Wednesday 23 January 2008

Can Fed cut boost the markets?

The market may advance today, reversing its seven day fall on the back of global recovery, triggered by the US Federal Reserve’s surprise rate cut. The US Federal Reserve in a surprise move on Tuesday, 22 January 2008, cut Fed funds rate and discount rate by 75 basis points each. The Fed funds rate is now at 3.5%. This comes as an attempt to limit the risks of a recession, after huge selling in global financial markets. It is the largest rate cut in one shot for the first time in 24 years.

Most Asian markets were trading higher today, 23 January 2008. Hong Kong's Hang Seng (up 7.28% at 23,342.18), Japan's Nikkei (up 3.35% at 12,994.32), Singapore's Straits Times (up 2.97% at 2,951.82), and South Korea's Seoul Composite (up 1.74% at 1,637.02) advanced. However, Taiwan's Taiwan Weighted (down 0.17% at 7,569.05) and China’s Shanghai Composite (down 0.24% to 4,548.80) declined..

The Dow Jones industrial average which was down 465 points at one point of time staged a solid intra-day rebound to close 128.11 points lower at 11,971.19 on Tuesday after the Fed rate cut. The Standard & Poor's 500 index, fell 14.69, or 1.11%, to 1,310.50, while the Nasdaq Composite index lost 47.75, or 2.04%, to 2,292.27.

Back home market suffered fall for the seventh straight day on Tuesday, 22 January 2008 triggered by selling by foreign institutional investors (FIIs), margin call and weak global markets. the BSE Sensex plunged 875.41 points or 4.97% to 16,729.94, on Tuesday 22 January 2008. At one point of time it was down 2273.93 points. But value buying and short covering helped the markets erase some of sharp losses. The S&P CNX Nifty lost 309.50 points or 5.94% to settle at 4,899.30, on Tuesday 22 January 2008.

The BSE Sensex lost 4,097.51 points or 19.67% in just seven consecutive sessions from a recent high of 20,827.45 on 11 January 2008. The S&P CNX Nifty lost 1300.80 points or 20.98% from 6200.10 on 11 January 2008.

Sensex has now pared 4476.83 points or 21.11% from its record high of 21,206.77 hit on 10 January 2008. The S&P CNX Nifty is down 1457.80 points or 22.93% from all-time high of 6,357.10 hit on 8 January 2008.

As per provisional data, foreign institutional investors (FIIs) sold shares worth a net Rs 4265.19 crore on Tuesday, 22 January 2008, their highest single day outflow since they started investing in the market in 2001. Domestic institutional investors (DIIs) were net buyers of shares worth Rs 2278.71 crore on Tuesday, 22 January 2008.

FIIs were net buyers to the tune of Rs 7,669.88 crore in the futures & options segment on Tuesday, 22 January 2008. According to data released by the NSE, FIIs were net buyers of index futures to the tune of Rs 2,823.06 crore and sold index options worth Rs 137.26 crore. They were net buyers of stock futures to the tune of Rs 4,989.56 crore and sold stock options worth Rs 5.49 crore.

Buying from insurance firms and mutual funds has supported the market at declines in recent months. Insurance firms have been raising lots of funds through unit-linked insurance plans with high weightage for equity. The money is being pumped in the secondary market. It now remains to be seen whether the investors in a unit-liked insurance plan (ULIP) stick to a plan with high exposure to equity if the market continues to remain weak. Insurance companies provide ULIP investors an option to switch over to debt funds from equity funds with certain restrictions.

Fundamentals of the Indian economy remain strong. Corporate profits continue to grow at a good pace