Mkts to be volatile today

Asian Indices:

Asia is not too bad; its giving a misleading picture because three markets are in the red but the two markets which are up are up quite a bit. China has recovered a large part of the losses of the last couple of days is up 5% nearly that’s here fuel prices have gone up and the Hang Seng is up nearly 400 points that’s nearly 2%. So, two of those weak markets have bounced back quite a bit. The losses in the other markets are mixed but with a bit of a positive flavour maybe this morning.

There will be a bit of nervousness wont there about the inflation figure today whether or not it’s 9% or 10%?

Yes but that known devil argument is doing the rounds that everybody is talking about 10%, will the market fall off the cliff when that 10% number is declared, if we get to that level. It is difficult to call what the market will do because one saw it with the repo hike as well when it came through the market formed an intermediate base and moved up for the next couple of days. So there has been a sell off in the last couple of days; banks too have sold off after their initial rally this week. Is it all in preparation of that 10% inflation number or close to that which will come today?

One could argue that maybe the market does not when we get that number because last couple of times its been bad news; its been interesting to see how the market is reacting, it actually tries to edge up a bit once the news comes in. So I do not know whether sentimentally 10% will be such a blow that the market gives a knee jerk reaction on the way down or the more likely phenomenon of it being in the price and therefore the market not worrying too much is going to be the preferred route.

But things are going to be so easy; all we are talking about is today’s reaction for the market. Today’s reaction maybe positive because the morning is expected to be good; it is entirely possible that after the inflation number comes in, the market does not fall and chooses to say that “we knew it and therefore lets move ahead a bit more from here.”

The bigger problem is this doesn’t end with the day; one cannot say, “Inflation came at 10%, we buried it and moved on. So now everything is fine because come next week inflation is back to 7%.” No that’s not the case; inflation if it goes to 10% this week next Friday when we come back to sit here again will be 10%, the week after that when we come back to sit here will also be close to 10% if it does not go higher. So that’s the discomforting thing. It’s easy to say that the market can price it and move on but move on in what kind of an environment?

I think we are still in a high inflation environment and things are suggesting that in the next few weeks and months we are probably not going to get a meaningful cool off. Look at the bond market we have already come to 8.5% on the benchmark yield. If the inflation stays at 10% will the Reserve Bank of India press the trigger again sometime in the next few weeks? – Its not quite impossible. So these lingering fears will happen.

So beyond the day one saw what happened to bank stocks a few days back; repo rate came in, banks knew it, banks rallied for one day, everybody said “great value in banks; banks should do well because everything priced in.” Next couple of days most bank stocks are down 8-10%, it’s not the end of road for inflation.

Today we know it; it will linger so maybe today we get a rally but once again it going to that tricky turf that we have got to negotiate for the next few weeks. We need to separate today’s reaction with the kind of inflation environment that we got to deal with from a stock market perspective over the next few weeks and months.   

It is even more difficult to gauge what’s happening on the political front but from a market point of view is it looking like a flashpoint situation?

Could be, I am no political expert but the rhetoric is not looking good. If it was just the Left parties you would have said okay they have shouted so many times in the past, this time they will shout but they will not do anything. So from a market perspective we don’t want to worry too much. The problem is that this time it is the Prime Minister because he has put so much of himself on the line with this deal and I think probably he is not the bark a lot -don’t bite kind of guy, maybe you probably have a flashpoint situation given the hard stance that the Prime Minister himself has taken on the issue. So it’s difficult to say what turn this will take, the FOMC meeting and the political meeting both falls on the June 25 that is the day before the F&O expiry this time. One doesn’t know what kind of a situation we are heading towards, suffice it to say that even if this does not turn out to be a major event for the market it just is one more straw of uncertainty, which is keeping the market guessing.

The market needs to have less uncertainty at this point. Everything around it is uncertain; inflation is uncertain, interest rates we don’t know, crude is keeping us guessing everyday, global situation is uncertain, FII flows uncertain. In that environment the more sure you can get about anything is good and this is one more level of uncertainty which just got injected and it couldn’t have come at a worse time.

I don’t know how it will turn out but the market will worry about it and fret about it till its out of the way.

On global cues and FIIs:

Flows continue to get unkind even yesterday if one looks at the numbers; Rs 600 crore cash more disturbingly Rs 1,300 crore of Nifty futures, so if we add the two then we have got nearly half billion dollars of cash plus F&O sales. The sales are not very small, it’s quite discomforting to see those kind of sales continuing. I think people overseas are taking quite a dim view of how Indian macros are evolving from here, so that remains a problem.

Of course the only help is that crude is not going to more than USD 140/bbl as long as that does not happens may be the next important levels for the market, the support levels do not break because I think those will be coincidental if they have to happen. Crude goes to new high and the market breaks the support that it has been finding for the last few days, so that’s loosely the correlation that we are talking about here globally speaking. Otherwise global markets continue to amble along; there are no great cues that we are getting from there with the exception of crude.