labels: stock markets - india, markets - general
Markets decline ahead of results seasonnews
By Rex Mathew
08 July 2006

The major pull back over the last couple of weeks is finally facing some resistance. Most of the gains were in anticipation of good first quarter numbers, which would start coming out from next week. As usual traders have decided to book profits ahead of the event, which led to the weakness towards the end of this week.

Markets opened the week on a firm note and sustained the uptrend from last Friday. Helped by heavyweights ONGC and Reliance Industries, the indices overcame initial volatility and closed with decent gains.

After a minor correction on Tuesday, the indices surged on Wednesday and ended with gains of 2.5 per cent each. Steel and engineering stocks led the rally and ended with significant gains.

Thursday saw some profit booking as most of the frontline stocks came under pressure. The indices recovered in early trades on Friday, only to slump in the afternoon and end with losses of around 2.5 per cent each.

The Sensex lost 99 points or 0.93 per cent during the week and the Nifty declined 52 points or 1.66 per cent over the week.

Mid-caps and small caps continued their correction for the second week. They were subdued even when the frontline stocks rallied. The CNX Mid-Cap 100 index closed the week lower by 61 points, or 1.55 per cent.

Domestic economic and regulatory action

  • The government was forced to suspend its disinvestment programme in Nalco and Neyveli Lignite after a partner in the ruling coalition threatened to pull out of the government. When announced last month, the disinvestment move was seen a sign of new found assertiveness in the government on the face of strident opposition to reform moves from the left parties.

    When they were not able to force the government to drop such policies, the left parties have utilised the services of some of the regional parties who are ideologically closer to the left. Competitive politics in Tamil Nadu and the wish to be seen as labour-friendly also encouraged the DMK to issue an open threat to the government.

    Though the government has avoided a further escalation of tensions and mistrust in the ruling coalition by backing off, the incident has brought forth the lack of coordination among the coalition parties. Such incidents create an environment of political uncertainty which can affect economic decision making. There were rumours that the prime minister is thinking of resigning after the decision. Smooth governance, especially in a coalition set up, requires considerable coordination and hopefully the situation would improve in future.

  • The government should also be more pragmatic about such controversial decisions which are completely unacceptable to its own allies. Now that it has failed to convince the left parties about the need for drastic reforms in many sectors, the government may take a more conciliatory stand and try to achieve the best possible without pushing the country into political uncertainty and a mid-tem election.

    Divesting 10 per cent each in two companies would not have much of an impact on government finances. It would not have changed anything at these companies as the government would have still held majority stakes. When that is the case, was the government decision to disinvest worth the risk of a public confrontation with its own allies?

  • Wholesale price inflation for the week ended 24 June declined to 4.84 per cent from 5.44 per cent reported for the previous week.

US markets, global economy and oil

  • US markets remained relatively flat as the trading week was shortened because of independence day holiday. Indices were firm on Monday, but declined considerably on Wednesday as trading resumed. They recovered and erased part of the losses on Thursday on positive corporate news flows.

    Technology stocks were weak as major stocks like Apple and eBay came under pressure on negative developments.

  • The European Central Bank (ECB) left key interest rates unchanged at 2.75 per cent per annum at its meeting this week. The Bank of England, UK's central bank, also decided to leave interest rates unchanged

    However inflation in the Euro area remains above 2 per cent, above the target zone set by ECB, and may prompt a rate hike by next month. Economic growth in major European countries like Germany remains reasonably strong and high oil prices would continue to add to inflationary pressures.

    On its part, the ECB said it is keeping 'strong vigilance' against inflationary pressures. Most economists now expect the ECB to raise interest rates to 3 per cent per annum by next month and to 3.5 per cent by the first quarter of 2007.

  • Crude oil prices maintained the up trend this week after North Korea conducted missile tests and Iran refused to budge from its position despite increased pressure from western countries. Military action by Israel in the Gaza strip also heightened concerns of fresh tensions in the Middle East.

    Prices went past $75 per barrel by Wednesday and sustained that level on Thursday as well. Near month futures on the NYMEX is trading around $75 per barrel in European trades on Friday.

  • Increased investments in crude oil production would start yielding results by next year and would lead to an increase in output, according to a survey conducted among oil analysts. Along with a decline in demand growth, this would exert pressure on crude oil prices. For calendar year 2007, average crude oil prices are expected to decline to $60 per barrel.

    However, average prices for the current year have been revised upwards to $67 per barrel by the analysts covered under the survey. Though demand growth is expected to remain at the same levels as last year, output growth is expected to slow down - especially from OPEC countries and Russia.

    Possibility of hurricanes hitting oil installations, like last year's Hurricane Katrina, would exert upward pressure on prices. The Iranian nuclear dispute also has considerable bearing on crude oil prices. However if the Iranian issue is settled peacefully and hurricane activity is low this year, then average prices would be lower than anticipated.

*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.


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Markets decline ahead of results season