Rating downgrades in Europe to weigh on mkts

Friday’s debt-rating downgrade of euro nations by rating agency Standard and Poor’s (S&P) may weigh on the domestic equity markets when they open for trading tomorrow. The downgrade will not only push up euro nations’ borrowing costs; it may threaten to hurt their economies too, according to analysts.

Last week, the markets in India had surged for the second consecutive week on the back of strong global cues emerging from the US and Europe. The BSE Sensex had registered a gain of 1.8 per cent, while S&P CNX Nifty of the National Stock Exchange rose over two per cent during the week. Sensex closed at 16,154 and Nifty was at 4,866.

Also, the data was positive on domestic macro economic front. The IIP Index for the month of November 2011 rose to 5.9 per cent year on year, higher than the street estimates of 2.1 per cent.

Then, on Friday, came the sentiment dampener when S&P stripped France and Austria of their triple-A ratings and also downgraded Spain, Italy, and Portugal.

France and Austria are now both rated AA+, while Spain is at A and Italy at BBB+. Meanwhile, Portugal’s rating was slashed to a junk grade of BB. The move had been anticipated after the ratings agency placed 15 euro zone countries on CreditWatch negative in early December.

The euro temporarily lost ground against the dollar following the announcement, but it soon rebounded to 1.2675, while the dollar index fell back from an initial spike.

Equity analysts say that domestic stock markets could remain in narrow range as the debt downgrade could throw a spanner in efforts to resolve the crisis in Europe.

The triple AAA rating of euro zone’s EFSF bailout fund depends on top-notch ratings of the member states that finance it. “One immediate consequence of the ratings downgrade,” says an analyst from a foreign fund house, “could be that the governments will have to pay more to borrow money from markets.”

“On the up side, there will be a lot of selling pressure around 5,000 level,” said Monal Desai, head of institutional equity derivatives at Prabhudas Lilladher. “The Nifty is likely to remain in a range of 4,500 to 5,000 in the near term.”

The markets will also watch out for the inflation data to be out tomorrow.

Heavy weights like TCS, HCL Technologies, Wipro, Reliance Industries, JSWL Steel, Axis Bank and HDFC Bank will be announcing their quarterly results next week. These results will be keenly watched and will have a further bearing on the markets.

Technical charts show that a key support in the immediate run is around 4,800 and resistance will be faced at 4,950. In terms of trend reversal, a break below 4,680 will reverse the trend.