Painful week for the market
Rex Mathew
24 March 2005
An interesting feature of this bull run is that indices keep moving up for days without a pause and when the sentiment turn around they decline for days on end. This makes it very risky for retail investors to participate as it is difficult for even seasoned traders to predict the appropriate entry and exit points. Also, price movements are sudden and in large measures. Another feature is the excessive dependence on FII inflows to give direction to the market. When FII's take a pause market sentiment turns very weak, even if they are not heavy sellers. It is like FII's are expected to keep buying even when they are sitting on profits and would book part of it in normal course.
World markets also remained weak as the Fed Reserve raised interest rates by 0.25 per cent to 2.75 per cent. Statements by the Fed chairman about inflation spooked the market. There is speculation that future interest rate hikes would be higher than 0.25 per cent. The continued rally in oil prices is adding to the inflation worries.
NYMEX crude for April delivery declined to below $54 on Wednesday as US inventories were higher than expected. Last week this column had mentioned the large speculative activity in crude which is partly responsible for the huge run up in prices. The correction this week even though there was not much change in the fundamentals would give some credence to this. High volatility in prices even on relatively insignificant news like a change in oil inventory indicates heightened speculative activity. So the possibility of a runaway increase in oil prices from these levels is limited. But any development affecting supplies, like a US intervention in Iran, could drive up prices.
Some analysts are pointing to the rise in Middle East crude, which does not have an active futures market, to postulate that this rally is more about demand-supply mismatches than speculation. The price discount for Mid-East heavy crude to the NYMEX light crude has indeed narrowed during this rally as compared to the last year rally. But it is again natural for the Gulf region producers to ask for higher prices when NYMEX and Brent are hitting new highs. It is like a rally in large stocks pushing up prices of small stocks in the same sector, whatever their fundamentals may be.
There are some disturbing signs on the domestic economic front in the form of a decline in the infrastructure index for the month of February. The index declined by 0.6 per cent as compared to last year on lower production of crude oil, electricity and coal. If this trend continues, it could affect the manufacturing revival we have seen recently.
The government's plans to roll out VAT from 1 April received a minor set back with the opposition playing politics and deciding not to implement VAT in states where they are in power. The government should not allow itself to be browbeaten in this very important piece of tax reform. The dissenting states would gradually come on board as staying out of the VAT framework will erode their competitiveness when compared to the implementing states. 21 states and union territories are going ahead with plans to implement VAT.
