Though the markets rallied from the lowest point of the week seen on Tuesday, the breaching of the January low of 4,448 by the Nifty confirmed the worst fears of investors that we are, in fact, in a bear market.
In March earlier this year when the Sensex broke through its January low of 15,332 to touch 14,677, the Nifty managed to stay above the January low of 4,448. This divergence was seen as a negation of the bear market hypothesis and the Nifty rallied 18.5 per cent and the Sensex 20.8 per cent from their March lows.
Both the Sensex and the Nifty have now made new lows in June. The Nifty slumped to 4,369 and the Sensex to 14,645. Both the indices have now made lower tops and lower bottoms, which suggests beyond any doubt that we are in a cyclical bear market.
While there would be the usual quota of doubting Thomases in this market, this event has converted a lot of bulls into bears and given a reason to fundamentals analysts as well to review their persistent bullish calls. This widespread bearishness, aided by the media talk of broken levels has helped the markets bounce back on a contrarian call.
Fundamentally too, the nuts are getting tightened. After experimenting with CRR hikes for a long time, the RBI used its "brahmastra" — the repo rate to fight inflation. This tightening of the screws should continue for a while. Expect an encore from Dr Reddy on July 29 as well.
Inflation is going to rise to around 10% cent when the recently announced petroleum product price hikes are also counted in the coming week. So there would be more requirement to raise rates.
But high inflation expectations seem to have been priced in. It is no more a surprise and forthcoming RBI
action seems to have been discounted. So bank stocks may not really tank further, which may allow the markets some breathing space.
But before you get complacent, let's not forget that what has been discounted is the inflation related to petroleum price hikes already announced. A move by crude oil beyond the $139 mark is not factored in.
So crude is the joker in the pack. In the eventuality that crude does make a new high and our government does not further increase petroleum product prices, the markets will wilt.
Back in the US, the Beige Book Report indicates that the Fed is willing to shed economic growth to fight inflation, which is a clear change of stance. The report gets its name from the colour of its front page and contains anecdotal information on all the 12 Fed districts.
Two-year notes, which are more sensitive to changes in the central bank's interest-rate policy, posted their largest jump in yields in around 12 years earlier this week reflecting a decline in bond prices, driven by inflation fears. UK debt dropped the most in a decade after a report showed UK producer-price inflation accelerated the fastest in two decades. Interbank lending rates in Europe have hit highs last seen in December.
The futures markets now say there's a more than 40 per cent chance that the Fed will raise its key rate from 2 per cent when it meets on August 5. A week ago, there was zero likelihood of higher borrowing costs. As the US readies to raise interest rates in the coming months, mortgage rates have been rising, further depressing housing markets. Banks need more capital infusion amidst reports that companies are beginning to default on their debt.
During the month of June, the Sensex fell 1770 points from it's May end close to it's lowest level in June. Even as of Friday, the loss was 1226 points, vindicating our bearish call on the market for the month of June.
Looking towards the fact that the cues are positive as we enter the week, the advance tax numbers should also by out by Monday, there is some hope of a rebound, which could improve the markets. TheNifty could face resistance at around 4750 levels, where we would take a fresh call on the market direction and get back to you.
The fact that Saudi Arabia has called a meeting of the petroleum users, consumers and investors toconfabulate on high crude prices on 22nd January, should also help matters. Though I believe the OPEC would not like to discuss production hike in a open meeting with outsiders, but there is an outside chance that Saudi Arabia , suo-moto, announce a nominal hike in production.
So keep an open mind for an upward correction of the fall, with a clear understanding that a close below the level of 4490, you would give up your bullish instincts.
Shakti
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