Europe deal comes to the rescue

Published: 31 October, 2011 09:52 IST | Alex K Mathews |

The fireworks were reserved for after the festivities

The fireworks were reserved for after the festivities

Diwali crackers did not make too much noise this time for Muhurat trading but the real dhamaka happened after Diwali triggered by a widely awaited deal struck between the European banks and European (EU) Union leaders.
 The markets opened up for trading last week on a positive note, but remained sideways to positive thereafter in the week but gained strong momentum on the final day and closed at higher note.

The people have spoken: People demonstrate in Thessaloniki Greece.
Huge demonstrations against austerity in Greece described by officials
as the largest since the country's debt crisis broke, were marred by
violence in Athens, Thessaloniki and other cities. 


The latest decision taken by the EU Zone leaders helped the market to gain its lost ground, According to the agreement reached, the private banks voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now. The euro zone will offer sweeteners to the private sector, with a total of 30 billion euros. The aim is to complete negotiations on the package by the end of the year. The value of that package would be 130 billion euros up from 109 billion euros when a deal was last struck in July, an agreement that subsequently came apart. We also saw Euro zone leaders agreeing to scale up the European Financial Stability Facility, their 440 billion euro ($600 billion) bailout fund set up last year. The fund has already been used to provide help to Ireland, Portugal and Greece, leaving around 290 billion euros available. Around 250 billion of that will be leveraged about four to five times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways. The EFSF will be leveraged in two ways, either by offering insurance or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks, aimed at attracting investment from China and other majors.

In the domestic arena, the RBI, on expected lines, increased the Repo rate by 25 bps to 8.5 per cent and the Reverse Repo rate stands adjusted at 7.5 per cent. Another major decision RBI made was the deregulation of savings interest rate. The deregulation of savings bank interest rate is considered a major banking move since the last 20 years. According to this, the banks are now in full command to decide the saving bank deposit rates. This move will have a positive impact on banks with lower CASA (Current Account Saving Account) ratio and a negative impact on banks with higher CASA ratio. Yes Bank is the major gainer after this announcement.

We saw food inflation rising towards 11.43 per cent for the week ended October 15 as against 10.6 percent in the previous week as prices of vegetables, fruits and milk went through the roof. But if we closely watch the food index number it has moved up from 199.5 to 200.8 in the last three weeks at a declining pace. Here, the part of the rise in inflation can be attributed to the base effect. Going forward, we may even see inflation even moving towards 12 per cent-12.5 per cent by the first week of December but towards the end of December the base effect will start its play and we may see food inflation coming down towards 8 per cent-7 per cent by the end of this fiscal.

On Friday, Nifty has breached and closed above 5300, so it is very easy for the Nifty to move above its 200 Day simple Moving Average of 5408. If it can stay at least above 5408 in coming days, then Nifty may even test 5500. The Nifty has already entered in the overbought zone, so volatility can increase. Investors can create long strangles on Nifty by buying 5300 call November and 5200 November put options. The position can give return through directional move or with the increased volatility. Gold has moved above the key resistance level of $1710 and it is likely to test $1770 in the short term. The major support for the gold will be at $1735 and $1680. Silver has immediate resistance at $36.95; if it can break that crucial resistance level with volumes then it may easily break the key resistance at $40.10 in the short-term. Investors can buy stocks like NTPC, IDBI, Central bank, L&T and SBI with a short- term perspective. Tata Elxsi, NHPC and Coal India can be bought for the medium term.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended. Feel free to e-mail him at Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is  for educational and information purposes only and under no circumstances should be used for actual trading or making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment or trading decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at his or her risk.

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