Mkts look weak amid negative global cues

After worries from the global markets and fear of inflation data, markets look weak. A cap down will be seen in the markets. But, still there are hopes of digesting the bad news as the pull back has just started.

Nifty is seen at 4000-4,100 levels and the medium-term is very challenging.

Couldn’t have been a more inauspicious start to the July series; just when it look like there was some semblance of stability and the market was attempting at least a relief rally, comes a big whack from the global markets. 360 points down the Dow Jones’ Index bringing it down to lows for 2008; S&P’s crumble below 1,300 mark by quite a margin, crude shot up to USD 140 last evening before cooling down to about USD 139 per barrel but dangerously high and dangerously high to all time highs which means we probably start gap down as well this morning. So things haven’t been exactly begun well for the July series and of course at noon we will have dreaded inflation number once again. 

We were hoping that with burial of the June series the market might just have got off to a slightly better trading range in July because earnings are coming out, we did some rearguard action coming in from slightly above 4,000 levels on the Nifty but that’s the problem with the market. Every time the bulls just put out their fingers a bit, they get whacked so hard on the knuckle that they retrace once again. So some positions might have got built-up in the last couple of days and they will have to get cut once again.

We will wait and see because a pullback has just started. So sometimes in the early nascent days of a pullback, when one is bouncing off fairly reasonable base, then sometimes bad news doesn’t break one down below those levels. So one may still find support around 4,000-4,100 mark; we are not going there this morning in one short hopefully but lets see if it can holdout and one can digest the bad news and try and create some kind of a platform around 4,000-4,100 level. Medium-term still looks very challenging and it would be brave man who predicts the bottom right now.   

Asia is not a pretty picture particularly markets like China. China is down 4.5% as we speak, the Hang Seng is down 2%, Nikkei is down more than 2%, Taiwan is down nearly 4%, Korea is down 2% as well. So cuts range between 2-4% across Asia is not a pretty picture.

Q: We were talking about a pause for the global markets though yesterday and it seems the situation is not that sanguine?

A: No, far from it. As you said, all those gains since the Bear Stearns days have been wiped out and I think it is sort of emblematic of what’s gone on in the US over the last few days because all the hope, which had build up into the price, in the US market since the bail out of Bear Stearns has completely been undone and reflected in the index as well, over the last couple weeks. I think it probably just tells you that in event of Bear Stearns, which led the market to believe that the worst of the subprime and the financial crisis had been put into place - that feeling has changed in the US and with every passing day, the kind of news that we are getting from the financial sector out there yesterday culminating in Goldman Sachs saying that there is far more pain in Citi and Merrill Lynch over the first few quarters; and it is just admission of the fact that things are not good in the financial sector.

We may still have to see or deal with blow ups happening in the financial space, may be Bear Stearns was not the last. I think that reality coupled with the fact that earnings are not looking good at all, whether the GDP number in the US is 0.6% plus or 0.6% minus is not as material. I think there will be lot of brownie points quotes by recession callers and people who were saying that recession may not happen but beyond that what is the stock market focused on. What will happen to the companies over the next few quarters and I think increasingly there is a sense that earnings, whatever the GDP number is as a token number at the end of the quarter earnings will not be very good at all.

So there is a mark down happening; I think the ease with which the 2008 lows have been broken yesterday is not very comforting. The only hope that you have is that it has happened so quickly that this is a bit of a climax happening in global equities as well, after which we will form some kind of an intermediate bottom and try and bounce up from there because the fall has been very rapid. But crude is not giving you any comfort at all, as even people keep talking about how and why crude will cool down. Crude seems to have other things on its mind, it keeps going back to those USD 140 per barrel and who knows whether all this volatility is probably a launch pad for going well above that USD 140 per barrel mark. So we need to be extremely cautious about the cues, which are coming in from the West and not been denial that things will suddenly wake up on Monday morning and every thing will be hunky dory once again.

Q: Is it seeming that climactic though the situation yet for the global markets because it is not that it is a knee-jerk reaction to one event, it is almost like through this series or this month most markets have just been crumbling?

A: Yes, it is not good. But the point that I was making is that it took about few months for the Dow to build up after that Bear Sterns event to the recent highs that it went to and the speed, at which it has given up all those gains in just the last few weeks, is quite alarming. So the climactic point is only about how little time it has taken to undo all the good work of 2008. One should remember that just a month back or bit more than a month we were all sitting here and marveling at how strong the US is, how resilient it is and how every market should take a leaf out of the US and it has all gone. That market is down to lows for the year and not all Asian markets are down to their 2008 lows. So I do not know-I am just hopeful that since the ferocity of the fall has been very much and that at some point it will try and form a base but all this is really frankly hope. You are right, what is flashing out from the screen cannot be very comforting.

Q: The problem is we have got that up in the air event, which is inflation at some point in trade today and we have got a more emphatic reiteration of what is happening with rates?

A: Yes, inflation hopefully will come in between 11% and 12% and not more. I say hopefully because the surprises from the inflation front have only been on the downside, it has never been on the upside. So one can keep on hoping that suddenly it will become 9% but it will not and now the Finance Minister is also admitting that it will remain in double digits for the next many weeks. So one can just pray that it does not get a rude shock at 12 o’clock with 12% figure and that will destroy sentiment some more. If it is 11.5% having seen 11% maybe the market will deal with it and move on but the jury is still out and what the Reserve Bank of India (RBI) will do next that dangerous word is doing the round, preemptive strategy, preemptive meaning even before inflation goes on the boil again you have got to hurt it and hurt it with more and more tightening that is not good news for the stock market at all but a good news for inflation fighting for the economy at large from the inflation perspective and it maybe well be the right thing to do though that is debatable but from an equity market’s point of view it is not good.

State Bank of India (SBI) is raising rates, disturbingly the SBI Chief is now talking about the non-performing asset (NPA) problem cropping up once again and much that there is a lot of seeming value in the interest rate sensitive space. I think they will still underperform from hereon because once again bank earnings will be hit by higher provisioning something, which was beginning to taper off as they wrote off most of the NPAs from their books but now provisioning will start going again, which will hurt earnings quite a bit.

So this is not a great environment for interest rate sensitives and we may probably have not seen the last of it. Sure you will hear lots of voices saying inflation will cool down from tomorrow, next week, next fortnight but that is not happening for the last many months as we have seen.