Weekly Update 26th – 30th July 2010

The markets witnessed good buying in the week gone by as the corporates from U.S. to Europe showed good performance raising the confidence in the strength of the global economic growth. Continuous buying by the foreign institutions and the strength in the developed markets helped stocks to scale 29 months high. U.S. Fed chief Ben S. Bernanke said that central bank would take additional action if the world’s largest economy does not continue to improve.

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European Banks Stress test result showed that from a sample of 91 European banks, representing 65% of the European market in terms of total assets, 7 banks would see their Tier 1 capital ratios fall below 6%. The focus of the test was mainly to assess the ability of the banks to absorb possible shocks on credit and market risks, including sovereign risks over a 2 years horizon, until the end of 2011. The test revealed that the aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3 percent in 2009 to 9.2 percent by the end of 2011 (compared to the regulatory minimum of 4 percent and to the threshold of 6 percent set up for this exercise). However investors are still ambiguous about the credibility of the test as it ignores the majority of banks’ holdings of sovereign debt assuming a case of no default by Greece or any other European country.

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India Inc. has so far shown good performance. The net profit of 339 companies that have declared results has grown by 25.5 percent and sales have shot up by 17.8 percent compared to corresponding quarter last year. The annual monsoon rains improved 24 percent from the deficit in the previous week, but were still 17 percent below normal in the week to 21July 2010, as per the data of the India Meteorological Department on Thursday, 22 July 2010. The seasonal monsoon rains during 1 June to 22 July 2010 were 12 percent below normal.

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The expectation of another 25bps hike in policy rates has already been built in the market. Market would take a cue from what RBI says in its monetary policy on 27th July about the health of domestic market and the steps in its act of balancing growth while anchoring inflationary expectations.

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Trend of Indian Stock Markets is up since a month and now the world markets are also participating in the rally. The rise in Base metal commodities is giving more steam to the rally as that is a reflection of increasing demand for metals in the industry. Nifty has support between 5315-5250 levels and Sensex between 17700- 17500 levels.

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Better than expected earnings amid optimistic equity market bestowed the much needed direction to the commodity market and thus it headed for biggest gain since March. In the meantime, dollar is going down and likely to trade in a negative territory as investors are moving back to the risky asset, which is appearing more promising in current context. Gold is narrating the same story and it is moving in a range with downside bias. Gold silver ratio has declined as silver outperformed gold, getting support from terrific rise in base metals prices. Energy complex has ignored the negative news and shore up on better results and strong technicals. But yes, it’s a time to book profit in spices as they are overbought now, especially pepper.

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