Markets relieved at end of uncertainty

Indian equity indices snapped a four-day losing streak on Monday, after the US government reached a consensus on increasing the country’s debt limit. As the US managed to avoid a possible debt default, equities staged a smart rally along with commodities and other asset classes. The rupee also strengthened on expectations of higher dollar inflows on the back of improved global risk appetite.

US President Barack Obama said Republican and Democrat leaders in the US House and Senate had reached an agreement to increase the nation’s debt ceiling by $2.1 trillion and cut government spending by $2.4 trillion or more. Financial markets globally reacted positively to the development, which had been in abeyance for the past few days.

The 30-share Sensex gained 0.64 per cent or 117.13 points to close at 18,314.33. The broader S&P CNX Nifty of the National Stock Exchange surged 0.63 per cent or 34.80 points to end the day at 5,516.80. Elsewhere in Asia, the benchmark indices of South Korea, Japan and Indonesia all gained over one per cent each.

“Stocks are gaining because fears of a partial US government shutdown or default have been the main worry for investors recently, given the potential impact on Asian exporters,” said Sydney-based Shane Oliver, head of investment strategy at AMP Capital Investors. “Nervousness is likely to remain high as the deal will still have to pass both houses of Congress,” he added.

Meanwhile, the Indian rupee appreciated 11 paise or 0.25 per cent to 44.07 against the dollar, supported by higher inflows in the Indian equity markets on Monday. The rupee-dollar pair traded in a narrow range after touching a high of 44.03 on dollar demand from Indian oil companies. The yields on the 10-year benchmark government bond inched up to 8.46 per cent on Monday as Reserve Bank of India Governor D Subbarao indicated rate increases were needed to control inflation.

Market participants are of the view the rupee may weaken against the dollar, going forward. “The rupee’s strength should be short-lived as we’ll get more clarity tomorrow on the US debt deal issue,” said Abhishek Goenka, CEO, India Forex Advisors.

Any failure to reach an agreement would have led to a US rating downgrade, which could have had a catastrophic effect on global markets. Commodities gained ground as the decision eased worries of a debt default by the world’s largest economy. While nickel contracts gained nearly one per cent, lead, aluminium, zinc and copper contracts rose marginally on MCX. Rising supply fears due to mine closures in South Africa and Chile also helped metals shoot up. Meanwhile, gold (down 0.61 per cent) and silver (down 1.96 per cent) contracts fell as investors booked profits at the current high levels. “The additional flow of funds will help the US economy recover, resulting in more demand for base metals for consumption in infrastructure and housing projects. On the other hand, it may also cause the dollar to fall, resulting in a spurt in base metal prices,” said Gnansekhar Thiagrajan, director of Commtrenz Research.

The impact of the positive news could also be gauged from the fact that US stock futures rose, indicating the S&P 500 may rebound from its worst weekly loss in a year. The index had posted a third straight monthly loss in July, its longest losing streak since 2008.