labels: stock markets - india, markets - general

Indices maintain uptrend despite PSU bank jittersnews
By Rex Mathew
05 August 2006

Markets started the week on a firm note, helped by strong global markets and healthy corporate numbers. Sensex went past 10800, helped by banking and engineering stocks, before seeing some selling in afternoon trades and closing below that level.

A last hour rally on Tuesday helped the indices to regain all their early losses and close with modest gains. Engineering stocks sustained their rally, but select banking stocks came under pressure.

Wednesday saw the Sensex moving close to 10900 mark on strong gains for auto, technology and metal stocks. Index heavies, ONGC and Reliance Industries, also gave a helping hand to maintain the up trend.

The Sensex finally crossed the 11000 mark on Thursday after a gap of nearly a month. Private sector banking and auto stocks were in the limelight, but profit booking in the afternoon saw the Sensex settling below 11000.

The index broke past that barrier once again on Friday and held above that level for some time before giving up again. Losses in PSU banking stocks following the directive from finance ministry on lending rates affected sentiment. Reliance Industries contributed to the afternoon decline and the indices ended lower.

The Sensex gained 187 points or 1.75 per cent during the week and the Nifty added 46 points or 1.47 per cent over the week.

Mid-caps and small caps also moved in line with the large caps and ended with good gains for the week. Investors remained interested in the smaller stocks after the superior earnings growth reported for the first quarter, though some profit booking was seen towards the end of the week. The CNX Mid-Cap 100 index closed the week higher by 67 points, or 1.75 per cent.

Domestic economic and regulatory action

  • The finance ministry directive to PSU banks to get board approval for interest rate hike decisions halted the rally in banking stocks towards the end of the week. Banking stocks had perked up on expectations the RBI may not be inclined to raise interest rates for the rest of this calendar year. The recent PLR hikes announced by the banks would have protected their margins at least for the current financial year.

    Though the exact implications of the finance ministry missive to banks are still not known, as it is not clear how far the ministry would go on the face of widespread criticism, the issue has considerably dampened the sentiment in PSU banking counters.

    Most of these banks had put up a credible performance during the April-June 2006 quarter. Though stability of earnings on a quarter-to-quarter basis is still an issue with most PSU banks, they have shown enough signs that they can take on their private sector and foreign-owned competitors and thrive in a very competitive environment.

    PSU banking stocks have traditionally attracted much lower valuations than their private sector peers purely because of the concerns over government interference and management autonomy. After they improved their competitiveness, it was expected that the valuation gap with private sector banks would narrow. Such hopes would now stand belied and sadly, the minister, supposedly the most reformist in the cabinet, should be responsible for this occurrence.

  • Wholesale price inflation for the week ended 22 July increased to 4.67 per cent from 4.52 per cent reported for the previous week. Prices of primary food articles continued the uptrend while select manufactured items also became dearer.

US markets, global economy and oil

  • US markets held steady during the week after the previous week's recovery. Corporate results and news flows were mixed, leading to some volatility during the week. Hopes about a pause in interest rate hikes by the US Fed at its meeting scheduled for next week helped prevent further decline.

    After opening the week on a modestly subdued note, US markets declined on Tuesday. Indices gained for the next 2 days, but the gains were given up on the last day of the week.

    The Dow gained less than 0.2 per cent during the week while the S&P 500 added a very marginal 0.05 per cent. Technology stocks underperformed yet again and the NASDAQ index lost close to 0.45 per cent over the week.

  • US economic data released during recent weeks make the case stronger for keeping interest rates unchanged. After the US GDP growth rate for the second quarter came in at 2.5 per cent annualised, a key survey showed that growth in the services sector has slowed down. Both these key economic indicators would have considerable influence on the Fed decision when the governors meet next week.

    US employment data for the month of July released yesterday indicates some easing off in the labour markets as well. New job creation was lower than forecast and unemployment rate, though still less than the long term average, increased for the first time in nearly 6 months. Strong job growth and rising wages were some of the key factors which have kept the US Fed to keep raising interest rates since mid-2004.

    Statements from senior Fed officials in recent months and minutes of the recent Fed meetings have given enough indications that the Fed would prefer to stop raising rates as soon as economic indicators show some signs of slowing down. Though inflationary pressures remain, especially from high crude oil prices, the modest slow down in key indicators should see an easing-off of consumer spending in the coming months.

    Till last week, consensus forecasts were in favour of a pause in hikes after another 25 basis point hike this month. More economists now expect the Fed to take a pause next week, even though average wages have not declined.

  • In the crude oil market, developments in the Middle East took a back seat during the week and the storm season took over. Traders were glued into weather forecasts for hurricane warnings in the Gulf of Mexico. The weathermen have given a warning that a named tropical storm may develop into a hurricane.

    Hurricanes in the Gulf of Mexico had severely affected oil installations, including offshore platforms, and caused refinery shutdowns last year. Oil prices soared at every new hurricane threat. This year has also been forecast as a busy hurricane season and oil prices are bound to see considerable action in the next couple of months.

    Oil prices touched $76 per barrel by the middle of the week before correcting modestly on forecasts that the intensity of the hurricane may be lower than expected. Near month futures on the NYMEX settled at $74.6 for the week, higher by nearly 1.8 per cent from previous week's closing levels.

*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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Indices maintain uptrend despite PSU bank jitters