Bear show on prime time
World equity markets were thrashed this week by a fresh wave of selloff amid heightened concerns about the impact of the turmoil in the US subprime mortgages on the global financial markets. This despite the ECB, Federal Reserve and Bank of Japan continuing their liquidity-boosting moves by infusing cash into the banking system. The trigger this week was a warning by a leading Wall Street firm that Countrywide Financial Corp., the largest American mortgage lender, could go bankrupt due to sharp losses in subprime mortgages. Countrywide's shares slumped after the troubled mortgage lender said it had drawn down all of an US $11.5bn credit facility to fund its operations amid tough conditions in the credit markets. Standard & Poor's cut Countrywide's credit rating after the mortgage lender was hit by liquidity and earnings pressures.
The string of bad news on Countrywide coupled with the unwinding of the so-called carry trades, funded through loans taken in Japanese yen, sent global markets into a tizzy, led by US stocks. Metal shares too plunged, led by gold and crude oil. However, by the end of the week, things had started stabilising, buoyed by a recovery in the US market on Thursday and a similar show by their counterparts across the Atlantic. Continental stocks surged and US market futures turned higher after the Federal Reserve cut the discount rate to 5.75% from 6.25%, saying it wanted to narrow the spread between the primary credit rate and the targeted federal funds rate. The yen lost most of its gains versus the dollar after the release of the Fed statement. European stocks rallied, with the FTSE 100 jumping 2.1% in London. Gold and crude too climbed after the rout suffered earlier in the week.
Govt in trouble?
Even as the stock, bond, currency and commodity markets were being pounded, an intriguing story was shaping up in the capital. The ties between the Left parties and the Congress took an ugly turn with both sides refusing to budge from their stated positions on the just concluded nuclear pact with the US. While the communist parties ruled out withdrawal of support to the UPA, senior CPI leader AB Bardhan said the withdrawal of support appeared to be inevitable. But, CPI-M patriarch, Jyoti Basu, ruled out withdrawal of Left support from the UPA government on the Indo-US nuclear deal. Last week, the UPA Government's communist allies had rejected the 123 agreement, which set in motion the landmark civilian nuclear agreement between the two nations.
As expected, the Parliament proceedings were thrown out of gear in the first week of the monsoon session, with the Left along with the BJP-led opposition parties trying to corner the Congress-led alliance over the nuke deal with the US. Prime Minister Dr. Manmohan Singh vehemently defended the deal, saying there was no sellout and that it in no way hurt India's sovereignty. He also said that the deal would benefit India a great deal. The BJP termed the Indo-US nuclear deal as humiliating for India and asked the Prime Minister to either renegotiate it or quit. The party moved breach of privilege motions against him in Parliament following Washington's assertion the pact would be terminated if New Delhi exploded a bomb.
Bulls go underground
Worries kept mounting one after another. Sub prime crisis, global liquidity crunch, strengthening of the Japanese Yen, heavy selling by the FIIs and growing tension between Left parties and the Congress-led Government over the recently concluded civilian nuclear deal with the US were some of the highlights of the week. Don't be surprised if the same is repeated next week too.
Key stock indices fell by around 5% over the week in line with a rout in global markets, recording its worst weekly performance in five months. Investors concerns over the riskier assets have resulted into a sharp decline in the emerging markets. Finally, the BSE 30-share Sensex fell by 4.9% or 727 points to close at 14141.52 and NSE Nifty lost 5.2% or 225 points to close at 4108.
At the start of the week, major central banks across the global injected huge sums of money into the liquidity system. Central Bank’s action provided some support to the Financial Markets, by solving liquidity crunch. However, it failed to stabilize and markets lost further ground with Hang Seng Index recording its biggest weekly decline since September 2001.
Metal stocks have been the worst hit over the week. A slowdown in US housing continues to have a negative impact on the metal stocks on Dalal Street. Metal index nose-dived by 9.7% during the week being the top loser among the BSE sectoral indices. Index heavyweight Tata Steel was the top loser among the Sensex stocks as the scrip plunged by over 14% to Rs544. JSW Steel lost 9% to Rs568 and SAIL dropped 8.2% to Rs137.
Capital Goods index was the second biggest loser led by a fall in the frontline stocks. BHEL lost by over 8% to Rs1558, L&T dropped 5.2% to Rs2305, Punj Lloyd slipped 4.7% to Rs62 and Gammon India declined 4.4% to Rs410.
Despite the weaker local currency against the dollar, IT stocks fell sharply in line with other major indices, erasing gains of last week. TCS fell nearly by 8% to Rs1056, Satyam lost 8% to Rs440 and Infosys dropped 5% to Rs1854. The rupee fell to its weakest level in almost four months as overseas funds turned net sellers.
Concerns over the exposure of Banks to the credit market brought the banking stocks lower. BSE Bank Index fell by 5.4%. Index heavyweight SBI lost 5.4% to Rs1519, HDFC Bank slipped 5.5% to Rs1068 and ICICI Bank was down by 5.5% to Rs824. Others like Kotak Bank, Corporation Bank and OBC were the top losers among the Mid-Cap Banks as each slipped over 10%.
Selling was also seen in real estate stocks over the on-going saga of subprime worries. Unitech lost 5.4% to Rs484, DLF edged lower by 0.6% to Rs580, Sobha lost 4.1% to Rs778 and Akruti was down 0.8% to Rs489.
Right said Fed, but what about our Left !
Market outlook changes faster than one can imagine. Just when global pangs were threatening to rock bourses the Fed stepped in bringing cheer to US market futures.
The Federal Reserve cut its discount rate to 5.75% from 6.25%, saying it wanted to narrow the spread between the primary credit rate and the targeted federal funds rate. But back home the US nuclear deal threatens to shake the ruling government. The nuclear deal will come up for discussion in Parliament on August 20. The Congress will be in a tight position as opposition pressure is mounting against the deal from the Bharatiya Janata Party and the Third Front and of course the Left parties.
Stock specific action will continue. For instance ICICI Bank could be in action as the Foreign Investment Promotion Board (FIPB) has reportedly accepted ICICI Bank’s application for infusion of foreign funds into a holding company for its insurance venture. Value buying may be seen in select heavyweights. Buy with a medium to long term horizon. Should you make some quick gains in a strong bounce back, don't hesitate to lighten your positions. Single events appear to have a cascading effect across sectors. WNS (Holdings) Limited, a leading provider of offshore BPO services has been told by one of its client (in the mortgage business) that they expect to stop substantially all work WNS does for them. Be prepared for many more such developments.
If global cues are anything to go by (they are everything to go by these days) the start of the week promises to be positive. Stay alert and avoid falling into bear traps. Keep some amount of cash and invest with a long term view. For day traders, God help you.