Local markets to make a flat-to-cautious start after the recent sell-off

The Indian markets finished at the lowest levels in 28-months in last session. The benchmarks traded on a somber note with huge losses for most part of the session on global concerns but some short covering in late hours and supportive European bourses prevented the indices from settling with large cuts. Today, the start is likely to be flat-to-cautious, though the optimism in Asia is likely to help the domestic markets. Investors also may hunt for some undervalued bargains after the recent sharp sell-off in heavyweight stocks. Stocks from the Automobile counter may keep buzzing on reports that government will ensure that the interest of the domestic automobile industry is not compromised while negotiating free trade agreement with the EU which is demanding heavy duty cuts in the India's automobile sector. SKS Microfinance will be on investors radar after deputy governor of the RBI said microfinance institutions would be allowed to borrow up to $10 million from overseas markets. Apart from this there will be lots of scrip specific actions to keep the markets buzzing.

The US markets suffered a late afternoon fall on Monday after European Union finance ministers failed to come up with the full amount of money pledged for a bailout fund. ECB President’s remarks that the European economic outlook faced substantial downside risks weighed on sentiments while sharp sell-off in financial stocks dragged the major indices to lower levels. Asian markets got off to an optimistic opening, on the back of hopes that the US economy will pick up pace and grow by around 2% to 2.5% next year, boosting the outlook for the region’s exporters. Though all major indices in the region traded on a positive note, their gains were less pronounced as concerns over Euro-zone debt crisis persisted.

Back home, Indian equity bourses commenced fresh week on a depressing note as the benchmark indices extended previous week’s sell-off and sank by close to a percentage points to the lowest levels since August 2009. Though, the frontline indices quadrupled the sorrow of closing in the negative terrain yet they managed to hold on to important psychological 4,600 (Nifty) and 15,300 (Sensex) levels. There appeared some recovery in the last late hours of trade as the key gauges managed to pare over a percentage point from the session’s lows on the back of short covering in some heavyweight stocks like Reliance Industries and also on getting some supportive leads from European share markets. However, sentiments largely remained pessimistic in the local markets amid heightened worries about the uncertainty looming over Europe’s future and also amid the gloomy domestic macro-economic headwinds. Discouraging developments from Europe continued to dissuade investors amid heightened worries that potential credit ratings downgrades of several Euro-zone nations may derail progress towards resolving the region's onerous debt problem. In addition, fears of political instability in the Asian region increased after reports that the mercurial leader Kim Jong Il of nuclear-armed North Korea has died. Back home, sentiments were also undermined after an influential securities firm CLSA downgraded India's weight in its relative-return portfolio by two percentage points to 11%, citing the rising subsidies bill and broadening fiscal deficit as concerns. Meanwhile, cabinet approved a populist but hugely costly bill to provide subsidized food grains to over 64% of the country's population but the bill once approved will increase the government's financial burden by nearly $5.3 billion at precisely the wrong time. Earlier on Dalal Street, the benchmark got off to a somber opening, extending the downtrend as pessimistic sentiments prevailed across Asian markets. The selling pressure accentuated in the mid morning trades as investors took to across the board risk aversion. The key gauges made some attempts to claw back into the green zone in early afternoon trades but profit booking at higher levels dragged the key indices to the lowest point in the session. However, late short covering in blue-chip stocks and supportive leads from European markets ensured that local bourses go home with relatively small losses. On the BSE sectoral front, the Capital Goods pocket bore the maximum brunt of selling pressure followed by the rate sensitive Banking and Realty indices. On the other hand, the Oil & Gas pocket remained the top gainer in the space after heavyweight Reliance Industries closed with around two percent gains. Finally, the BSE Sensex shaved off 112.01 points or 0.72% to settle at 15,379.34, while the S&P CNX Nifty sank by 38.50 points or 0.83% to close 4,613.10.

The US markets ended lower on Monday, halting a two-day advance amid concerns that European officials were failing to make progress in taming the debt crisis. France faces a debt rating downgrade while France, Italy and Spain expand the list of nations facing early recession. Federal Reserve Bank of Richmond President Jeffrey Lacker predicted that the US economy will grow 2 percent to 2.5 percent next year, with inflation likely to meet central bank goals, and urged no additional stimulus. Investors were pessimistic on reports that the Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, a defeat for giant US banks.

In Europe, ECB President Mario Draghi undercut hopes that the central bank would be more aggressive in helping struggling countries by expanding its bond purchases, noting its governing treaty forbids monetary financing. The report was disappointing to investors who view ECB purchases of debt issued by European countries nearly squeezed out of the bond market as an important tool in ending the sovereign-debt crisis. The sentiments were further dampen after a statement from European Union finance ministers, who met by telephone, said euro-currency members had agreed on providing additional bailout funding via the International Monetary Fund. But the added resources -- 150 billion euros, or $196 billion -- fell short of the 200 billion euros proposed at the December 9 EU leaders’ summit.

The Dow Jones industrial average lost 100.13 points, or 0.84 percent, to 11,766.30. The Standard and Poor’s 500 closed lower by 14.31 points, or 1.17 percent, to 1,205.35, while the Nasdaq composite lost 32.19 points, or 1.26 percent, to 2,523.14.

Crude oil prices finally halted the four session downtrend on Monday and managed to negotiate modest gains as investors took to bottom fishing after the recent slide amid worries over geopolitical instability in North Korea after the death of their mercurial leader Kim Jong-il. The oil prices also got support from reports of protests in Kazakhstan which raised fears of supply disruption. Developments from Europe also were helpful as the Euro-zone finance ministers agreed on a 150 billion euro contribution to the IMF to help support debt markets.

Benchmark crude for January delivery advanced $0.35, or 0.4% to settle at $93.88 a barrel, after trading as high as $94.42 and as low as $92.54 on the New York Mercantile Exchange. In London ICE February Brent crude settled with moderate gains of $0.29, or 0.28%, at $103.64 a barrel.