The rebound seen in Indian benchmark indices last week could see a temporary halt, as global negative factors are weighing large on investor sentiment. The latest trigger, weak job data from America, is dampening investors, along with news of the ongoing debt crisis in Europe.
Last week, US government data showed unemployment still above nine per cent, putting pressure on President Barack Obama to take action. He will lay out a new jobs plan in a speech on Thursday. Non-farm payrolls were unchanged, the weakest reading since September. The report underscored the frail economy and kept fears of a recession on investors' radar.
Market experts, meanwhile, say the undertone of the market was still weak and some amount of downside couldn’t be ruled out. They feel last week's rise was only a technical bounce-back, after the lows registered in the earlier weeks.
“Share markets have had a good bounce, following their lows earlier in August. But, the risk of further weakness is high,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors. “Uncertainties in Europe are as large as ever. Leading economic indicators in the US and elsewhere are continuing to weaken, with the stalling in the US labour market in August clearly a concern. Further easing by the Fed may be a while away yet and there is uncertainty as to whether it would work,” he explained.
Data on foreign inflows in the Indian market was also not so encouraging. Foreign institutional investors (FIIs) net-sold shares worth $2 billion (Rs 9,000 crore) in August. According to EPFR Global, which tracks fund flows into world markets, India-focused equity funds were hit with redemption in the week ending August 31, for the 17th time in the past 18 weeks. It cites factors like a spike in food inflation that cooled hopes of an end to the Reserve Bank of India’s (RBI) tightening cycle.
RBI, as part of efforts to control inflation, has increased key rates 11 times since mid-March 2010. A majority of market participants expect the central bank to raise rates by another 25 basis points in the September 16 policy meeting, as inflation is well above the bank's threshold level of four to six per cent. Wholesale price-based food inflation was in double digits after five months, at 10.05 per cent for the week ended August 20.
In another development, UBS has cut the MSCI Asia (excluding Japan) Index’s year-end target from 670 to 580. The analysts have said they prefer China and India, because global growth weakness should help ease inflation concerns. The MSCI Asia index fell 10 per cent last month, the most since October 2008, amid concern that global economic growth was slowing as Europe’s sovereign debt crisis spreads and the US witnessing a rating cut.
“We still expect weak data and little relief from central banks in terms of major fresh policy action, but (also) that the weak patch in data will ease into the fourth quarter,” said UBS analysts Niall MacLeod and Aakash Rawat.