Markets opened the week on a weak note as traders booked profits after the previous week's strong rally. Weakness was seen in commodity and oil stocks. A rally in TCS and ONGC stocks helped reduce the losses on the Nifty as compared to the Sensex.

Tuesday saw the indices bounce back as FII's came back as buyers. Reliance Energy managed substantial gains after reports of huge investment plans in power generation.

Markets were subdued on Wednesday and the indices closed flat. Some action was seen in the two-wheeler stocks as they reported good volume growth for the month of May.

The indices lost over a per cent each on Thursday as commodity stocks faced large selling pressure. Profit booking in select stocks like HLL and ITC led to further weakness. Good shipment volumes reported by cement companies for May could not hold the stock prices from declining.

Friday was all about hopes and renewed expectations about Reliance settlement and the disinvestment programme. The indices surged as all Reliance group shares made smart gains. News of possible disinvestment in Nalco gave further strength to the rally.

The markets had a short trading session on Friday as well, reportedly to test the system back up facilities of NSE. Institutional participation and hence volumes were very low as expected. The indices closed without much change.

The discount on near month Nifty futures to the spot index has remained well over a per cent for quite some time now. Under normal circumstances, arbitrage traders would have taken advantage of this gap and the gap itself would have come down fast.

The main reason for the wide gap between spot and futures is the hefty dividends declared by frontline companies. Many of the index stocks are yet to turn ex-dividend in the cash market while the dividends are not factored in futures prices. This will be corrected as more stocks go ex-dividend during this month.

The start of the week was on a dull note for mid cap stocks also. After opening the week below the 3000 mark, the CNX Mid-cap 200 bounced back on Wednesday to cross it again. The rally was short-lived and the index declined on Thursday and underperformed the larger stocks on Friday.

US markets, economy and oil

US markets were subdued during the week as the economic data was generally weak. Weekly unemployment claims rose while job additions for the previous month were lower than expected. The surge in crude prices gave the traders yet another reason to bring some pessimism back into the markets.

NASDAQ has performed better than the broader indices in the past couple of weeks and the tech index remained steady in the early part of the week. Weakness in Apple Computers, which is reportedly facing a slowdown in iPod sales, led to a weak closing on Friday.

US markets would be looking forward to the US Fed chairman's testimony on the outlook for the economy and trade data for the month of April due next week.

US jobs data for the month of May disappointed as the number of jobs added were less than half of analyst expectations. The job growth is the weakest in more than 20 months and has raised fears of a slowdown in economic growth in the US.

However, the data may not be as bad as it looks, though a sharp drop is always a cause for concern. Unemployment rate actually dropped to 5.1 per cent, which is the lowest since second half of 2001. The drop in job creation is more likely to be a temporary blip in the longer-term picture.

There could be a positive effect to the drop in job growth as well. The US Federal Reserve, which is expected to meet again by the end of June to review the short-term interest rates, will surely take a closer look at the data. There are many who believe or rather hopeful that the Fed is about to reverse its policy of periodic hikes in interest rates.

US bond prices have gone up in the recent past which means bond traders expect such an action from the Fed. Bond traders have been proved right more often than the high profile Wall Street traders.

Euro weakened against the US dollar after the French and the Dutch voted against the European constitution. Europe, especially the larger economies in Western Europe, has been facing subdued growth for the past few years.

Though there are many reasons behind this underperformance, one of the more important reasons being the rigidities in policy, imposed by the introduction of the common currency.

This setback for the union may at last force member countries to create a more flexible policy environment, which may boost growth. A fall in the value of Euro would allow European exporters to regain some of their lost glory and kick start growth within the union.

The oil bulls were back in action during the week and pushed up the commodity above the $55 mark. The present rally was triggered by the ill health of the Saudi monarch leading to speculation that there could be succession disputes and possible political unrest.

Crude futures gained close to 5 per cent on Wednesday on reports of a rupture in an oil pipeline leading to a Texas refinery. Any news of supply dislocations, however minor, is enough to drive the super charged crude market.

US inventories of both crude and petrol were higher than expected and the weekly data helped oil futures to cool off on Thursday. Crude bounced back on Friday on reports of higher than expected demand for diesel and other refined products.

Domestic economic and regulatory action

There was some very good news on government finances with the fiscal deficit for 2004-05 declining to 4.1 per cent. It indeed is a rare event when the actual deficit is below the government's revised estimates as per the last budget. The revised estimate was 4.5 per cent of GDP.

This unexpected improvement in fiscal health was a result of growth in revenues as well as a reduction in expenditure. Non-tax revenues like dividends from PSU companies were the major contributor to the rise in revenue collection. This buoyancy in revenue receipts can be reasonably expected to continue as corporate profits will remain high and the service tax net widens.

On the expenditure side, the government managed to keep things under control by reducing the plan expenditure by over 3 per cent as compared to estimates. The savings in non-plan expenditure was under a per cent. Though a reduction in plan expenditure is not a healthy sign on the face of it, many would agree that the classification into plan and non-plan is not always fool proof. Therefore the judgement would have to wait a detailed analysis.

Encouraged by the feat, the finance minister has committed to keep the current year's deficit to at least the same level of 4.1 per cent if not lower.

The government is showing some signs of reviving the disinvestment plans in a major way. If reports are to be believed, the finance ministry is targeting Rs10,000 crore from disinvestment during the current fiscal. The news on Nalco disinvestment during the week was widely seen as the government testing political waters on the proposal.

News of possible disinvestment has been floating ever since the government came to power. There have been subtle indications from the prime minister himself on the subject. So far there has been no concrete action, with the left parties crying foul at every mention of the word disinvestment. The announcement on BHEL was the first concrete indication, but the ability of a minority government to carry off such a controversial programme remains to be seen.

Inflation for the week ended 21 May declined to 5.38 per cent from 5.55 per cent reported for the previous year. The fall was mainly on account of a decline in energy and food prices. Manufactured product prices remained firm during the week.

The government's continued dithering on fuel price hike has kept price levels under control. The decision was almost announced during the week but was postponed once again after opposition from left parties. With crude prices back above $55 to a barrel, oil marketing companies continue to bleed.

Industry update

• Commodity prices are showing definite signs of a short to medium term correction. Most steel companies have cut product prices during the week following a drop in international prices. Domestic aluminium prices have also come down after the commodity weakened at the London Metal Exchange. Industry players are citing a possible slow down in Chinese demand for the weakness, though most companies still maintain that demand from that country remains strong.
  
• A decline in commodity prices may see the postponement or even cancellation of at least some of the massive investments planned in the steel and other metals sectors. Though domestic demand is expected to remain strong with an annual growth of around 7 per cent in volume terms, export demand may see some easing in the short term, especially if there is a Chinese slow down.
  
• Going forward, commodity prices would depend on the infrastructure projects in East Asian countries, other than China and Middle East. Some East Asian countries have lined up investments of $30 billion for infrastructure projects in the next few years. Middle East is already in a construction boom spurred by record revenues from oil. There are many analysts who believe that any decline in demand from China will be compensated by India, other East Asian countries and Middle East. A construction boom in the Middle East will also open up great opportunities for Indian engineering, cement and construction firms.
  
• The new low cost or budget airlines have received a good response, though these are very early days yet. All three low cost airlines, Air Deccan, Kingfisher and SpiceJet have reported passenger load factors of over 90 per cent. Air India Express, the low cost international service from Air India, is also enjoying similar capacity utilisation. The cut in aviation fuel during the week prompted all the domestic low cost players to cut prices marginally by up to 5 per cent. More airlines companies are waiting to launch services. The latest to join the bandwagon is Cochin International Airport, which plans to brand its airline Kerala Airways.
  
• The success of low cost carriers will definitely force full service carriers like Indian Airlines, Jet and Sahara to come up with new strategies. Indian Airlines is already planning to drastically cut prices on all routes operated by its low cost competitors. The full service carriers have not yet announced an across the board reduction in ticket prices after the fuel price cut.
  
• Non Banking Finance Companies or NBFC's will be allowed to raise external commercial borrowings or ECB to fund infrastructure projects. This is expected to make available more affordable funding for critical infrastructure projects. Housing Finance Companies will be allowed to issue foreign currency convertible bonds or FCCB's. This would help the housing finance companies to access cheaper funds.

Corporate moves

• State Bank of India, the country's largest commercial bank, is celebrating its 200^th anniversary. Created by merging the regional banks set up by the British, the bank was called the Imperial Bank before Independence. The bank was renamed as SBI after Independence and is governed by an Act of Parliament passed in 1955. Currently the bank ranks 83rd on balance sheet size, globally. In 1950, the bank was ten times bigger than Hong Kong and Shanghai Bank which is now HSBC. But now, HSBC is ten times the size of SBI. The comparison is a sad commentary on the opportunities wasted by the country's socialist past.
  
• SBI is expected to chart out an aggressive overseas expansion plan to take the share of its overseas operations to 25 per cent of the total business from the current 5 per cent. The bank has reportedly set aside $1 billion to fund overseas acquisitions and is looking at possible targets in Asia and Africa. SBI may also consolidate its associate banks into itself. Operational consolidation within the State Bank group has already progressed considerably.
  

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance