The Hindu Business Line : Dalal Street keenly watching political drama

A file picture of Parliament building. Parliamentarians would meet over the next two days to decide the fate of the UPA Government. The result of the confidence vote moved by Dr Manmohan Singh would set the trend for the market this week.

External and internal triggers tossed the equity market last week. The Wall Street rally on July 16 and 17 resulted from the sharp drop in crude oil, better-than-expected earnings reports from some of the big banks and IT companies, and short sellers covering positions after the SEC prohibited naked short-selling in 19 financial stocks reeling under the load of large short positions.

Dalal Street too saw a reflection of these on the indices on short covering. As the home economics and politics did not throw up fresh troubles, some late recoveries provided temporary breathing space.

This week the market may again plunge into turmoil if the trust vote results precipitate a political crisis. Market apprehension is not only over the future of the nuclear deal but also the management of the economy.

Last week, the rupee appreciated over the greenback on a significant correction in crude oil prices. Rupee appreciation came after Fitch downgraded its rating for the local currency to “negative” from “stable” on “a considerable deterioration in the central government’s fiscal position in 2008-09 combined with a notable increase in government debt issuance to finance subsidies not captured in the Budget”. If political turmoil ensues this week, then rupee gain would evaporate in a jiffy.

Crude correction

On weekly basis, crude prices dropped by over 11 per cent. But there is hardly any indication to suggest that a serious corrective phase in global crude prices has set in.

On the other hand, high local inflation continues to threaten growth.

Erosion in corporate earnings and profits has been evident in the Q1 results declared so far. The market has been factoring in lower forward-earning growth as well. But a fresh political uncertainty would lead the market to factor in negatives more aggressively.

Too many ifs and buts appear in forming a short-term outlook. If the UPA Government sails through the trust vote on July 22, the market may follow a stable course in the short term.

If the Ambani brothers come to some kind of rapprochement, the market would consider it as positive, for the sentiment in the least. If after the weekend meeting in Geneva, which went off well in engaging Iran over the nuclear issue, things go sour afresh, speculators would find it easy to jack up crude oil prices in the short term and the equity markets would not have some respite.

But no one seems to be betting for a dramatic positive news even if the probability is high.

RIL, Bharti, SAIL, Maruti, BHEL and ACC are among the biggies to announce their first quarter results this week.

(Responses may be sent to jayanta_mallick@thehindu.co.in)