Market glued to Tuesday's trust vote

Market glued to Tuesday's trust vote
D-St Outlook


The outcome of the crucial trust vote on Tuesday, which will not only decide the fate of the UPA government, but also Indo-US nuclear deal, will set the tone for equities this week. If the government fails the vote, it is expected to trigger the next major bout of selling, as investors are generally uncomfortable with unstable regimes. Going by the euphoria in the market in the last couple of sessions, also aided by declining global crude prices, it appears that investors expect the Congress-led UPA government to win the trust vote. Sentiment has been boosted by expectations that surviving the trust vote will prompt the UPA government to speed-up the languishing economic reforms process.

But, not everyone thinks the government’s survival in the trust vote would change India’s real economic conditions “Overall, it may well be that the Congress-led government survives the vote of confidence and limps on until 2009. However, there will be plenty of demand for populist action as each party, in what is likely to be a very unwieldy coalition, attempts to quickly make its mark before the general election,” said HSBC’s economists and strategists in a recent note.

Even if the market rallies, driven by the government’s survival in the trust vote, analysts believe upsides will be short-lived, as concerns such as inflation along with slowing economic and corporate profit growth remain. So far, for the first quarter, companies’ earnings have not sprung any positive surprises, with sales growth remaining stable, while profit growth getting squeezed.

“History suggests that the government’s ability to control growth and inflation is fairly limited and we suspect that it will go into the election with still high WPI (wholesale price index) inflation and softening economic activity,” the report added. As the week progresses, investor bets will likely shift to the outcome of RBI’s monetary policy review on July 29. Given that inflation has not mellowed, analysts expect the central bank to hike the repo rate as part of its attempts to contain prices. In the week to July 5, inflation, represented by the WPI index, rose to 11.91%, as against expectations of over 12% and up from 11.89% in the previous week. Banks and real estate shares may see build-up of short positions in the futures and options (F&O) markets ahead of the monetary policy review.

CLSA notes the 3,688-3,781 level marks an important pivot point for the Nifty, which closed at 4092.25 on Friday. Key corporate results this week include BHEL, Maruti Suzuki, Bharti Airtel, Reliance Industries, ACC, SAIL and Sesa Goa, among others. “These technical levels are important to take note of as they often mark the end of corrections. We would lighten up on existing short positions here. Initial resistance is provided by the August 2007 lows at 3,953-4,021 with key resistance found at 4,412-4,471,” the French brokerage said, in its recent trading strategy note.

Source: ET