Markets to remain volatile as China returns from holidays

The bears continued to maul the markets for the fourth straight week with both the benchmark indices losing over four per cent to end at their lowest close in over 13 months and the highest weekly loss after November 2011 amidst weak economic data and global cues while the sharp sell-off by foreign institutional investors also weighed on investor sentiment.  

In the week to September 4, 2015, the 30-share Sensex dropped 1,190 points or 4.5 per cent to end at 25,202 and the 50-share Nifty closed 347 points or 4.3 per cent lower at 7,655.

The broader markets also reeled under selling pressure with both the mid-cap and small-cap indices down over 3.5 per cent each during the week.  

“The weak monsoons so far have raised prospects of higher food prices, while the disappointment on the rate-cut front by the central bank also weighed on the market sentiment. Further, weak economic data and the continued selling by foreign funds also added to the downside. Weakness is likely to persist for a couple of weeks and one can look at IT and pharma stocks,” said G Chokkalingam, founder & MD, Equinomics Research & Advisory.  

Foreign institutional investors were net sellers in equities of over Rs 4,300 crore during the week.  

The government accepted the recommendation of former law commission chairman A P Shah panel report stating that minimum alternate tax (MAT) should not be imposed on overseas portfolio investors, retrospectively.  

Markets to remain volatile as China returns from holidays India's GDP (gross domestic product) for the first quarter ended June 30, 2015 slowed down to seven per cent compared with 7.5 per cent in the previous quarter.  

Further, a private survey showed that factory production expanded at a slower pace in August compared to the previous month. Nikkei purchasing managers’ index (PMI) data fell to 52.3 points in August against six-month high of 52.7 points in July.  

Meanwhile, India's growth in eight core sectors eased to 1.1 per cent in July 2015 after a growth of three per cent in June 2015.  

Capital goods and power sector stocks witnessed selling pressure on the back of weak core sector growth and lower-than-expected first quarter GDP growth. State-owned BHEL was the top Sensex loser down nearly 12 per cent while L&T eased over five per cent.   

Banks which are a proxy to the economy also witnessed profit booking with SBI, ICICI Bank and Bank of India hitting 52-week lows amid weak first quarter GDP, while the new guidelines proposed by the Reserve Bank of India (RBI) for computing base also dampened sentiment.

According to the CRISIL report, banks might take a one-time hit of Rs  20,000 crore or Rs 200 billion to follow the RBI prescription to use marginal cost of funding to decide base rate.   

Auto stocks also reversed gears despite positive sales growth in August. Mahindra & Mahindra slumped nearly 10 per cent after total tractor sales in August 2015 dipped 22 per cent to 11,699 units compared with 15,006 units in August 2014.  

Tata Motors eased over five per cent on worries over JLR sales in China and damage to its vehicles in the recent explosions at China's Tianjin port.

However, the auto major reported 16 per cent growth in exports, 19 per cent growth in passenger car sales and 31 per cent growth in commercial vehicles segment during August 2015 compared to the same month last year.  

Metal stocks also lost their sheen on worries that the economic slowdown in China, the world's largest consumer of metals, would hurt export demand.  

Outlook  

Markets are likely to remain volatile, as China markets resume trading post the holidays.  

Meanwhile, the mixed US jobs data in August has raised the uncertainty of when the US Federal Reserve would announce its first interest rate hike. The US Federal Reserve's meeting is scheduled for September 16-17.  

Further, selling by foreign institutional investors are likely to keep market under pressure.  

The government will release the Index of Industrial Production for July 2015 on Friday, September 11, 2015.