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Manas Chakravarty, Mint’s Consulting Editor and Mark to Market columnist talks about why the Budget reacted negatively to the Budget.

The guessing game finally reaches its climax on Monday, when finance minister Pranab Mukherjee unveils the 2009-10 budget. Financial market participants and economists have been debating what the budget will deliver since the Congress-led United Progressive Alliance returned to power in May.

Some investors are betting that the budget would herald a new generation of economic reforms. The big question: Will the government be able to deliver what the economy needs and what the stock market wants? The answer will be available only on Monday; it is hoped the government would fulfil some major demands of the economy and that should satisfy the stock market. Read more

Stock market traders are keenly aware the finance minister has a tough time ahead of him on budget day, but so far, they’ve been reluctant to bet against him pulling a rabbit out of his hat.

Given the well-known difficulties the government faces in expanding the fiscal deficit, there has been a remarkable reluctance by the bears, who were badly burnt after the election results, to build up short positions ahead of the budget. That is why the rollover in Nifty futures was so low.

As a note by Anagram Securities Ltd points out, “Short side traders are wary of losing money on a positive budget, like they lost it on election results. If the budget is positive, there will be a rush to close long derivative positions and if it disappoints, there won’t be a buying support which usually exists from short sellers.” That means the downside risk in case the budget disappoints is high. Read more

Much on expected lines, key indices fell initially, but bounced back on bargain hunting at lower levels. The gains were not limited to India; global bourses also showed resilience in the face of lingering economic concerns. Positive data flow spurred the northward momentum.

In India, the markets took their cues from global economic indicators and showed signs of strength despite the fact that the prediction of a below-normal monsoon raised fresh concerns about the strength of an economic revival.

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The stock market has put up a disappointing show in a month after the budget announcement seven times in the past 10 years, but analysts have opined that this time the government’s move on policy reforms may provide a positive surprise.

An analysis of the market performance one month prior and a month after the Budget announcement in the past 10 years by Morgan Stanley showed that the Bombay Stock Exchange index, Sensex, had been in the positive territory on just three occasions. Read more

However, annual monsoon rains, which are a lifeline for the country’s trillion dollar economy, have weakened and are expected to be below normal, the government said on Wednesday.

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Ending 14 consecutive weeks of gains, key indices slipped on profit selling by funds and traders last week. I had mentioned in my previous column that the markets had started showing signs of fatigue and a correction was on the cards. The main index dropped 4.7% on the week, after rallying 83% over the previous 14 weeks— its best run in four years. The decline was moderate and well within the limits of a technical correction; fresh buying at lower levels shows there is appetite for quality stocks.

A similar trend was witnessed in key global markets as well and, except China, all the major bourses ended with losses. In the US, the Dow fell 3%, the S&P lost 2.6%, and the Nasdaq dropped 1.7% for the week.

That was despite the emergence of encouraging data. Data ranging from production/manufacturing and jobless claims to inflation measured by consumer and wholesale prices sent out a message that the US economy is on the track to recovery. Read more

Take a look at the accompanying chart. It compares the huge rise in the Sensex since the beginning of March with the rally in the second half of 2007.

The first thing you notice is how extraordinary the recent run-up has been, with the Sensex rising much higher in a shorter span of time. A casual glance would suggest the market in the last few months has been like the 2007 market on steroids.
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The Bombay Stock Exchange’s (BSE) benchmark index, the Sensex, gained for a 14th consecutive week on buying by foreign funds. As expected, however, the markets showed signs of weakness from the middle of the week and declined on Thursday and Friday.

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