Markets to make a cautious start; to take direction with RBI’s policy review

The Indian markets despite losing some stem in the final hours managed a close of decent gains in last session; some weak earnings announcements derailed the hefty gains of the markets. Today is a big day for the Indian markets as not only the October series F&O will expire but the RBI will be announcing their mid quarterly monetary policy review. The general expectation is that the RBI will increase the rates by 25 basis points but anything surprising will impact the markets. In its macroeconomic and monetary development report released ahead of the second quarter review of the monetary policy, the bank has reiterated that inflation remained “sticky”, but shifted focus to the rising “downside risks” to growth and a weakening investment climate. It stated that growth may fall below 8 per cent in 2011-12. Industrial activity has slowed down and investment demand is softening. The apex bank’s statement that monetary policy actions will be guided by growth-inflation dynamics, has given a sense that it will pause its rate hike binge. Commodity stocks might see some upmove tailing their global peers while the PSU oil companies may come under pressure with rise in international crude prices. There will be lots of scrip specific actions based on the result announcements to keep the markets buzzing. Alstom Projects, BASF India, Dr Reddys Lab, Engineers India, Kotak Mahindra Bank, NTPC, Oracle Financials and Sesa Goa are among many to announce their numbers today.

The US markets extended their gains in the new week, though trade turned choppy but still the major indices managed to close with good gains as traders concentrated on US fundamentals, which have improved sharply in last few weeks and also on hopes that European leaders will come up with a solution to fix their problems. The Asian markets have made a mixed start and some of the indices have erased their gains ahead of European policymakers meet on Wednesday for region’s bailout fund.

Back home, the penultimate day of October series futures and options contract expiry turned out to be a good session for the Indian frontline equity indices as they managed to settle with gains of around a percent after two previous disappointing sessions. Sentiments were buoyant in the first half after the European leaders’ assurances of an upcoming rescue deal for the region’s lingering debt problem. The weekend meeting of EU leaders resulted in “good progress”, though not many concrete details were announced post the meet, investors remained optimistic that policy makers will announce significant measures on Wednesday to bolster the bailout fund and resolve Greece's debt crisis, while also supporting the region’s banks. However, the optimism got tempered to some extent after FMCG bellwether ITC announced earnings which were in-line with Street’s estimates. But the weaker than expected earnings announcement from Union Bank of India hit the morale of investors and led to a sell-off in banking counter. Apart from this on the global front, sentiments also petered out after European shares drifted into the red terrain post a positive opening. Earlier on Dalal Street, the benchmark got off to a rollicking opening as investors rejoiced after Euro-zone policy makers in their weekend meeting closed with concrete blueprint to rescue the region from debt trouble. The indices in no time climbed to intraday highs and traded around the psychological 17,100 (Sensex) and 5,150 (Nifty) levels through the morning trades. But the optimism soon started showing signs of easing in late hours of trade and profit booking in few sectors and drifting European markets weighed down the local bourses by the end of session. On the BSE sectoral space, the IT index soared by close to two percent being the top gainer, followed by the rate sensitive Automobile and Oil & Gas counters too gained good traction and went home with over one and half a percent gains.  Meanwhile, reports that the government may lift a ban on foreign airlines investing in the country's domestic carriers as they battle intense competition and high fuel costs underpinned domestic airline companies. Finally, the BSE Sensex gained 153.64 points or 0.92% to settle at 16,939.28, while the S&P CNX Nifty advanced by 48.40 points or 0.96% to close at 5,098.35.

The US markets closed higher on reports of improving earnings, an improvement in China manufacturing data and optimism that European leaders will succeed in halting the spread of the region’s debt crisis. European leaders held their 13th crisis summit in 21 months, debating how to cut Greece’s debt burden, boost the firepower of the region’s bailout fund and bolster banks ahead of another meeting on October 26. The sentiments further turned positive after reports showed China’s manufacturing may grow in October for the first time in four months and Japanese exports rose more than expected last month.

In US, the Federal Housing Finance Agency stated that it will eliminate fees and relieve banks of certain risks as part of a plan to help homeowners refinance their mortgages. Also, Federal Reserve Bank of New York President William C. Dudley stated that the central bank wants to keep mortgage interest rates from rising too much and may do more to hold down borrowing costs. In the earnings news, Caterpillar third quarter net profit surged beating forecasts.

European leaders promised resolution to debt crisis but also conceded that help from Asia and other regions may be needed to bolster its rescue fund. German Chancellor Angela Merkel will seek backing from lawmakers to bolster the euro bailout fund. Leveraging the rescue fund to more than 1 trillion euros ($1.4 trillion) and how far to cut Greece’s debt load emerged as two main hurdles in the way of a deal to stop the debt crisis at the October 26 summit.

The Dow Jones industrial average gained 104.83 points, or 0.89 percent, to 11,913.60. The Standard and Poor’s 500 closed higher by 15.94 points, or 1.29 percent, to 1,254.19, while the Nasdaq composite gained 61.98 points, or 2.35 percent, to 2,699.44.

Crude prices surged on Monday and the Nymex crude gathered gains of over 4 percent for the day on hopes that European leaders were edging closer to a solution to the euro zone debt crisis. The euro rose against the US dollar, hitting six-week highs and supported the crude. On the same time encouraging manufacturing data from China too encouraged investors to buy riskier assets.

China's manufacturing sector expanded moderately to a reading of 51.1 in October from September's 49.9, ending three months of contraction.

Benchmark crude for December delivery settled at $91.27 a barrel, gaining $3.87, or 4.43 percent, after trading in a range between $87 and $91.88 on the New York Mercantile Exchange. In London, Brent crude for December settled at $111.45, up $1.89, or 1.73 percent on the ICE.