The Game is Bond

Jun 24, 2013, 01:26 IST | Arun Kejriwal

FED's announcement triggers hell, global markets fall

The Reserve Bank of India (RBI) delivered as expected and kept key rates unchanged. The markets too after a knee jerk reaction, rallied on expected lines. All this happened on last Monday and then for the next two days, markets were fairly flat with a negative bias.

Washington, District of Columbia, UNITED STATES: Federal Reserve Chairman Ben Bernanke opens his notes as he arrives for a press conference on June 19, 2013 at the Federal Reserve Board Building in Washington, DC. Bernanke said on Wednesday that the Fed could begin to ratchet down its key stimulus program later this year, signaling a growing confidence in the US economy. Pic/AFP

Thursday all hell broke loose as globally markets, whether they are equity, commodities or currencies just fell as the FED announced that they would at the appropriate time stop buying bonds. Indian markets fell close to 3 per cent on a single day. Friday saw some recovery but was simply not enough. The week ended with losses and the BSE SENSEX lost 403.69 points or 2.10 per cent to close at 18,774.24 points. The NSE NIFTY lost 140.75 points or 2.42 per cent to close at 5,667.65 points. The broader indices lost in between the two indices with the BSE100, BSE200 and BSE500 losing 2.19 per cent, 2.21 per cent and 2.18 per cent respectively. The BSE MIDCAP lost 2.32 per cent, while the BSE SMALLCAP lost a mere 0.96 per cent.

The fall was widespread across sectors and there was just one sectoral gainer. BSE IT gained 0.30 per cent. BSE REALTY led the losers, down 5.72 per cent. Other losers included BSE BANKEX down 4.83 per cent, BSE METAL down 4.22 per cent and BSE PSU down 3.86 per cent. The top gainer in individual stocks was Bajaj Auto, up 3.79 per cent. Other gainers included Wipro up 3.32 per cent, Maruti Suzuki up 2.64 per cent and Glaxo Pharma up 2.22 per cent. The losers were led by Jindal Steel and Power down 15.74 per cent, Power Finance down 11.96 per cent, Apollo Tyres down 11.58 per cent, Chambal Fertilisers down 10.53 per cent and Punjab National Bank down 10.11 per cent. There were quite a few big losers as the above names are all in double-digit losses.

The week sees June futures expiring on Thursday, June 27. The May series had expired at a level of 6124.05 points, which means the current level is lower by 7.45 per cent or 456.40 points. With the bears having such a big advantage there would be no pressure on expiry day and one could see greater volatility as people look to roll over positions. The government would release data on the current account deficit for the fourth quarter of the financial year 2012-13, during the week. It would be important to see where the same has ended.

The Rupee was a big loser and managed to survive turning a ‘senior’ citizen due to the intervention of RBI. It however still lost Rs 1.76 or 3.06 per cent, to close at Rs 59.27. FIIs were big sellers in equities where they sold worth Rs 5,030 crore and in debt worth Rs 7,042 crore. Domestic institutions were neutral while the state-run LIC propped up the domestic support and invested Rs 2,500 crore. This figure is not included when SEBI numbers are reported for domestic institutions purchases and sales. International gold prices have fallen below the $1300 mark and are now at a near three-year low. In India, prices have fallen but lesser simply because the Rupee has depreciated and taxes have been increased. Gold prices in India were around Rs 26,850 and silver around Rs 40,850.

The open offer from the parent Hindustan Unilever has begun. If fully subscribed to the company would spend slightly over Rs 29,000 crore of which Rs 3,000 crore has already come into the Escrow account. The price being offered is very attractive and it appears to be an offer, which must not be missed. There are two issues however which need to be noted. There is a large institutional holding in HUL of both domestic players and FIIs. If they all tender, then the acceptance ratio would fall and would be about 53 per cent. The second issue is regarding taxation. Investors from the retail category would have held these shares for a long time and would be subject to nil tax if sold in the market while they would have to pay tax after taking benefit of indexation. In the latter case, it makes sense to sell the shares in the market and repurchase before tendering in the open offer if one wants to avoid the tax element. In this case, tax on the income between the purchase price and the buyback price would apply. In the above case, tax on roughly R 10 per share profit would be applicable. In the interest of shareholders, the company has also agreed to pay dividend to shareholders offering shares in the buyback. Under all circumstances, looking at the valuation and the price offered, one must accept the offer.

This week would be extremely choppy with futures expiry on Thursday. The markets are likely to rally at the beginning simply because they are oversold. Any rally should be used to exit long positions. The movement of the Rupee and the stand taken by FIIs would determine the course the markets take. Small rally and then continuation of the fall is how I look at it. Key levels for the SENSEX are 18,375 and 19,100 while similar levels for the NIFTY are 5,530 and 5,825 respectively. The BSE SENSEX has support at 18,652, then at 18,455 points, then at 18,345 points, then at 18,205 points and finally at 18,145 points. It has resistance at 18,858 points, then at 19,063 points, then at 19,233 points, then at 19,387 and finally at 19,525 points The NSE NIFTY has support at 5,627 points, then at 5,563 points, then at 5,515 points and finally at 5,478 points. It has resistance at 5,696 points, then at 5,766 points, then at 5,815 points and finally at 5,865 points. Trade with extreme caution and use all rallies to exit.

Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd. Readers are invited to read more about these and other issues on his website

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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