It was a good week for the stock markets as domestic investors remained cheerful on hopes that Gujarat’s ruling BJP party will win the state election despite a tough fight from the Congress.
The RBI kept rates steady on expected lines, and there is a feeling that the central bank may also hold rates in February because of upside risks to inflation.
The rupee traded stronger despite a rise in the dollar index, closing the week below 64.50 against the greenback.
Going forward, the Indian currency’s strength is unlikely to sustain and a rate hike by the U.S. Fed in its upcoming meeting could trigger selling pressure in Indian bond markets.
Global investors remained optimistic after the U.S. senate approved a tax overhaul, including corporate tax cuts which could lead to more profitability for companies, improve risk appetite and increase the inflow of overseas funds into U.S. stocks.
Meanwhile, the UK government finally struck a deal with the EU to move Brexit talks forward, ending months of negotiations. There won’t be a "hard border" in Ireland while the rights of EU citizens in the UK and UK will be protected. The estimated cost of the divorce bill will be about 35-39 billion pounds, which is less than anticipated 50 billion pounds.
A surge in the value of crypto-currencies had an impact on gold and silver.
Bitcoin touched levels above $19,000 this week as speculators rush to buy the crypto-currency due to fears of being left out of the rally.
They mostly funded these positions by liquidating their underperforming assets like gold and silver.
Bitcoin is well on its way to emulating the Tulip bubble of the 1630s. The times, the people and the subject matter may have changed but the underlying greed, euphoria, fear and eventual collapse will continue to be the hallmark of such speculation.
On the stock specific front, pharma shares were in action after the U.S. senate approved a bill to cut corporate tax, imparting advantage to companies which have operations in America.
The current tax rate for pharma companies in the U.S. is around 40 percent, and that is expected to be lowered with the implementation of new tax laws.
Infosys gained after the company appointed Capgemini's Salil Parekh as MD and CEO. Parekh has a strong track record of executing business turnarounds and managing successful acquisitions.
India's service sector contracted in November after two months of expansion due to deterioration in business performance due to the effects of GST.
In contrast, the manufacturing sector expanded in the same month at its fastest pace since October 2016.
The government also announced fresh incentives worth 84.5 billion rupees to boost exports and support the MSME and labour-intensive industries. The incentive came as a part of the mid-term review of India’s Foreign Trade Policy 2015-2020.
On the global macro data front, China's exports and imports unexpectedly accelerated last month, an encouraging sign for the world's second-biggest economy.
Exports in November rose 12.3 percent on a yearly basis, the fastest pace in eight months, led by strong sales of electronics and high-tech goods, while commodity purchases helped lift imports. Imports grew 17.7 percent in November.
In the U.S., a report by the commerce department showed trade deficit widening more than expected in October to $48.7 billion from a revised $44.9 billion in September.
The keenly watched U.S. jobs report for November was released on Friday, where headline non-farm payrolls number came in significantly better than expected, with 228,000 jobs added in November against a prior consensus forecast of around 200,000 jobs.
But wage growth turned out lower than expected. The FOMC starts its two-day meeting on interest rates on Tuesday. The Fed’s policy outlook will be of critical importance for policy expectations into next year.
The coming week will be an extremely busy one for markets. The main focus is on the Gujarat election that is expected to give cues for the general election in 2019. The government will announce IIP data for October and retail inflation data on Tuesday. Wholesale inflation for November will be announced on Thursday.
The Nifty, which took support at the psychological support level of 10,000, will be volatile in the coming week.
At current levels, we seem close to an intermediate top which will be surpassed only if the BJP wins in Gujarat with a large majority. Election results can throw up surprises, so it is prudent to wait for the outcome, which will be announced on December 18, before investing further.
Ambareesh Baliga has about 25 years of experience in the stock market and has worked with Karvy and Kotak groups in the past. He is a regular market commentator on various business channels. He is a commerce graduate from Calcutta University and a qualified cost accountant.