Have world financial markets become so fragile??

So, you are surprised by today’s 450 point Sensex gain?? Don’t be.

It took just one stock analyst – Meredith Whitney, to steer a global rise in stock markets. Yesterday, the analyst’s buy rating for ‘Goldman Sachs’ triggered a rally in other financial stocks too, which later spread to other stocks and as a result the Dow Jones rallied up more than 2.5%. And, as other markets also closely follow the Western markets, Asian markets opened strong followed by a strong opening in the Indian markets!

The critical question is – have world financial markets so delicate, that even one person can single handedly trigger a rise? Well if this is so, the financial markets are becoming a riskier place to be in. And to top this, the said analyst in fact maintained that she remains bearish on the US economy and other US financial companies!

The markets thus ‘read’ only what it felt convenient to read. Or may be the markets just wanted a reason to break the downward spiral in which it was gripped for the past few sessions.

What ever it be, the recent ‘rally’ has all the characteristics of a ‘corrective’ rise and it must be treated so. Some important factors which will influence the Indian stock markets in the near term are:

1. The regular onset of monsoon. The meteorological department envisages 90% of the normal rainfall in the month of July. This may not be good news and there are some sates like Madhya Pradesh which are on the verge of being declared drought hit.
2. The Interest rates are likely to rise. The heads of major banks indicated on Monday (July 13) that there is no scope for rates to fall and that in fact the interest rates may rise by about 1% in the near future. This may not be positive for an already sluggish industrial growth. Input costs for the industry have been rising on the back of a rise in fuel prices among other costs. A rise in interest cost will only add to the already tight profitability.
3. Slower reforms on the part of the government may be a factor which will have impact on the markets. However announcements on big ticket disinvestments may provide the needed relief.

Considering these immediate ‘concerns’ we maintain our view of investment buying at around 3800 Nifty levels and we may strongly suggest that corrective price rises like the one we saw today (July 14) may be used as profit booking opportunity , till the time a clearer trend emerges – both technically as well as fundamentally.

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd