Markets over the week (13-17 June 2011)

Global Markets:

Breaking its six week long fall, the S&P 500 registered its first weekly gain to close at 1271.50. However, the NASDAQ which leads the market moves has not fared so well and closed below its 200 day average (1% down over the week) at 2616.48, falling at a time when all other indices seemed to have stabilized (DJIA was up 0.36% at 12004.36)

The bond markets meanwhile anxiously await the climax of Greek debt crises as the default probability (using the CDS prices from Markit with 40% recovery rate) reaches as high as 81%. Many economists believe that the problem is unsolvable with the debt reaching 150% of the GDP.

In Greece, Prime Minister Papendreou appointed a new finance minister Venizelos to push through the austerity programs. Concerns over the Euro debt crises also caused Moody to review Italy’s credit rating.

The last few weeks have seen a glut of data indicating slowdown in the US economy leading to heavy selling in the same. Investors are now taking a wait and watch approach as the US Q1 GDP numbers come in next week. The expectations is tepid at 1.9%. Another event of significance would be the two day Fed meet ending Wednesday from which investors are expecting a mild continuance of the Fed’s asset purchase programs (by reinvesting the coupons at least). With a gloomy outlook already priced in, any indication of economic recovery can lead to a rally.

The CBOE VIX index is still at depressed levels (despite spiking during the week) indicating a complacent attitude to the risks ahead.

Meanwhile oil prices dropped on Friday with the US crude slumping to a four month low at $93 on concerns over the Greek crises. US futures fell by  more than $3 a barrel while the US crude’s discount to Brent widened by more than $1 to $19.90 a barrel. Oil’s slump broke its inverse correlation with the dollar which has eased to its weakest since mid-April dropping by more than 22%.

World stocks and euro rose on Friday as member countries France and Germany indicated the possibility of aid to Greece (as large as 120 billion euros before they run out of the present cash this summer).  The World MSCI index rose by 0.4%  to rebound from a 3 month low.

However risk aversion still remains high as indicated by the drop in the oil prices, jump in gold prices and resilience of the Swiss franc (seen as a safe-haven currency). The demand for low risk government bonds also increased over the week.

Indian Markets:

With RBI raising rates for the 10th time (25 basis points this time) since 2010 to curb inflation, the Indian stock market took a tailspin this week as Sensex closed 2.18% lower at 17870.53 while Niflty slid down the same percentage points to 5366.4. The repo and reverse repo are as high as 7.5% and 6.5% now.

Rate hikes notwithstanding, inflation remains stubbornly high, with the May data clocking 9.1% yoy compared to 10.5% a year ago. Food inflation  was as high as 8.96%  and fuel inflation was 12.84% giving concerns about real possibilities of further rate hikes in future. This is exacerbated by the RBI indicating a clear stand against inflation and putting growth on the backseat.

Sentiments were further made negative by a sharp drop in the RIL stock and vigorous selling by FIIs.  The latter has been casued by a whole host of reasons including, but not limited to rising rates (and thus higher costs of capital), increasing delays in undertaking economic reforms, scams in government bodies and the slothful pace of infrastructure projects. The positive news included healthy signals on the progress of monsoon, increase in advance tax payments by big names and the drop in crude prices internationally.

Top losers for the week were techology sector with the BSE IT index losing 4.5% on concerns of slowdown in US economy and Greek debt. TCS was down 6.6%  and Wipro 6.5%. The BSE Oil and Gas sector was also down by 4.8% with Reliance loosing 4.5% on the CAG report of RIL inflaing KG basin development cost an fears of a stern SEBI over insider trading charges. The BSE FMCG sector was the only sector which showed a northward movement rising by a small 0.2%.  Top gainers included Marico rising by 3.7% and HUL moving up by 3.1%.

The week ahead is likely to remain bearish on similar global cues. Apart from government cues on macroeconomic and policy reforms, events to look out for include US Q1 GDP numbers, US Fed meet and possibilities of a consensus on the Greek bailout.

Also, with the possibility of  sugar inventory getting spoiled by the high moisture in the monsoon winds, there are chances of government relaxing export quota for the same and of a mid-rally in sugar counters.

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