Markets cheered the arrival of monsoon on Monday with a surge in early trades, only to give up all the gains later in the day and close on a flat note. Power stocks were the flavour of the day while Reliance group stocks held firm.

Tuesday was the day of private bank stocks as stocks of almost all the big banks surged. HDFC Bank was the single largest gainer followed by ICICI Bank. PNB and HDFC also posted significant gains.

Wednesday saw most frontline stocks surge and indices close above important psychological levels of 6800 and 2100 for the Sensex and Nifty respectively. Infosys led from the front with gains of over 3 per cent, reclaiming the position as the most valuable technology company in the process.

Profit booking emerged on Thursday as some of the stocks which saw significant gains over the previous few days declined. Technology stocks and select bank stocks like ICICI lost ground.

Friday opened as the markets recovered after the previous day's correction. However, the indices could not sustain the highs and declined for the rest of the day. The Sensex and Nifty closed below the crucial levels of 6800 and 2100 respectively, disappointing many traders.

Mid-caps on the other hand were on fire for most of the week with the CNX Mid-cap 200 index posting new all time highs for four consecutive days. The index gave up close to half a per cent on Friday on profit booking.

US markets, economy and oil

US markets were subdued during the early part of the week as traders hesitated before a scheduled testimony from the US Fed chairman on the health of the economy. The bounce back in crude prices also held the indices flat.

US Fed chairman gave his much awaited testimony to the joint committee on economics. He maintained that the US economy was on a firm footing and that inflation remains under control.

This statement dashed hopes that the Fed would soon stop the periodic hikes in short term interest rates after eight successive increases of one-fourth of a per cent each. While the chairman mentioned that it is difficult to arrive at a neutral rate, he indicated that the Fed may be very close to an end to interest rate hikes. This helped the US markets to recover on Thursday.

Major technology companies continue to maintain a very positive outlook for the immediate future and revised their earnings estimates upwards. Texas Instruments raised its projections saying demand for chips continue to grow. Later in the week, Intel also raised its guidance as demand for processors remained robust.

Traders are waiting for the US trade data for April. Consensus estimates point to an increase in trade deficit. The trade deficit had narrowed surprisingly in March.

On Thursday, crude futures surged over 3 per cent after reports that major oil companies have been forced to remove operators from oil rigs after a tropical storm in the Atlantic Ocean.

This week's storm in the Atlantic nearly played out the scenario depicted in a documentary film about a potential oil shock in the US. In the film, hurricanes disturb the oil rigs and crude landing points in the US, affecting supplies and pushing up oil prices. To make matters worse, political disturbances arise in Saudi Arabia and crude prices rise to an incredibly high $150 to a barrel. The film had caught widespread attention, feeding on public fears about rising fuel prices. But even in the film, prices fall to previous levels once supplies are restored.

Weekly US inventory data of crude oil and refined products showed a surprising fall for the second week running. After last week's dip, many oil analysts were expecting a build up in stocks.

The International Energy Agency has hiked its demand projections for the second half of the calendar year by 200,000 barrels per day. This will definitely cause fresh concerns over supply and push up crude prices. The projected average daily demand for the last quarter for OPEC crude is higher than the average daily output during May.

However, IEA said Chinese demand for crude fell for the second month in April. The agency expects Chinese demand growth to remain weak during the year. However, this will be counterbalanced by demand from other parts of Asia and the US.

Domestic economic and regulatory action

Some very good numbers on the economic front were completely ignored by the markets on Friday. The Index of Industrial Production rose a very impressive 8.8 per cent for the month of April as compared to the same month of previous year.

The infrastructure output data for April was relatively subdued and had raised fears of a slowdown in industrial growth. However, the fall in infrastructure output was more than compensated by growth in manufacturing output which went up by 10 per cent during the month. This came as a pleasant surprise and is much higher than the 7.8 per cent reported during March.

There are some fears that the economy will find it difficult to maintain this growth going forward. If the infrastructure output, especially mining and power generation, continues to remain weak it would have an adverse effect on manufacturing growth later in the year.

In such a scenario, a good monsoon would become all the more critical. If the monsoon fails and manufacturing output also weakens, the overall GDP growth would be well below the expected 7 per cent. On the other hand, if the growth in manufacturing is sustained and is followed by a good monsoon, the GDP growth could inch closer to the 8 per cent mark.

Inflation for the week ended 28 May declined to 5.2 per cent from 5.38 per cent reported for the previous week. The decline was mainly on account of lower prices of fruits, vegetables and pulses.

The government continues to delay the oil price revision as opposition from the left parties makes it a difficult decision to make. The various formulae suggested to lessen the impact of the price hike are also under the consideration of the concerned ministries.

Monsoon arrived in the southern parts of the country over the last weekend, earlier than expected. The progress of the monsoon over the week has been satisfactory so far. The meteorological department expects the rains to weaken during the month of July before strengthening again in August. Overall, monsoons are expected to be normal.

Industry update

• The domestic power sector is reeling under a shortage of coal as summer demand has peaked. NTPC has already shut down some of its plants. The power ministry has asked the producers to import coal to meet the shortage. This is an unfortunate outcome of continuing public sector monopoly in core sectors like coal mining. The power plants have run out of coal even at less than 80 per cent capacity utilisation on average. On one hand we have regressive policies which dissuade new power projects from coming up while on the other the existing plants cannot find enough fuel. The fact that a country like India, sitting on huge deposits of coal, has to import the commodity at higher costs shows a serious lack of planning and development in the mining sector.
  
• The state of natural gas based power plants is not any better either. The demand for gas has gone up substantially and suppliers like GAIL are finding it difficult to meet the demand with existing availability. Power producers like NTPC has postponed expansion plans because of shortage of fuel. The much publicised gas pipelines from Iran would take years to complete. Domestic gas production would also see a substantial jump only after another 3 years once Reliance and ONGC start production at the KG basin. Till then, supply would depend on how fast the landing terminals for LNG come up on the western coast of the country.
  
• One of the buzzwords in stock markets these days is carbon trading, with stocks of many companies which claim to be eligible for emission rights flying around. Under the Kyoto Protocol, a net absorber of greenhouse emissions like a plantation is eligible for what is known as Certified Emission Reductions or CER. Companies with projects or products which help in reducing emissions are also eligible for CER. Countries which are net producers of greenhouse gases can buy CER to meet part of their obligations to reduce greenhouse emissions.
  
• There are many who believe that trading in CER, or carbon trading as it is commonly called, will take off in a major way and companies eligible for CER are in for windfall gains. The current estimated value of a unit of CER fluctuates between $5 and $10. However, these are very early days as the future of the Kyoto treaty itself is not certain. US have refused to sign the treaty and European countries may refuse to bear the costs alone once the treaty comes into full force. Retail investors would do well not to rush in till a clearer picture emerges.

Corporate moves

• There are reports that Honda Motor of Japan is discussing joint management of its two-wheeler manufacturing facilities in Africa and South America with the Munjal group, co- promoters of Hero Honda. Even though Honda is the global leader in motor cycles, it has been facing difficulties in managing its African and South American operations which manufacture low end motorcycles. In future, Honda is planning to focus more on mature markets where realisations and margins are far higher than the emerging markets.
  
• The Munjal-promoted Hero group is acknowledged for its ability to manage low cost operations while maintaining international quality standards. It is the single largest manufacturer of bicycles in the world and Hero Honda is the largest manufacturer of motorcycles in terms of volumes globally. Though the details of proposed investment by the group in Africa and South America are not available, it is unlikely that the listed company Hero Honda will be involved.
  
• Reliance Energy confirmed that it is planning a massive
  12,000mw coal-based thermal power plant in the state of Orissa. The total investment planned is a staggering Rs48,000 crore, which would make it the single largest project conceived by the Reliance group. When completed the plant would be the largest in the world in a single location. However, there are reports that the government of Orissa is not very enthused about the proposal unless the company is willing to increase benefits to the state.
  

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance