Manas Chakravarty: The markets next week

WATCHWORD

May 16: Crude prices rebounded to $51.27 a barrel today, their highest level in 2.3 weeks, on fears that Chinese growth will lead to burgeoning demand for energy. "Saudi Arabian production is at an all-time high," said a panicking oil trader, "and yet prices are not coming down."

Oil industry analysts on Wall Street predicted that crude would touch a whopping $100 a barrel within six months. "Once summer ends, concerns will rise about the coming winter season and the need for heating oil supplies," pointed out a senior analyst. In India, the stock market plunged on fears that the high oil prices would lead to lower growth.

May 17: Crude prices plummeted to below $45 a barrel today on the Nymex exchange, as US inventories rose to their highest level in 3.5 weeks. "There's a huge speculative bubble in oil," said an energy analyst. "I wouldn't be surprised if oil prices fell to $30 a barrel within the next six months," he added.

"Once the summer driving season is out of the way," pointed out a trader, "prices will come tumbling down". On Dalal Street, analysts said that the lower oil prices were a result of slowing global growth. Stock prices fell as a result.

May 18: The yen rallied strongly against the dollar today after a Chinese official hinted that they were studying the yuan's peg to the dollar. Asian currencies firmed up after the official's comments were splashed in the Chinese media. Meanwhile, Indian stocks rose on hopes that a yuan revaluation would lead to upward pressure on the rupee, which would attract FII inflows to the market.

May 19: Asian currencies fell across the board today as the Chinese government scotched reports about an impending yuan revaluation. "We are thinking deeply about the subject," said a People's Bank of China spokesperson, "but haven't made up our minds yet."

When a defence analyst pointed out that the Chinese government took almost thirty years to make up its mind about Sikkim being part of India, the rupee dropped sharply against the dollar. Stocks on Dalal Street rose as analysts pointed out that a lower rupee is good for the country's exports.

May 19 (forenoon): The Dow Jones Industrial Index lost 2 per cent in early trading today, as traders fretted that the US economy had hit a soft patch. "Fewer jobs mean lower demand," pointed out an equity strategist, "which means lower earnings for companies."

May 19 (afternoon): The Dow recovered smartly from its lows to end in positive territory today in spite of the weak economic data.

"Weak economic numbers mean that the Fed will be slower to raise rates," pointed out an equity strategist, "which in turn means interest rates will remain steady, credit card spending will continue, housing loans will grow, and demand will rise, lifting earnings."

May 20: Commodity prices on the London Metal Exchange wilted today after Chinese industrial production data showed that industry had grown by 27.31 per cent in April. During the previous three months of the year, industrial production had risen by 27.55 per cent. Stock markets across the world reacted nervously to fears about a hard landing for the Chinese economy.

May 20: Stock prices fell on Dalal Street this morning, due to overnight losses on Wall Street, which ended lower after a slew of profit warnings from blue- chip firms. By mid-afternoon, however, stocks edged higher as traders believed the weak earnings numbers showed a slowing US economy, which would force the US Fed to hold interest rates, thereby improving the prospects of FII flows to emerging markets.

But by evening stocks fell again as speculators felt that a weaker US economy would also mean a smaller current account deficit in the US, which would lead to a dollar rally, which in turn would lead to lower flows to emerging markets.

At the close of business, however, stocks rallied again as traders forecast that a slowing US economy would lower oil prices, which in turn would help domestic growth. The session ended before traders could start worrying about whether higher domestic growth would lead the RBI to raise interest rates.

manas@business-standard.com