Markets were expected to end a 5-week long declining trend and recover this week as indicators pointed to a highly oversold situation. The expectations were for a relief rally as global concerns about rising interest rates remained and liquidity was low.
But the recovery came only after the markets went through much more pain during the first three days of the week. Frontline indices gave up the remaining gains of calendar 2006 earlier this weak and pessimism among traders deepened.
The week opened on a disastrous note as the indices gave up more than 3 per cent each. Banking and cement stocks were among the biggest losers. The decline continued on Tuesday and the Sensex dipped below 9000, but managed a late recovery and closed above that level.
Wednesday turned out to be a highly volatile session for the indices. Helped by a recovery in Asian markets, frontline indices soared nearly 3.5 per cent each in early trades. But they came under pressure later in the day and the Sensex closed below 9000 for the first time after December 2005.
Just when trading sentiment hit a low, the markets bounced back strongly on Thursday. The indices saw their biggest ever single day gains as markets across the globe recovered from their lows.
The good run continued on Friday as well, though profit booking in afternoon trades pared gains on the indices. The Sensex went past 10000 but the index closed below that level.
The Sensex added 75 points or 0.77 per cent during the week and the Nifty gained 24 points or 0.84 per cent over the week.
Mid-caps and small caps followed the trend in large caps and declined for the first three days of the week. The recovery on Thursday and Friday did not entirely wipe out the losses. Though larger and more popular mid-caps recovered considerably, many other ended the week with considerably losses.
The CNX Mid-Cap 100 index closed the week lower by 29 points, or 0.78 per cent.
Domestic economic and regulatory action
- During the first week of the market decline, politicians of all hues were extremely concerned about the 'plight of investors'. Big names from the opposition and the Left parties blamed the government and excessive influence of overseas investors for the decline. The finance minister was forced by the media into giving daily statements to 'reassure' retail investors.
All of them went surprisingly silent as the crash deepened. Politicians became silent as they could not identify any specific cause to pin the blame on the government. The government ended its own phase of heightened concern over the market decline with a dull statement which called it a global phenomenon. The media stopped asking for the finance minister's reaction as the Sensex crash became a daily event and lost its shock value.
The whole episode once again exposes the way in which the system - including politicians, the government, regulatory authorities and the media - approaches various issues. Everyone jumps in when the issue is hot, statements fly around and the quest for culprits, both real and imagined, would begin. Usually nothing much happens for a while and the issue loses its novelty and news value, even if the root causes remain. Everyone forgets the issue very conveniently and life moves on.
In the case of the current market decline, what was the need for all the hyperactivity by politicians and media? Did they achieve anything other than increasing the anxiety of retail investors? And when the pain became much worse for retail investors, they grew silent. Probably they were the reason why Indian indices fell much more than other emerging market indices.
- Market regulator SEBI took a more subdued stand and refrained from periodic statements and announcement of 'steps taken' to address the situation. Finally the SEBI chairman made a statement this week that the regulator would take the required steps to bring down volatility.
Without waiting much time, SEBI announced new norms for cash market margins. From next month, cash market margins would be computed five times daily instead of once at the end of the day. Margins in the derivative segment are already updated as many times a day.
Would this bring down market volatility? Maybe when the trading environment is normal, but definitely not when the markets are under strong forces like a global liquidity drain we are witnessing now.
- Wholesale price inflation for the week ended 03 June increased 2006 to 4.72 per cent from 4.68 per cent reported for the previous week. Prices of primary food articles and some manufactured products increased during the week. Primary metal prices declined marginally.
US markets, global economy and oil
- US markets declined during the earlier part of the week on continued worries of higher interest rates and a slow down in the economy. The indices started a recovery on Wednesday and saw one of their biggest single day gains in recent days on more accommodative statements from US Fed chairman. Data showing sustained rise in factory orders and a decline in unemployment helped ease concerns about the economy.
For the week the Dow index gained over a per cent while S&P 500 closed with marginal losses. The sharp 2.8 per cent surge on Thursday helped the NASDAQ index to end the weak on a flat note.
- This week, The Bank of Japan decided to leave interest rates unchanged to avoid another blow to the weakened stock markets. The move was largely expected and helped support the recovery in Asian indices towards the end of the week.
However, it is only a matter of time before interest rates in Japan rise. Most economists expect the Bank of Japan to abandon its zero interest rate regime later this year or even as early as next month on strong economic growth and rising inflation. The Japanese economy expanded 3.1 per cent during the Jan-March quarter while inflation for the month of May stood at 3.3 per cent.
- Crude oil prices declined substantially during the beginning of the week as IEA said higher prices are affecting US demand and cut demand forecast for the remaining part of this year. Prices slipped to as low as $68.5 as threat to oil installations in the Mexican Gulf from a storm subsided.
Prices recovered later in the week after US inventory data showed a decline in stocks of crude oil and refined products. Near month futures on the NYMEX lost nearly 2 per cent for the week to close marginally below $70 per barrel on Friday.
- Iran, which is under pressure from the US and its allies to abandon its nuclear programme, is trying to move closer to China and Russia with an offer for energy cooperation. Iran is a major supplier of oil to China and other Asian countries and pressure from emerging Asian powers may force US and its allies to accept a settlement with Iran.
China and Russia, both UN Security Council members, can influence any UN decision on Iran. If this dispute is settled, crude oil prices may decline over the medium term. On the contrary, possible support from China and Russia may help Iran to buy time to achieve higher nuclear capabilities. This may enrage the US and its allies and would lead to a worsening of the situation.
*Disclaimer: The author may have positions in the stocks mentioned above at the time of writing this article. This analysis/report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.