Lower CAD, weaker US data give markets breather

The BSE Sensex ended the day at 18,875, up 323 points or 1.8% on Thursday

Indian shares rose sharply on Thursday, as better-than-expected trade deficit numbers and weaker US economic growth data sparked short covering ahead of the expiry of the June derivatives series. However, fund managers and analysts warn the market strength could be temporary because the outlook for the rupee remains bleak and foreign institutional selling shows no signs of abating.

The BSE Sensex ended the day at 18,875, up 323 points or 1.8 per cent on Thursday. The NSE Nifty closed at 5,682, up 94 points or 1.7 per cent.

However, the weak US gross domestic product (GDP) data, which raised hopes that the US Federal Reserve may not roll back its stimulus package starting later this year, did not stop foreign institutions investors (FIIs) from extending their selling. They sold shares worth Rs 1,043 crore on Thursday, extended their selling spree in stocks from June 11. These investors, who have bought stocks worth Rs 71,000 crore so far in 2013, have net sold to the tune of Rs 11,150 crore since June 11 till June 26. (Click for table)

“There was broad-based short-covering in the market as the markets had been beaten down severely in the last few sessions. The CAD (current account deficit) numbers were a positive surprise,” said Hemant Kanawala, head (equity investment) at Kotak Life Insurance. The CAD numbers for the March quarter came in at 3.6 per cent of the GDP, much lower than the market expectation of five per cent.

The US GDP growth numbers for the first quarter came in at 1.8 per cent, elevating hopes of a continuation of the easy monetary policy. In response, US stocks rose leading to a relief rally across the globe, setting aside concerns about the discontinuation of the easy monetary policy. Analysts said the GDP data had punctured the new found optimism surrounding US economic recovery.

“The US GDP numbers came in much below than expectations and stocks in the US started moving up. This was replicated in other global markets, particularly in those of the emerging markets. Market expectation now is that the retrieval of the QE3 (third quantitative easing or stimulus programme) monetary policy would not start immediately,” said Sonam H Udasi, senior vice-president and head of research at IDBI Capital.

Thursday’s rally in the market was led mainly by the rise in energy sector stocks. Reports that the government may look at raising gas prices saw these stocks move up, with the BSE’s oil and gas sector stocks being the best performer of the day.

Reliance Industries, which has the second highest weightage among the Sensex stocks, was up 3.5 per cent to Rs 830.45 per share on the BSE.

Traders were also seen selling off into the futures and options (F&O) segment expiry session on Thursday.

“There is nothing to cheer about till the rupee shows signs of strengthening. We don’t see any clear trends emerging that would support appreciation in the rupee,” said Deven Choksey, managing director of K R Choksey Securities.

Fund managers and analysts said they did not expect this positive momentum in the market to continue in the days to come. With the markets having corrected sharply in the past few days, indices could see further gain of 100 points. However, with the rupee continuing to play spoil-sport in the market, FIIs could continue to be sellers. The rupee has fallen by over 12 per cent since May this year.

According to analysts, the market will now be guided mainly by foreign flows.