Weekly Update 28th June – 2nd July

China’s central bank move to increase flexibility in yuan against the dollar pushed global markets higher with the onset of the week. The optimism for the demand of commodities rose as the move is expected to increase Chinese consumers demand with the rise in purchasing power. Thereafter, the worrisome news flow from both U.S. & Europe only gave weakness to the markets.

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Disappointing earnings forecast by U.S. companies reignited the growth concerns in the market during the week. Fed policy makers left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent. Fed echoed that low inflation, stable price expectations and high unemployment “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

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It said the U.S. recovery is progressive but not strengthening and “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.” Concerns also rose about solvency position of both U.K. and Global banks. Bank of England said that U.K. banks remain “vulnerable” to further writedowns on their assets because of a potential decline in investor appetite for risk. Overall investors are circumspect of the global recovery and are not sure whether the austerity plan by various government will lead to economic prosperity.

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The Indian government now seems to be batting its second innings in power by working on many reforms that were in its agenda for long time. On the recommendations of Kirit Parekh committee, the government decided to go ahead by linking petrol prices to market linked prices & giving Rs. 2/-, Rs. 3/- & Rs. 35/- hike in diesel, kerosine & LPG prices respectively. The long awaited step is expected to cool down the burgeoning under-recoveries of OMC’s & will help consequently in lowering the fiscal deficit. As per our estimates the said increase will accentuate inflation by close to 0.50%. The move that was quite necessary from the long term perspective may put some pressure on the Equity & Bond Markets. As we are already facing high inflation & are on mercy of good monsoon, the step is likely to increase worries. We expect now, with the robust manufacturing activity & clear signs of demand pull inflation the next step may come soon from the monetary body by hiking policy rates. The move may lead to some correction in the capital markets & bond prices may fall.

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Trend of Indian stock markets is up though U.S. and other markets is down which is giving rise to volatility here. Even dollar index is taking some reaction which might give some relief rally to metals in coming week. Nifty has support between 5200- 5100 levels and Sensex between 17300-17000 levels.

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Notwithstanding the doubt over the health of world economy, especially U.S. and Europe, commodity is reacting optimistically on every small news and statements.

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CRB index is going through a consolidation phase; any positive news can result in good upside. Two factors; flattish dollar index amid strong Asian economic growth accompanied by commodity demand can keep commodity on stronger side. In past seven months dollar index has rallied around 20%, the move was not showing the inner strength of dollar, rather it was majorly due to European debt crisis and safe haven demand. If we see rangebound to bearish movements in dollar index again it will boost up commodities prices. However, we can see some correction in between, but that should be considered as good buying opportunity.

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,http://www.smcwealth.com

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