Indices started the week on a firm note as Asian markets rallied. Expectations of good quarterly numbers helped the indices to scale new highs. Steel and engineering stocks were the best performers.

Tuesday saw a firm start following very good results from TCS and HCL Tech, but the indices lost their way in afternoon trades on profit booking. Some of the big gainers from the previous day corrected while engineering stocks continued to rally.

Indices continued to consolidate on Wednesday even as engineering stocks and select banking stocks gained. Oil marketing stocks rallied on lower crude oil prices.

Thursday morning saw a strong rally and the indices scaled new highs, helped by strong gains in ONGC and Reliance Industries. However, the indices turned volatile in the afternoon and gave up part of their gains.

Better than expected results from Reliance Industries did not help the overall sentiment on Friday and the indices drifted down on profit booking. Select technology stocks came under pressure, as their results were disappointing. An afternoon recovery helped the indices to cut down part of the losses

Sensex gained 126 points or 0.9 per cent during the week and the Nifty added 38 points or 0.94 per cent over the week.

Mid-caps and small-caps did well for the first three days of the week as trading interest shifted to the smaller stocks in anticipation of good quarterly numbers. On Thursday, they gave up all their gains in the afternoon and closed flat. Mid-caps and small caps corrected on Friday, mostly on profit booking.

CNX Mid-Cap 100 index closed the week with gains of 55 points or 1.05 per cent for the week.

Domestic economic and regulatory action

• Third quarter results announced so far, especially from some of the large companies, are better than expectations. While the average sales growth of close to 40 per cent is very impressive what has come as a surprise is the improvement in operating margins achieved by some companies. Margins were under pressure in recent quarters and most analysts were expecting a further contraction in the latest reporting quarter as well. Most frontline technology companies managed better margins during the quarter, despite the Rupee appreciation, while Reliance Industries achieved a substantial improvement even when global benchmark margins declined.

  While this performance is very encouraging and may help the market to scale further heights, the danger is that expectations would also rise further. Most overseas analysts are worried that expectations – as expressed by rising price-earning multiple for the market as a whole – are already very high. The sustained out-performance by leading companies may create complacency in the market. When the performance starts to flounder at some point, as it inevitably would, the heightened expectations would cause a much deeper crash which would be very painful.

• NCAER has once again revised its GRP growth forecast for the current year following the better than expected expansion during the first half. The revised forecast of 8.4 per cent for the current year equals last financial year's actual growth rate. NCAER also expects inflation to decline to 5 per cent by end-March on lower crude oil prices.
  
  
• Rating agency Moody's said India cannot sustain growth rates above 9 per cent over the medium term because of capacity constraints. The agency expects current growth rate to be sustained for another year, after which the capacity constraints and shortage of skilled labour would lead to a slow down. The agency estimates the Indian economy's long-run growth potential to be around 6.5 per cent.
  
  
• The oil ministry has backtracked from last week's announcement regarding a review of retail fuel prices by this month end. The minister now says the government would review the situation only if the Indian crude oil basket falls below $50 per barrel and stabilises at least for a month. However, political considerations and rising inflation may force the oil ministry to reconsider this view.
  
  
• Wholesale price inflation for the first week of this year increased to 6.12 per cent, a two-year high, from 5.58 per cent reported for the pervious week. The rise in inflation was mostly on account of higher prices of primary food articles even as manufactured products reported a modest decline in prices. Inflation was at 3.86 per cent during the same week of previous year and part of the rise is also because of the low base effect.
  
  
• Though inflation has moved way past the upper limit of RBI's target range of 5 - 5.5 per cent for the year-end, economists and analysts are not unduly worried. They believe that the effect of lower crude oil prices has not reflected so far and expect inflation to decline over the next two months. The government too does not appear to be very concerned and may well be prepared for reducing retail fuel prices. However, higher inflation is almost certain to force the RBI to go in for a rate hike of at least 25 basis points.

US markets, global economy and oil

• US markets were subdued this week on growing concerns about the sustainability of corporate profit expansion. Even the companies, which announced better than expected numbers were cautious in their guidance for current year. Data showing rising producer price inflation led to a further erosion of hopes about an early rate cut by the US Fed.

  However, the outlook for the US economy has improved in recent weeks. There is growing consensus that the housing market may not see further declines and may even recover modestly this year. Lower energy prices have lifted consumer confidence to a three-year high and should support volume growth for most consumer businesses. Job additions and average wage growth also remain robust, which is more good news for the economy. Though the possibility of an interest rate cut has receded, the market may settle for steady economic growth and interest rates instead of a rate cut and more weakness for the US economy.

  The Dow scaled a new lifetime high on Tuesday but declined modestly later in the week. Technology stocks saw sustained profit booking for three days from Tuesday on concerns of stretched valuations before stabilising on Friday. The Dow gained less than 0.1 per cent for the week while S&P 500 ended with very marginal losses. The NASDAQ lost more than 2 per cent for the week.

• Rating agency Standard & Poor's expects Asian economic growth to remain robust in 2007. The agency has forecast a growth rate of 5.3 per cent for the region, lower than 5.6 per cent achieved for last year. India would be the third fastest growing economy this year in the region, behind China and Kazakhstan, according to the report.
  
  
• Crude oil prices continued to decline this week even after losing nearly $10 per barrel over the previous two weeks. After a steady start to the week, oil prices tumbled on Tuesday as leading OPEC members including Saudi Arabia ruled out the possibility of an emergency meeting of the oil cartel to discuss the oil price decline. The oil cartel believes its earlier production cuts have removed part of the excess supplies in the market and the fundamentals of the market have improved. OPEC had announced production cuts totalling 1.7 million barrels per day to help stabilise falling oil prices.

  Higher than expected US oil inventories led to further weakness and crude oil fell below $50.5 per barrel on Thursday. Friday saw a pull back, which helped pare losses for the week. Near month futures on the NYMEX lost close to a per cent for the week and settled at $52.04 per barrel.

• Global investor Jim Rogers, who had predicted a long-term bull market in commodities, still believes that crude oil will bounce back from this decline. He believes that fundamentals of the energy markets make it imperative that oil prices would sustain a long term up trend. He predicted that prices would rise above $100 per barrel and even $150 per barrel, but refused to give any timeline. Crude oil had set a lifetime high of over $78 per barrel last year.
  

*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.