Market may extend losses as oil hovers near record high

The market is likely to extend the sharp fall witnessed in the last three days with oil prices hovering near record high and amid concerns about political stability. Oil, India's biggest import, rose more than $1 a barrel on Wednesday, 2 June 2008, within sight of Monday (30 June 2008)'s record high above $143. Oil has risen more than 40% in calendar 2008 so far and it is the key reason for the turmoil of Indian equities. A section of the market reckons that only a sharp fall in oil prices can bring out a meaningful recovery in battered Indian stocks.

The barometer index BSE Sensex plunged 1,460.14 points, a fall of more than 10% in the past three trading sessions. Sensex has shed 4638.44 points or 26.35% from a recent high of 17600.12 hit on 2 May 2008. It is own 7,325.31 points or 36.10% in the calendar year 2008 so far from its close of 20,286.99 on 31 December 2008. It is 8,245.09 points or 38.87% off its all-time high of 21,206.77 struck on 10 January 2008.

Asian stocks were mostly in the red today. Key benchmark indices in Hong Kong, Japan, Taiwan and South Korea were down by between 0.2% to 2%. Key benchmark indices in China and Singapore were up by between 0.39% to 1.58%.

US stocks rose on Tuesday, 1 July 2008, after embattled automaker GM surprised Wall Street with stronger-than-expected June sales and financial shares reversed earlier losses as investors scoured for bargains, overshadowing concerns about record oil prices. The Dow Jones Industrial Average gained 32.25 points or 0.28% to 11,382.26. The tech-laden Nasdaq Composite index rose 11.99 points or 0.52% to 2,304.97.

Record high oil prices, surging inflation, higher interest rates, a likely increase in fiscal deficit and political uncertainty have all caused a gloom on the macro economic front in India at this juncture. The stock market’s concerns are that the rise in input costs and tough macro economic environment comprising high inflation, record high global crude oil prices and rising interest rates, will result in slowdown in earnings growth of the corporate sector.

The advance tax payment by the Indian corporate sector this year so far has been strong. Government’s direct tax collection from the corporate sector rose 39.81% to Rs 30655 crore until 21 June 2008 compared to the corresponding period last year. More clarity on the impact of poor macroeconomic environment on earnings of India Inc. will emerge when company managements give outlook for the current fiscal years at the time of announcement of Q1 June 2008 results this month.

Sustained selling of Indian stocks by foreign institutional investors (FIIs) has also dented market sentiment. FII outflow in June 2008 totaled Rs 10095.80 crore. FII outflow in calendar year 2008 totaled Rs 25692.40 crore, till 30 June 2008.

Political uncertainty continues to haunt Indian bourses. Doubts have been raised as to whether the Congress led United Progressive Alliance government will be able to push through a much-debated Indo-US nuclear deal and still retain its power, in the face of heavy opposition from its key communist allies. The Left parties on Sunday, 29 June 2008, renewed their threat to withdraw support from the ruling coalition if Prime Minister Manmohan Singh forged ahead with the nuclear deal. Singh on Monday, 30 June 2008, promised to bring the nuclear pact with the US before parliament before going ahead with the deal that is fiercely opposed by his communist allies, a report said.

The Prime Minister played down the communists' threats to withdraw support to his government saying all that he wanted was that the government should be allowed to complete the negotiation process with the International Atomic Energy Agency-IAEA and Nuclear Suppliers' Group-NSG. Singh expressed confidence that the government would be able to address concerns of all including the Left parties on the civil nuclear cooperation agreement with the US.

For the stock market, the political uncertainty pertains to whether there will be stability at the centre if mid-term polls are held i.e. whether the new government will complete five years and whether the new government restarts economic reforms process which has virtually come to a halt in the last two years or so.

A good news in the current gloom on the macroeconomic front is that the Indian Meteorological Department (IND), in its long-range forecast update for the 2008 southwest monsoon, has maintained that rainfall for the country as a whole is likely to be ‘near normal’. The department classifies rainfall as near normal when it's between 96% and 104% of the 50-year average. Good rains will bolster farm production which in turn may help rein in inflation