The Hindu Business Line : Asian stock markets brace for impact of spike in crude prices

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Asian stock markets brace for impact of spike in crude prices

Sensex likely to move close to the 15000-mark in initial trades

Crude woes
$11 surge in crude oil prices, 3% drop in Dow index may lead to knee jerk reaction in Asian markets.
If crude falls below $138, there could be a recovery which will impact Indian markets.
Analysts expect Sensex to move in the 14000-18000 band in the next 2 quarters.

Lokeshwarri S.K.

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With crude prices having breached the $138 mark on Friday, expectations within the market of a recovery in equity values now centre on a softer trend in the price of crude.

But even then an initial plunge when the market opens for trading seems a distinct possibility. Indian markets will on Monday morning react in a knee-jerk fashion to the $11 spike in crude prices and the 3 per cent drop in the Dow Jones Industrial Average on Friday.

A similar trend can be observed in other Asian markets which are likely to open at least 2 per cent down on Monday as they react to the impact of a high fuel bill and a slowing US on their economies.

Indian markets

“The situation in the US is getting worse, going by the unemployment figures,” said Mr Gautam Dua, Head of Research, Sharekhan. The chances are quite high that the Indian markets will open down on Monday. European stocks too fell on news of rising crude prices and weak employment data in the US.

“There are fears about Europe also, as the central bank there has clearly indicated the possibility of a hike in interest rates. With so much of negative news, it will definitely weigh on the markets in India,” said Mr Dua.

Price patterns on the pivotal stocks on the BSE (Sensex) indicate that the index could move close to the 15000 mark in initial trades and Nifty could decline to 4467. All eyes would be riveted on the March lows in both the Sensex and the Nifty.

Institutional investors could start bargain-hunting once the indices near these levels. A recovery in Asian markets and decline in oil prices would aid a rebound in the Indian market. The domestic market witnessed a pull-back rally in the month of April, despite the pressures of slowing corporate earnings growth and soaring inflation.

The return of volatility in the current month comes as no surprise to most analysts who expect the Sensex to move in the band between 14000 and 18000 for the next two quarters at least.

Third wave

The risk is all the greater as the Indian market has launched itself into what in technical parlance is called the ‘third wave’ of downward trend in prices. The third wave down is usually the most powerful in price behaviour as it follows an aborted upward move. The failure of the attempt at recovery results in investors capitulating and pressing the panic-buttons. This results in a ferocious decline that encompasses all stocks, whether fundamentally strong or weak.

However, the retail investors are relatively insulated from a strong decline at this juncture since many of them have already retreated to the sidelines following the heavy losses suffered in January and March. The low turnover on the bourses and the predominance of put options (that indicates that traders expect a decline in stock prices) supports this view.

Domestic institutional investors too are not likely to sell below 15000 given the attractive valuations.

FII outflow

It is the outflow from the foreign institutional investors (FIIs) that can cause a decline below 14000. These external investors have already net sold $4.8 billion in cash this year resulting in the Indian markets under performing their Asian peers in the past month.

FIIs would face further pressure to unwind positions since all off-shore derivative instruments (ODIs) with derivatives as underlying need to be extinguished by March 2009 and limitations of 40 per cent of assets under custody on ODIs in cash segment.

(With additional inputs from Mumbai Bureau)