Expect a volatile week

Markets may stay volatile this week, as investors could limit activity to assess the impact of the US Fed indicating that further rate cuts are unlikely on foreign fund flows. With the second quarter earnings of companies showing signs of a slowdown and oil prices hovering just below $100 per barrel, investors are uncertain about how long the recent rally would last.

A section of the market does see some slowdown in foreign fund inflows in the near-term, as absence of further rate cuts would make “carry trade” less attractive in a market that is already expensive. Also, curbs on participatory notes may further slow such inflows into India.

Carry trade involves borrowing in countries with lower rates and a weakening currency and investing the proceeds in high-yielding assets elsewhere, for higher returns. Analysts partly attribute the glut of foreign institutional
inflow into emerging markets, especially India, to this trade, which gained significance after the 0.5% cut by the US Fed in its benchmark rate.

Foreign funds have net invested $8 billion in October alone after the first Fed rate cut on September 18. So far this year, these funds have poured in over $17 billion into Indian equities, which is way above the highest-ever annual foreign inflow of roughly $11 billion in 2005.

But with the Fed chairman making cautionary statements on inflation after another 0.25% rate cut last week, investors believe that the Fed is unlikely to trim rates further. The healthier-than-expected US job report — one of the most closely watched economic data — on Friday will give lesser leeway for the US central bank to cut rates further, analysts said.

Meanwhile, bulls in the US market got the news they were waiting for on Friday when the October jobs report turned out to be better than expected. The data fuelled some opening gains, which was, however, quickly relegated to an afterthought amid renewed concerns about the financial sector’s prospects. The Dow ended 0.2% higher at 13,595 points on Friday.

Oil futures added to the positives late Friday when the British Foreign Office said the UN Security Council agreed to draft a new sanctions resolution, which could be passed in November, if Iran’s cooperation with the International Atomic Energy Agency does not improve. Investors worry that any conflict between the West and Iran would disrupt oil supplies from the Middle East. Light, sweet crude for December delivery rose $2.44 to settle at a record $95.93 a barrel on the New York Mercantile Exchange.

Back home, oil marketing companies’ shares may rise on expectations that the government will announce a hike in oil product prices soon, especially with global oil prices showing no signs of easing. Global oil prices have risen close to 50% since the past year, but oil companies have been unable to raise prices due to political compulsions.

Analysts feel shares of software companies could rebound slightly this week, as the stronger US job data suggests that the economy may not be in that bad a shape as was expected after the subprime crisis. These companies derive a major share of their revenues from the US. These shares have been the biggest laggards in the past sixmonths, as the rapid rise in the rupee against the dollar threatened to hit their earnings and margins.

Via ET