prices would decisively break their downward trend.

  However the Japanese economy has been doing well for the last many quarters, mostly on strong export demand. Consumer spending has also improved, raising hopes that economic growth would sustain for a longer period. Japanese economy is forecast to grow at more than 2 per cent during the current year.

  It is unlikely that BoJ would go for another rate hike this year as there is opposition within the board of directors. The decision to hike overnight lending rate was not unanimous as there are fears that higher interest rates would stop economic revival in its tracks. There is also political opposition to higher interest rates.

• Crude oil prices soared this week and posted new all-time highs. The prime driver was military action by Israel in the Middle East, which the markets fear would worsen into a wider conflict with Syria and Iran. On its part, Iran has warned that any attack on Syria would be treated as an attack on Arab countries and would face retaliations.

  A full-fledged war between these countries would affect oil exports from the Middle East. Iran is already facing the heat as the country has been referred to the UN Security Council for not responding fast enough to a peace proposal for settling the nuclear dispute. Militant attacks against oil installations in Saudi Arabia, the largest oil exporter, may also increase.

  To make matters worse, the security situation in Nigeria is worsening. This week, rebels attacked two pipelines and disrupted a major part of exports from the country. US inventory of crude oil and refined products declined much more than expected, exerting further upward pressure on prices.
  
  Oil prices once again went past $75 per barrel by middle of the week. After closing at record levels close to $76.5 per barrel on Thursday, prices soared above $78 in Asian trades on Friday. Near month futures on the NYMEX finally settled at $76.8 for the week, higher by around 2 per cent from previous week's closing levels.

• Supply growth would outstrip demand growth for crude oil in 2007, according to the latest forecasts from the International Energy Agency (IEA). The agency estimates demand to increase by 1.57 million barrels per day during the next calendar year. This is higher than the average demand growth projections for the current year, which currently stands at 1.21 million barrels per day.

  However, increased investments in oil production would lead to higher growth in supplies – especially from non-OPEC countries. Supply from non-OPEC sources is expected to rise by 1.7 million barrels per day in 2007, which would reduce the dependence on OPEC oil.

  But the situation would change once again after 2007, the IEA forecasts. Average annual demand growth is forecast at 2 per cent, or 1.8 million barrels per day, till 2011. Much of this demand would come from emerging economies like China. The IEA says dependence on OPEC oil would rise after 2007, and hence, geopolitical tensions in the Middle East would have a much bigger influence on oil prices by then.
  

*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.