Weekly Market Commentary - Sept 30 - Oct 4, 2013

Indian markets gained this week primarily due to US shutdown, which inadvertently threw FIIs dollars in its direction. Nothing much has changed in Indian fundamentals though: CAD is still high; cost of funds has not gone down; consumer and business sentiment as reflected by weak PMI data. Even then, market is trading near its highs; is expensive and is very volatile. Though I continue to seek out the reasons to explain these anomalies, and I focus on most important ones, the economy and markets have too many moving parts. Every now and then, in order to explain the movements, I give in to recency effect and attentional bias.

Recency effect is nothing but one’s inclination to explain the process/event occurred, by whatever fresh news/story/event comes to mind. For e.g. markets went up as new RBI governor sworn in.

Attentional bias, on the other hand, is using your current subject under study: one you are most closely paying attention to, to explain every event occurring. For e.g. US shutdown is leading to global market rally as dollar investors have nowhere to go.

However, both examples used above may explain the market movements or state of the economy to some extent but the point is they are not the only ones.

Sensex gained 1.0%, Nifty gained 1.3% and CNX Midcap was up by 1.5% this week.

Monday – Sensex down by 1.8%, Nifty down by 1.7%, Midcap down by 0.8%
Indian markets were under pressure ahead of current account data release expected later in the day. An ET poll is estimating CAD to average $23 billion for Apr-Jun quarter vs. $18.1 billion a quarter earlier. Investors are worried that bad CAD data may force RBI to intervene in the market again and may escalate the cost of doing business in the near term.

Tuesday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 0.6%
Markets went up as RBI promised to infuse liquidity into the system via Rs. 10,000 crores purchase of government securities. Also, CAD figures released previous day came out to be little lower than what market participants were expecting. Gold and oil imports pushed 1Q14 CAD to $21.8 billion i.e. 4.9% of GDP. Indian govt plans to reduce the current account deficit to 3.7% of the GDP in FY14 to meet its $70 billion target.

Wednesday – Markets closed on occasion of Gandhi Jayanti

Thursday – Sensex up by 2.0%, Nifty up by 2.2%, Midcap up by 1.6%
Indian markets rose, as they became the target of FIIs dollars as current political crisis in United States has led to a shutdown of non-essential govt functionaries. Investors are worried that shutdown may prolong and will jeopardize any recovery of US economy.

Friday – Sensex up by 0.1%, Nifty flat, Midcap up by 0.2%
Markets ended flat as US dollars continued to flow in leading to increase in the value of Indian currency. The gain was capped as investors were disappointed by weak HSBC PMI data, which fell to 46.1 vs. 47.6 in August indicating contraction in private economy. Realty, auto and consumers gained as govt. decided to infuse funds into PSU banks to help them offer cheaper loans to public and industry.