A slew of economy data to anchor direction

The stock markets have already factored in none too encouraging IIP numbers expected today and there could be a surprise up move.

Benchmark indices, however, are expected to remain in the range of five to seven per cent each on either side from last week’s closing price until this month end.

Equity derivatives will continue to vacillate heavily within the above range in the absence of market depth. This will increase volatility, and create confusion until end of the calendar year.

This week will see a slew of economic data, both from India and abroad, making it interesting.

Inflation data on December 14 and RBI’s mid-quarter review of the monetary policy on December 16 will set the direction of financial markets.

Yield on 10 year G-Secs is expected to hover in the range of 8.45 per cent (worst case) to 8.65 per cent. This will continue till the fresh set of fiscal deficit numbers come in which in all likelihood will result in higher government borrowing.

More than expected government borrowing will put pressure on liquidity and spike 10-year G-Sec yields if RBI does not do open market operations.

The much awaited Rs 10,000 crore tax-free bond issue of the National Highways Authority of India will coast through due to a better quality yield than its peer set.

The rupee can surprise the street with an upside, given the fact that the currency has been logging in gap openings as large as 40 paise to a dollar in recent times.

Global cues will fully depend on the Euro zone. The announcement of a fiscal union last week can result in the Euro rising to 1.37 dollars per Euro in the first half of the week.

But the fact still remains that the European Banking Authority (EBA) has estimated that banks in the Euro zone require another 114.7 billion Euros to re-capitalise their balance sheets.

On December 8 the EBA recommended that banks build up permanent and temporary buffers equal to September end market prices against sovereign debt exposures. It also wanted that these buffers be set aside such that core Tier -1 capital reaches nine per cent by June 2012.

It was not for revision in quantum of the buffers.

Finally, it said that sovereign bond sales could not be used as a substitute for maintaining the buffers as their primary objective was to reassure markets on the ability to absorb shocks (and still be capitalised) and not cover losses in sovereigns.

The US economy, on the other hand is showing more resilience on the back of improved job data. US stocks could rally this week as a result of liquidity moving away from US treasuries, sending yields from 2.05 levels to 2.20 levels.

Any upside breach of 80 levels on the dollar index sends out a strong bullish signal. Nymex crude futures and gold are expected to shed around three to four per cent from last week’s levels.

Finally, watch out for a lot of global data points this week. Data on new Chinese loans in November, consumer price index data from US, Euro zone and UK and rate decisions from US and Switzerland are expected this week.

Also on the anvil are inflation numbers from UK, December monthly report from the European Central Bank, economic sentiment from Germany (ZEW sentiment) and large manufacturer’s outlook from Japan (Tankan).

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