PRUDENT WEEKLY WISDOM - 05.07.2014

INDIAN EQUITIES RESUME BULL VOYAGE AFTER THREE WEEKS OF CONSOLIDATION; ALL EYES ON UNION BUDGET NEXT WEEK

THE WEEK GONE BY

World equities ended higher this week as oil prices cooled off on account of non-escalation of tension in Iraq and US and China came out with strong economic data.

Oil continued to decline for the second week. Brent crude dipped 2.3% for the week to $110.6 a barrel; Nymex crude declined 1.9% to $103.8 a barrel.

US indices ended with gains ranging from 1.3%-2% with Dow closing above the 17000 mark for the first time, European markets gained between 0.7%-2% and Asian markets advanced 1%-3.4%.

Keenly watched US nonfarm payroll data showed that the US economy added 288,000 jobs in June while the unemployment rate dropped to 6.1%, its lowest since September 2008.

Other data points from the US too were largely positive. Markit's gauge of U.S. manufacturing activity in June hit a four-year high while auto sales raced to their highest level in more than eight years last month.  Existing home sales surged 6.1% in May, marking the largest monthly gain since April 2010.  ADP jobs report showed private sector job creation surged in June, with companies creating 281,000 new positions. On the other hand May factory orders reported a greater decline than expected, ISM non-manufacturing index for June came in at 56 vs estimate of 56.5 and Markit's final June services PMI came in at 61.0 versus a preliminary estimate of 61.2.

Fed Chair Janet Yellen, in prepared remarks for a speech at the International Monetary Fund, said that monetary policy has limitations in addressing financial stability risks.

China's official PMI for June came in at a six-month high of 51, in line with expectations and up from 50.8 in May. The HSBC final manufacturing PMI for June came in at 50.7, which was up from 49.4 in May but in-line with the flash reading of 50.8.

In Europe, European Central Bank kept monetary policy unchanged as expected following last month's measures to stimulate the economy. Eurozone manufacturing PMI for June came in at 51.8, below an earlier estimate of 51.9 and touching a seven-month low, in a further sign that the region's stuttering recovery is losing momentum. The composite PMI came in at a six-month low of 52.8, in line with a flash estimate. Separate data revealed that euro zone retail sales for May came in flat month-on-month, below forecasts for a 0.2% rise.  Euro zone inflation came in at 0.5% y-o-y in June, unchanged from May. The euro zone's unemployment rate, meanwhile, held steady in May, at 11.6%.

Indian indices bounced back after three weeks of consolidation, gaining more than 3% this week, as oil cooled off, FII buying returned and expectation started to build ahead of union budget.

India's HSBC manufacturing PMI rose marginally to 51.5 in June from 51.4 in May. The services PMI for jumped to a 17-month high of 54.4 in June from 50.2 in May. The composite PMI climbed to 53.80 from 50.7.

On the flip side, core sector growth for May slowed to 2.3% from 4.2% in April 2014 and 5.9% in May 2013. The fiscal deficit in the first two months of the fiscal year touched 45.6% of the full-year target of Rs.5.3 trillion, a six-year high, because of high non-Plan expenditure and low revenue receipts.

Oil marketing companies, during the week, hiked petrol and diesel prices by Rs 1.69 and 50 paise respectively.

FIIs net bought stocks worth Rs 4368 cr during the week but net sold index futures and stock futures worth Rs 24 cr and 834 cr respectively. DIIs were net sellers to the tune of Rs 646 cr.

OUTLOOK

Minutes of the latest Fed meeting and economic data points across the world would be the key events to watch next week.

In the US, the minutes of the Fed open market committee's June policy meeting, to be published on Wednesday, will help indicate whether the committee is in accordance with Janet Yellen’s views about the US economy.

In Europe, industrial production figures are due throughout the region. Also in focus would be policy meeting of Bank of England where market would watch for any cues on rate hike as unemployment continues to edge lower.

China reports June PPI and CPI on Wednesday and June trade data on Thursday. The trade balance is expected to widen to $37 billion, with faster export growth outweighing an expected rebound in imports.

At home, Union budget for 2014-15 would be the biggest event to watch next week. The budget session of the Parliament starts Monday and Union Budget will be presented on Thursday. Some of the key expectations from the budget are increase in outlay on infrastructure sector with focus on stricter and time-bound implementation of projects, initiatives towards investments in agriculture and irrigation aimed at easing supply bottlenecks for food-grains, fiscal prudence with roadmap to reduce the fiscal deficit, a roadmap for reducing the subsidy burden and timeline for implementation of the Goods and Service Tax.

Another major trigger would be corporate earnings for the April-June quarter. Indusind Bank will kick start the earning season on Wednesday followed by Infosys on Friday.

Industrial production data for May would be released on Friday. In April, industrial output had risen 3.4% as against a contraction of 0.5% in March.

Progress of monsoon rains too will continue to be in focus.

Taking cues from the charts, Nifty has regained the higher-top higher-bottom formation on the daily chart and the view will remain bullish until this formation is intact. Also Nifty has broken out of a descending channel on the daily chart, the target of which comes to around 7800, which would be the immediate level to eye on the way up. On the way down, 7661, the bottom made on Friday, is the immediate support, with the stop loss of which trading longs should be held on to.