Market drifts higher ahead of Fed meet

Banking, metal and PSU shares led modest gains on the domestic bourses today, 3 November 2010, a day after the central bank on Tuesday, 2 November 2010, signaled a pause in its policy tightening drive that began in October 2009. The BSE 30-share Sensex jumped 120.05 points or 0.59%, up close to 40 points from the day's low and off close to 70 points from the day's high. Good Q2 September 2010 results and sustained buying by foreign funds underpinned sentiments.



European markets were marginally higher, Asian markets ended mixed and US index futures were slightly lower as investors awaited the outcome of the two-day US Federal Reserve policy meeting. Investors also digested results from Tuesday's (2 November 2010) US midterm elections, in which the Republican Party won control of the House of Representatives, but the Democratic Party retained control of the Senate.

Barring the BSE Oil & gas index, all the other sectoral indices on the BSE rose. The market breadth was positive. Index heavyweight Reliance Industries (RIL) settled in the red, reversing a firm start. Metal stocks gained after LMEX, a gauge of six metals traded on the London Metal Exchange, advanced 1.58% on Tuesday, 2 November 2010. Bank stocks moved higher on optimism of a pick-up in credit offtake in a buoyant economy. Software pivotals edged higher on renewed buying. Telecom pivotals edged lower, extending Tuesday's fall, on delay in rollout of mobile number portability.

Stocks were volatile. The market opened on a firm note, tracking higher Asian stocks. The market extended gains in morning trade. Stocks came off highs later. The market firmed up again in mid-morning trade. The market once again came off highs later. The market regained strength in early afternoon trade. The Sensex trimmed gains after hitting fresh intraday high in afternoon trade. A bout of volatility was seen in mid-afternoon trade as the key benchmark indices slipped to the day's low only to rebound thereafter. Volatility ruled the roost at the fag end of the trading session as the market recovered after hitting a fresh intraday low.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, was up 1.32% at 21.53. The index had risen 1.58% to 21.25 on Tuesday, 2 November 2010. The index had risen 0.77% to 20.92 on Monday, 1 November 2010. The index had risen 1.17% to settle at 20.76 on Friday, 29 October 2010. The index had lost 2.38% to 20.52 on Thursday, 28 October 2010, a day after it had risen 2.29% to 21.02 on Wednesday, 27 October 2010. The index had lost 3.79% to 20.55 on Tuesday, 26 October 2010. India VIX is calculated based on the S&P CNX Nifty options prices. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days.

The short-term trend of the market will depend on the outcome of the crucial US Fed's two-day policy meet that concludes on Wednesday, 3 November 2010 and listing of shares of Coal India on Thursday, 4 November 2010.

The Q2 September 2010 corporate results have been encouraging. The combined net profit of a total of 1789 firms surged 40.20% to Rs 80798 crore on 18.5% growth in sales to Rs 578951 crore in Q2 September 2010 over Q2 September 2009.

India's services sector expanded last month at a faster rate than in September 2010, bringing an end to a 3-month decline in the key business activity index, a survey showed on Wednesday, 3 November 2010. The seasonally adjusted HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 56.2 in October from 55.6 in September, remaining above the 50 mark that divides growth from contraction for the 18th consecutive month.

European stocks edged higher Wednesday following the US midterm elections, in which Republicans took control of the House of Representatives, and as attention focused on a likely further round of quantitative easing from the Federal Reserve. The key benchmark indices in UK, Germany and France were up by between 0.15% to 0.48%.

Asian stocks were mixed as investors awaited the outcome of the two-day US Fed meeting that concludes today, 3 November 2010. The key benchmark indices in Singapore, Hong Kong and South Korea rose by between 0.61% to 2%. But, the key benchmark indices in China, Indonesia and Taiwan were down by between 0.47% to 0.61%. Japanese markets were closed for a holiday.

Asian stocks and currencies have advanced in the past few weeks despite increased recent volatility, on expectations that a second round of quantitative easing by the Fed could further increase already-high levels of liquidity in Asia.

The World Bank on Wednesday, 3 November 2010 raised its forecasts for economic growth in China this year and next, saying that strong domestic fundamentals will help offset an expected slowdown in the global economy. In a quarterly update on China's economy, the World Bank said that the world's second-largest economy would likely grow by 10% this year, up from an earlier forecast of 9.5%. Next year's estimate was lifted to 8.7% from 8.5%.

US stocks climbed broadly Tuesday as investors awaited the results of US midterm elections expected to usher in more Republicans, and a two-day Federal Reserve meeting expected to yield more economic stimulus. The Dow Jones Industrial Average climbed 64.10 points, or 0.58%, to 11188.72. The Nasdaq Composite rose 28.68, or 1.14%, to 2533.52 and the Standard & Poor's 500-stock index climbed 9.19, or 0.78%, to 1193.57.

The Federal Reserve's policy-setting committee began a two-day meeting. A new round of bond-buying expected to be announced on Wednesday, dubbed "QE2" by Wall Street, would be aimed at lowering long-term interest rates to give the economy a lift.

Trading in US index futures indicated that the Dow could rise 7 points at the opening bell on Wednesday, 3 November 2010.

Back home, the Reserve Bank of India (RBI) at its second quarterly monetary policy review on Tuesday, 2 November 2010, hiked its lending and borrowing rates by a quarter point each, as expected, to tackle inflationary pressures. The RBI raised its repurchase or repo rate (at which it lends money to bank) to 6.25%, while increasing the reverse repurchase or reverse repo rate to 5.25%. It left the cash reserve ratio (the amount of deposits that commercial banks are required to keep with the RBI) unchanged at 6%. RBI Governor D Subbarao said that some controls on debt flows will be maintained.

Bond yields declined for the second day in a row after the central bank on Tuesday, 2 November 2010, signaled a pause in its policy tightening drive that began in October 2009. The yield on the most traded 8.13% 2,022 bond was hovering at 7.99%, compared with Tuesday's (2 November 2010) close of 8.01%. The yield on the second most traded 7.99% 2017 bond was hovering at 7.84%, compared with Tuesday's (2 November 2010) close of 7.9%. The yield on the benchmark 7.8% 2020 was hovering at 7.95%, compared with Tuesday's (2 November 2010) close of 7.97%.

Based purely on current growth and inflation trends, the Reserve Bank of India (RBI) believes that the likelihood of further rate actions in the immediate future is relatively low, RBI governor D Subbarao said in a monetary policy statement on Tuesday. "However, in an uncertain world, we need to be prepared to respond appropriately to shocks that may emanate from either the global or domestic environment," he added.

The central bank said inflation is expected to moderate from the present elevated level, reflecting in parts, some easing of supply constraints and concerted policy action. The RBI said that under a new series of the wholesale price index, its projection now stands at 5.5% at end March 2011, which is equivalent to 6% under the old series. In July 2010, the RBI forecast that wholesale price index inflation was likely to ease to 6% by March 2011, under an old method of calculating price increases. The RBI also retained its gross domestic product forecast for the current financial year, ending in March 2011, at 8.5%

The central bank imposed stringent norms on housing loans by commercial banks such as increasing the risk weights, higher provisioning for teaser rate loans, among others. At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks' housing loan exposures. In order to prevent excessive leveraging, RBI has proposed that the LTV ratio in respect of housing loans hereafter should not exceed 80%.

The RBI said it will continue to closely monitor both global and domestic macroeconomic conditions. "We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability", the policy statement said.

Demand side pressures in India have moderated due to the monetary actions that have been taken so far, Subbarao told analysts in a conference call on Wednesday, 3 November 2010. RBI deputy governor Subir Gokarn said rate actions taken so far by the Reserve Bank of India are consistent with achieving non-negative real interest rates by March 2011.

The RBI on Sunday, 31 October 2010, said it was extending the special liquidity measures unveiled last week up to 4 November 2010. The RBI also allowed lenders to temporarily lower holdings of debt below regulatory requirements to raise cash.

The manufacturing sector expanded in October 2010 at a much faster pace than in September 2010, supported by strong output and a sharp rise in new business, a purchasing managers' index (PMI) showed on Monday, 1 November 2010. The HSBC Markit PMI, based on a survey of 500 Indian companies, rose to 57.2 in October 2010 from 55.1 in September 2010 and 57.2 in August 2010. New orders climbed for the 19th month in a row and at a faster rate than in September 2010.

The report said input prices for manufacturers increased substantially in October 2010 and at their fastest pace in five months, while output prices rose modestly. "Price pressures, however, are still too strong for comfort, possibly prompting the central bank to hike again before the end of the year," Frederic Neumann, co-head of Asian Economics Research at HSBC, said in a statement

Finance Minister Pranab Mukherjee, last week, said the government has no plan to put any cap on flow of funds from foreign institutional investors (FIIs), which have pumped in nearly $25 billion so far this year. He said a sharp increase in inflow of funds from FIIs has provided cushion in controlling current account deficit. "I am confident with the flow of FIIs and foreign exchange availability, I will be able to contain current account deficit at around 3% of the GDP," Mukherjee said. The Finance Minister admitted that inflows of foreign funds have put pressure on the Indian currency.

India's economy is seen growing by 8.5% to 9.7% in the 2010/11 fiscal year and monetary tightening should ensure the pace of recovery is not hit, the finance ministry said in a report released on 26 October 2010.

While global liquidity remains ample, a section of the market is worried that a strong equity issuance pipeline over the next six months will soak liquidity from the secondary equity markets. Indian companies are estimated to raise about Rs 80000 crore from equity and debt issue over the next three to six months. State-run Power Grid Corp, Steel Authority of India and Indian Oil Corp are some of the companies that are planning large share sales in coming months.

But, the liquidity in secondary equity markets in the immediate short term could rise as Coal India has started returning the amount of excess subscriptions received towards its initial public offering. The IPO of Coal India IPO was subscribed more than 15 times. Shares of Coal India will debut on the secondary equity markets on Thursday, 4 November 2010.

Meanwhile, flows pouring into emerging market funds slowed considerably in the fourth week of October 2010. EPFR Global-tracked emerging markets equity and bond funds took in $2.68 billion and $710 million, respectively, in the week ended 27 October 2010, around half the previous week's totals. Last week, global emerging markets equity funds took in $3.76 billion, topping the record of $3.74 billion set in the first week of October 2010, which had been the highest total since EPFR started compiling weekly flow data.

Brazil equity funds posted another solid week of inflows despite that market's recent efforts to control capital inflows via higher taxes, EPFR said. The Brazilian government recently raised the tax on foreign purchases of fixed income to 6% from 4%. It also raised the tax on margin deposits on futures markets to 6% from 0.38%.

Foreign funds have made heavy purchases of Indian stocks this year. Net equity inflows in 2010 now stands at a record $26.46 billion, above last year's $17.45 billion.

The BSE 30-share Sensex was up 120.05 points or 0.59% to 20,465.74. The Sensex surged 193.11 points at the day's high of 20,538.80 in afternoon trade. The index rose 80.49 points at the day's low of 20,426.18 in late trade.

The S&P CNX Nifty was up 41.50 points or 0.68% to 6,160.50.

The market breadth, indicating the health of the market was positive. On BSE, 1663 shares advanced while 1338 shares declined. A total of 111 shares remained unchanged. The breadth was much stronger earlier in the day.

The total turnover on BSE amounted to Rs 4946 crore, higher than Rs 4882.56 crore on Tuesday, 2 November 2010.

Among the 30-member Sensex pack, 21 advanced while the rest of them declined.

The BSE Mid-Cap index rose 0.6% the BSE Small-Cap index rose 0.68%. Both these indices outperformed the Sensex.

Except BSE Oil & Gas index, all the other sectoral indices on BSE rose. The BSE Metal index (up 1.55%), Auto index (up 1.51%), Consumer Durables index (up 0.89%), Bankex (up 0.88%), PSU index (up 0.66%), FMCG index (up 0.66%), Capital Goods index (up 0.63%), Healthcare index (up 0.62%) outperformed the Sensex.

Oil & Gas index (down 0.49%), Power index (up 0.17%), IT index (up 0.3%), Realty index (up 0.49%) and underperformed the Sensex.

Shares of a number of state-run firms rose ahead of the listing of state-run coal giant Coal India on Thursday, 4 November 2010. Power Grid Corporation of India (up 0.3%), Neyveli Lignite (up 0.43%), Bhel (up 1.08%), Andrew Yule (up 1.39%), Dredging Corporation of India (up 1.83%), Hindustan Copper (up 4.02%), HMT (up 5.84%), gained.

Metal stocks gained after LMEX, a gauge of six metals traded on the London Metal Exchange, advanced 1.58% on Tuesday, 2 November 2010. Sesa Goa, Nalco, Steel Authority of India, Hindalco Industries, Jindal Steel & Power and Tata Steel rose by between 0.16% to 1.87%.

India's largest non-ferrous metals maker by sales Sterlite Industries jumped 3.74% and was the top gainer from the Sensex pack.

Index heavyweight Reliance Industries (RIL) slipped 0.85% to Rs 1065.25, off the day's high of Rs 1085. RIL's net profit rose 27.80% to Rs 4923.00 crore on 22.69% rise in net sales to Rs 57479.00 crore in Q2 September 2010 over Q2 September 2009. Its gross refining margin (GRM) for quarter was at US$7.9 per barrel as against US$ 6 per barrel in the corresponding period of the previous year. The company announced the results late last week.

India's largest oil exploration firm by sales Oil and Natural Gas Corporation (ONGC) rose 0.17%. As per reports, a consortium of India's top state-run energy firms led by exploration giant Oil and Natural Gas Corporation (ONGC) is in talks to acquire a 25% stake in Australia's Advent Energy.

Bank stocks moved higher on optimism of a pick-up in credit offtake in a buoyant economy. India's largest private sector bank by net profit ICICI Bank advanced 0.58% after its ADR gained 2.22% on Tuesday on the NYSE. The stock today, 3 November 2010, scaled a 52-week high of Rs 1,251.70

India's second largest private sector bank by net profit HDFC Bank gained 0.24% and India's largest bank by branch network and net profit State Bank of India spurted 2.19%.

Software stocks edged higher on renewed buying. India's third largest software services exporter by sales Wipro gained 0.15% and India's largest software services exporter by sales TCS gained 0.38%. India's second largest software services exporter by sales Infosys rose 0.15%.

North India's largest cement firm by sales ACC jumped 2.49% to Rs 1083.25 after striking a 52-week high of Rs 1093.35 in intra-day trade today. The stock extended Tuesday's close to 4% rally after reporting 13.6% rise in cement dispatches to 1.92 million tonne in October 2010 over October 2009.

Telecom pivotals edged lower, extending Tuesday's fall, on delay in rollout of mobile number portability. India's second largest listed cellular services provider by sales Reliance Communications lost 1.02% and was the top loser from the Sensex pack.

India's largest listed cellular services provider by sales Bharti Airtel lost 0.26%. Idea Cellular fell 0.82%.

Some realty stocks staged a comeback on bargain hunting after Tuesday's slide triggered by the Reserve Bank of India's stringent norms on housing loans by commercial banks. Indiabulls Real Estate, Sobha Developers, Unitech, and Phoenix Mills rose by between 0.08% to 2.61%.

India's biggest commercial India's biggest commercial vehicles maker by sales Tata Motors surged 2.72%. Total sales rose 21.26% to 64,757 units during October 2010 compared to 53,404 units in the same month last year. The company unveils its Q2 September 2010 results on 9 November 2010.

India's largest tractor maker by sales Mahindra & Mahindra gained 0.32%. The company's auto sales rose 34% to 34,495 units in October 2010 as against 25,670 units during October 2009.

India's largest bike maker by sales Hero Honda Motors inched higher by 0.7%. The company reported its highest ever monthly sales at 5,05,553 units in October 2010, registering a jump of 42.75% over the same month last year.

Bajaj Auto rose 2.3% after reporting 32% surge in total sales to a 3.7 lakh units in October 2010 over October 2009. The company said it clocked a record motorcycle and commercial vehicle sales in the recently concluded month.

But, Ashok Leyland dropped 0.99% as domestic sales fell 6.2% to 4,628 units in October 2010 over October 2009. Exports jumped 176.69% to 1,104 units.

India's top small car maker by sales Maruti Suzuki India fell 0.07%. The company's total sales rose 39.2% to 1.18 lakh vehicles in October 2010 over October 2009.

Fertilizers shares rallied on high volumes in anticipation of a new urea policy. Reports that RIL is likely to achieve a peak gas output of 80 million standard cubic metres per day (mmscmd) from its KG-D6 block in about 12 months augurs well for fertiliser companies. Rashtriya Chemicals & Fertilisers, National Fertilizer, GNFC and GSFC rose by between 1% to 17.51%.

Cals Refineries clocked the highest volume of 10.74 crore shares on BSE. Sujana Metal Products (1.54 crore shares), Chambal Fertilisers & Chemicals (1.37 crore shares), Nagarjuna Fertiser & Chemicals (1.18 crore shares) and Shree Ashtavinayak Cine Visison (1.13 crore shares) were the other volume toppers in that order.

M&M Finanacial clocked the highest turnover of Rs 179.85 crore on BSE. BS Transcomm (Rs 159.24 crore), Chambal Fertilisers & Chemicals (Rs 126.99 crore), State Bank of India (Rs 112.42 crore) and Reliance Industries (Rs 94.38 crore) were the other turnover toppers in that order.