Good luck seldom comes in pairs but bad things never walk alone.
What a difference a day makes! On Monday, the world markets cheered China’s proposed currency reform, firing up the risk trade. But, some of that euphoria seems to be fading already with US stocks closing in the red. In fact, the Dow Jones was up over 100 points at one point. A downgrade of BNP Paribas by Fitch and loan loss projections for Spanish banks by S&P reminded investors of Europe's debt troubles. The euro retreated from a one-month high against the dollar. The US currency is actually up against the yuan today.
Asian markets are mostly trading down this morning. So, the Indian markets will fall in line with the regional trend at start. Things could turn choppy ahead of Thursday’s F&O expiry. While chartists are gung-ho and see 5500 soon, short term oscillators entering into an overbought zone calls for consolidation in range of 5270-5320 before a fresh uptrend resumes. FIIs have turned buyers again this month after big outflows in May. So, some sideways consolidation is on the cards before the bulls take a shot at new highs.
The Chinese move to end the two-year peg on yuan with the dollar could turn out to be just a short-term booster. One has to see how far Beijing is willing to traverse on the road to currency reform. Also, it doesn’t settle the global imbalances issue completely. Americans have to save more and Chinese have to consumer more. That is a huge task and will take time to materialise.
At the same time the European debt crisis is yet to fully play out. It will drag on for a while and cast a shadow over world markets. Along the way, we will get intermittent bad news from the euro-zone which could temporarily play spoilsport. So, external factors will continue to have a bearing on Indian markets from time to time. We cannot just wish away the global linkages. Still, the undertone for India remains positive.
In the near term key events to watch out for include the two-day FOMC meet in the US that starts today. The RBI is scheduled to review its policy next month, though there is some speculation that it might just be forced to pre-pone its action if inflation fails to subside. Monsoon has remained erratic so far and has not yet covered the entire nation. Corporate earnings will also be keenly followed.
FIIs were net buyers of Rs15.64bn in the cash segment on Monday on a provisional basis, according to the NSE data. The local institutions were net sellers at Rs5.61bn on the same day. In the F&O segment, the foreign funds were net buyers of Rs13.21bn. On Friday, FIIs were net buyers of Rs6.95bn in the cash segment, as per SEBI data. Mutual Funds were net sellers at Rs459mn in the cash segment on the same day.
US stocks finished lower on Monday, with the Dow Jones Industrial Average erasing a gain of as much as 143 points, as investors chose to be cautious after a recent advance and discounted China's move to strengthen its currency.
The Dow finished down 8.23 points, or 0.l%, at 10,442.41, with 17 of its 30 components ending lower. The S&P 500 Index dropped 4.31 points, or 0.4%, to end at 1,113.20 with consumer-discretionary shares hit the hardest among its 10 industry groups.
The Nasdaq Composite Index fell 20.71 points, or 1%, to end at 2,289.09.
For every two issues rising, three declined on the New York Stock Exchange, where nearly 1.1 billion shares traded.
Stocks rallied in the morning, trimmed some gains in the early afternoon, and then slipped through the close. A variety of stocks declined, with big technology issues leading the way.
Amazon shares fell after the company cut the price of its Kindle electronic reader, the latest salvo in a pricing war that saw Barnes & Noble cut the price of its Nook earlier in the day.
US light crude oil for July delivery rose 64 cents to settle at $77.82 a barrel on the New York Mercantile Exchange.
COMEX gold for August delivery fell $6.20 to $1,233.70 an ounce after closing at a record $1,258.30 on Friday.
Treasury prices tumbled, raising the yield on the 10-year note to 3.24% from 3.22% late on Friday.
The trend seen on Monday reflects the increased volatility that has been seen lately. Also, stocks are pretty fairly valued.
US stocks had risen for two weeks straight, with the major indexes all up more than 6%. That selloff followed a roughly 80% rally on the S&P 500 off its March 2009 lows.
Worries over the euro-zone debt problems have ebbed a little lately. Market gains have also been driven by supportive technical factors.
Over the weekend, China said that it will allow its currency, the yuan, to rise against the dollar, after it was pegged to the dollar over the last two years. Freeing up the currency could be a boon to US manufacturers and exporters, who suffered as the artificially low yuan made imports to China expensive. However, China cautioned that the yuan's rise would happen only gradually.
On Monday, the dollar was barely changed versus the yuan and was 0.5% higher versus the yen. The euro barely budged versus the US currency.
China has kept its currency artificially low for nearly two years to support its exports in the aftermath of the global financial crisis. The People's Bank of China on Sunday said that a stronger yuan would help stem inflation and move investment to service industries from export manufacturing.
China's move is not a panacea for the global economy. It remains to be seen whether the US economy recovery proves self-sustaining as the effects of fiscal stimulus begin to wear off, and whether the sovereign debt crisis in Europe is contained.
European shares climbed, extending the best winning run in 11 months, with miners benefiting from the China move. The Stoxx Europe 600 index rose 1% to 257.92 for the ninth straight advance. This is the first time that has happened since the nine sessions rally ended July 23, 2009.
Monday's gains came after China said over the weekend that it will loosen the yuan's defacto peg to the US dollar. Miners rallied along with metal futures. European exporters also were strong.
The UK's FTSE 100 index rose 0.9% to 5,299.11, the German DAX index rose 1.2% to 6,292.97 and the French CAC-40 index advanced 1.3% to 3,736.15.
After the markets shut in Europe, Fitch Ratings downgraded BNP Paribas SA by a notch, citing "structural issues" linked to the French banking giant's business mix.
Separately, Standard and Poor's Rating Services said that it had raised its estimates for loan losses for Spain's banking sector between 2009 and 2011 due to the faster depreciation of real estate assets on banks' books.