It was yet another week of gains for the markets as the Indian indices continued to outperform other major global indices. The distinguishing feature of this week's move was the strong uptrend seen in the heavily beaten down oil marketing stocks. Uptrend in global markets and the sharp decline in crude oil prices helped sustain the sentiment.

Markets opened the week on a firm note and the Sensex settled above 11300 and the Nifty went past 3300. Stocks of oil marketing companies, which were rank underperformers for the last couple of years, started a major up move and ended with significant gains.

The indices extended their gains to the sixth straight session on Wednesday, after the Independence Day holiday on Tuesday. Oil stocks once again led from the front and index heavies, ONGC and Reliance Industries, also ended with good gains. The Sensex touched 11500 in intra-day trades, but closed below that level with gains of well over a per cent.

Markets tried to consolidate during the last two days of the week without much of a directional movement. Oil marketing stocks like HPCL, BPCL and Indian Oil surged again on Friday and closed with significant gains of around 20 per cent each for the week.

The Sensex gained 274 points or 2.45 per cent during the week and the Nifty added 83 points or 2.54 per cent over the week.

Mid-caps and small-caps outperformed the larger stocks this week as well. Buying momentum continued in the larger mid-caps and trading interest was high. After gaining significantly for the first two sessions, the smaller stocks saw a correction on Thursday.

They recovered on Friday and overall gains for the week were higher than the large caps. The CNX Mid-Cap 100 index closed the week higher by 134 points, or 3.24 per cent. Small caps continued to do even better during the week.

Domestic economic and regulatory action

• Merchandise exports for the month of July have increased 40.67 per cent in Dollar terms to $10.18 billion as compared to $7.23 billion for the same month of previous year. In Rupee terms, the growth is even better at 50.11 per cent. For the first 4 months of the current financial year, exports have increased 34.03 per cent in Dollar terms to $37.71 billion.

  After remaining sluggish for the first few months, import growth has also picked up in July. Total imports for the month were higher by 42.8 per cent at $14.14 billion as compared to $9.9 billion for the same month of previous year. For the April-July period, imports have gone up by 29.24 per cent at $54.42 billion as compared to $42.11 billion for the same period of previous year.

  The sustained up trend in imports, especially oil imports, have led to an increase in the trade deficit. For the April-July period, trade deficit increased to $16.72 billion from $13.98 billion for the same period of previous year.

• FDI inflows into the country during the April-June quarter at $1.74 billion was 47 per cent higher than $1.18 billion recorded for the same period of last year. The month of June saw a doubling of inflows to $534 million from $264 million during the same month of previous year. Only inflows in the form of equity capital are included in these figures.

  The government has set a target of $10 billion in FDI inflows — including equity capital, reinvested earnings and other capital — for the current financial year as compared to $7.7 billion for 2005-06. Total FDI inflows had increased 37 per cent during 2005-06 while equity capital inflows at $5.5 billion had recorded an increase of 72 per cent over 2004-05.

  Cumulative FDI equity inflows for the last 15 years from 1991 have touched $40 billion. Total inflows, including reinvested earnings and other inflows, over the same period have touched $49 billion.

• Wholesale price inflation for the week ended 05 August increased to 4.82 per cent from 4.61 per cent reported for the previous week. Prices of manufactured goods and select fuels went up during the week. Prices of primary food articles continued to decline for the second week.

US markets, global economy and oil

• US markets recovered considerably during the week on hopes that slower economic growth would keep inflation under check and would prompt the US Fed to extent the pause in interest rate hikes. Recent inflation data has supported this view and have re-energised the markets.

  The latest consumer confidence surveys also indicate towards a slowdown in US consumer spending which could lead to a further decline in growth rates. The decline in consumer confidence index for the month of July is much worse than expected.

  Though the possibility remains, markets are currently not focussing on a sharper slowdown in economic growth in the coming quarters. Consensus view among economists and analysts still point to a soft landing for the US economy over the next few quarters.

  After an indifferent start, US indices maintained an up trend for the rest of the week. The steady decline in crude oil prices over the week helped sustain the momentum. Even on Friday, the indices recovered from early weakness and closed with decent gains.
  
  The Dow index added over 2.65 per cent for the week while the S&P 500 index ended more than 2.8 per cent higher. Technology stocks fared much better as they tried to correct part of their underperformance relative to the broader markets in recent months. The NASDAQ added well over 5 per cent for the week.

• The People's Bank of China this week announced its second rate hike for the year. Benchmark lending rate has been increased by 27 basis points to 6.12 per cent annually. This time, the Chinese central bank has also raised the deposit interest rates to 2.52 per cent.

  The rate hike is widely seen as part of renewed efforts by the Chinese government to cool down the economy. Similar measures over the last couple of years have not had the desired effect and the Chinese economy remained in its growth trajectory.

  After the previous rate hike in April, Chinese banks tried to increase their lending as the deposit rates remained the same and hence their spread had improved. This had led to a further expansion in capital investment during the first half of the year.

  Even the latest rate hike is not expected to have much of a visible impact for some time. Forecasts of Chinese GDP growth for the current year as well as next year do not show any meaningful deceleration in growth rates. At the same time, inflationary pressures seem to be building up and may force further rate hikes in coming quarters.

  The Chinese government also seems to be more willing to let the currency appreciate. The Chinese Yuan saw its largest movement this week, after the government announced a flexible exchange rate policy last year. Though the extent of appreciation is very small, it is seen as an indication that the Chinese government would allow a gradual, but significant enough, appreciation of the Yuan.

• Crude oil prices saw one of the sharpest weekly declines this year, triggered by the ceasefire in the Middle East. The oil field in Alaska was not shut down completely as feared earlier and production from one half of the field continued. Other developments during the week exerted more pressure on prices.

  The sharper than expected slow down in the US economy may lead to lower demand for energy. This was supported by some analyst forecasts and weekly US inventory data. The decline in US stocks of crude oil and refined products was much lower than expected, giving credence to beliefs that demand is slowing down.

  After sliding for the first 4 days of the week, oil prices went as low as $70 per barrel on Thursday before settling marginally above that level. Friday saw a modest recovery and near month NYMEX futures settled around 5 per cent lower for the week at $71.09 per barrel.
  

*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.