Last week to be ruled by FII flow, crude oil price

Direction of Indian equities would be decided by FII flows and behaviour of crude oil prices, this week, being the last of 2011.

Though there is widespread expectation that the Nifty would consolidate within the 4600 - 4800 range, there are chances of the index going up this week.

The launch of Rs. 5000 crore tax free bonds by the National Highways Authority of India (NHAI) on December 28 is the most significant event in Indian financial markets this week.

NHAI has an option to retain another Rs. 5000 crore of oversubscription (which it will, given the government’s need to raise money) the bond is expected to out do other investment avenues.

With an overwhelming response on the anvil, this issue has the capacity to ensure lower collections for other tax saver instruments such as the equity-linked savings schemes (ELSS).

Foreign banks and FIIs (ahead of year end) and Indian banks (ahead of quarter end) will book profits on 10 -year G-Secs.

This will push 10-year G-Sec yields up from the present level of 8.25 per cent (which is below existing cost of funds, 8.37 per cent) to a range between 8.4 per cent and 8.6 per cent.

The rupee will be under pressure against the dollar due to year end outflows. However it is expected to hover around 52.8 rupees to a dollar this week given the relative lack of volume due to Christmas holidays.

On the global front, market-men expect the relief rally in equity, also called the ‘Santa’ rally to continue this week.

US equity markets in particular will do well carrying forward the momentum gained last week from encouraging data on jobless claims, housing starts and existing home sales.

Deployment of funds into equity is likely to harden US 10-year treasury yields. Though analysts peg the Euro to remain close to last week’s levels at around $1.3050 to a Euro, choppy and shallow trading in a holiday week could take the currency to $1.3150 or even $1.3200 for every Euro.

The dollar index (DXY) is expected to remain within the 78.5 and 80.5 range this week. Crude oil prices will strengthen further this week on account of winter demand and threat to oil supply due to Iran’s 10- day naval exercise which may result in the closure of Hormuz strait an important oil shipping route.

However, the street is not expecting Nymex crude to increase above $102 to a barrel, from the existing $ 99.8 to a barrel.

Softening demand for steel world wide could push freight rates for dry bulk cargo (such as steel, grain, lumber, cement and coal) downwards and the Baltic dry, the benchmark freight index is also expected to follow suit.

Gold is expected to be slightly bullish and could gain three to four per cent this week over last week’s close of $1606.43 to an ounce.

Finally, the last set of global economic data for 2011 expected this week are the US consumer confidence index on Tuesday (forecast at 58.5, up from the previous 56) and the German consumer price index from the Euro zone (forecast at 2.4 per cent, down from the previous 2.8 per cent) on Friday.

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