Sensex succumbs to EU jitters, local woes

The Indian market tumbled anew on Friday, extending the previous session’s big losses, as investors continued to shun risk amid growing evidence of a slowdown in the domestic economy. Stiff opposition to the Government’s proposed economic reforms this week has added to the perception of policy paralysis.

On the economic front, the Centre is struggling to control its worsening finances amid ballooning subsidies. It is most likely to overshoot the fiscal deficit target. The situation on the external front too is not encouraging with the current account gap widening. A weak rupee has only added to the bleak scenario.



A few top brokerages have recently cut their 12-month target of BSE Sensex citing lower earnings estimates amid a highly challenging macro environment. And though valuations may appear reasonable, most investors are not willing to take the bait. The near-term outlook will hinge on political developments and overseas markets.

The Sensex ended at 16,213, down 274 points or 1.7% over the previous close. It had earlier touched a day’s high of 16,382 and a day’s low of 16,142. It opened at 16,258.

The NSE Nifty was quoting at 4,866, down 76 points or 1.5% over the previous close. It earlier touched a day’s high of 4,918 and a day’s low of 4,841. It opened at 4,870.

The BSE Small-Cap and the BSE Mid-Cap indices were down ~0.9% each.

Capital Goods, Auto and Oil & Gas indices lost 2% to 2.5%. Power, Realty, FMCG, Teck and banking indices fell by 1-2%. IT, PSU, Metal, Pharma and Consumer Durables indices were down less than 1%.

Indian indices opened lower in line with other Asian markets but soon recovered on reports that most EU nations had agreed on tighter budget controls though a proposed treaty change didn’t materialise due to resistance from UK and few other members.

The reversal was short-lived though and the main indices hit new session lows in the afternoon. Things remained choppy, as the market hit new day’s high on the back of a recovery in he European counterparts. The last half an hour saw the Sensex and the Nifty lose fresh ground.

Meanwhile, a final EU statement and few more details are still awaited from the Summit in Brussels later on Friday when the crucial meeting concludes. The Dow Jones stock futures were trading up by ~100 points, pointing to a higher start on Wall Street.

The euro dropped to a one-week low against the dollar after the EU leaders failed to agree on treaty changes to forge a closer fiscal union. French President Nicolas Sarkozy said that British Prime Minister David Cameron made "unacceptable" demands regarding treaty amendments. The euro was poised for weekly losses versus the yen and the greenback. The yen advanced against the Australian and New Zealand dollars.

Asian markets closed sharply lower though the Chinese stocks managed to escape deep losses after government data revealed much softer inflation in November. However, other economic reports today showed slowdown in China's industrial production. Japan’s economy grew less than the government’s initial estimate last quarter.

Back home, the Government presented the economic report card for the first half of FY12. The finance minister pegged GDP growth at 7.5% for FY12 and said meeting the fiscal deficit target will be challenging.

"We expect some revival next year but outlook remains mixed. Given that India’s fundamentals are strong, if Europe and the US remain stable, it should be possible for us to get back close to our long-run target of 9%," the Finance Ministry's mid-year analysis said.

Separately, Commerce Secretary Rahul Khullar said that the country was facing a serious balance of trade problem due to the high level of imports. He also said that it will be difficult for India to meet FY12 exports target of US$300 billion.

Outlook for next week:

Next week is again very important for Indian markets. The IIP data for October will be out on Monday. The number is likely to be a pretty dismal one with one national daily actually reporting a 7% contraction.

Latest inflation report will be released on Dec. 14 and the RBI will take up its review on Dec. 16. A pause is what the RBI had predicted at its previous meeting. But, one has to see what stance the central bank takes as the rupee's depreciation has made things worse with cost of imports shooting up sharply.

Global factors will also remain in focus. Investors will closely analyze and examine the EU Summit outcome to gauge if the debt-strapped eurozone can finally fix its long-running problems. Any news on rating downgrade(s) may dampen the mood.

Though valuations of Indian equities may appear reasonable, most investors are not willing to take the bait just yet. The near-term outlook will hinge on political developments and overseas markets. Also watch out for the advance tax numbers, trend in FII flows and the rupee.