Market watch

Larsen & Toubro to Hit Rs.1795 , buy at CMP 1600

Reliance to reach 2283

our target of Nifty 5200 remains.

Markets will remain volatile until the end of october .

Commodity prices rose modestly last week amid weakness in USD. Reuters/Jefferies CRB Index added +1.4% while USD Index plunged almost -2% to 76.6, the lowest close in a year. Commodities normally trade in opposite direction with the dollar.

The generation-low interest rate in the US (Fed funds rate: 0-0.25%) has caused massive selloff in USD. Against the euro, the greenback plunged for 4 out of 5 trading days and closed -1.9% lower at 1.457, the lowest level in 9 months, for the week. Against the pound, USD also slid -1.6% to 1.6655, a 1-month low, last week.

There were 3 central bank meetings last week. All of the RBNZ, BOE and BOC left interest rates unchanged at 2.5%, 0.5% and 0.25% respectively during the meetings but policymakers indicated brighter economic outlooks for 2H09 and 2010.

In the coming week, the BOJ and SNB will decide on rates. We believe both banks will leave policy rates unchanged at 0.1% and 0.25% respectively. This would leave the markets range bound before the release.

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After spiking to 72.9, crude oil tumbled to as low as 68.8. The October contract plunged -3.9% to settle at 69.12 Friday, leaving this week's gain to +1.2% only. The black gold's decline Friday was accompanied by the dollar's weakness and strong US economic data. These were in contrary to the usual inverse relationship between commodities and USD.

Crude oil started the week with strong rally but ended it with a slump. We believe the reversal was not only due to profit-taking but also a delayed reaction to the industry news/data released during the week.

Both the industry-sponsored API and the US Energy Department reported huge draw in crude oil inventory but surprising increase in gasoline and distillate stockpiles. Although decline in crude inventory positive, surges in fuel storage should have more than offset bullishness.

Gasoline stockpile rose +2.1 mmb last week to 207 mmb. This had not only come in contrary to consensus of a draw but also halted the 6 consecutive weekly declines. In fact, we believe further increase in stockpile will follow in coming months due to the normal shoulder season in the 4th quarter. Distillate stockpile gained for the 3rd consecutive week. Since 3Q09, inventory has risen for 8 out of 10 weeks. As winter comes, demand for heating oil should increase but this may not be the case this year. Meteorologists suggested the possibility of El Nino which may bring a warmer-than-expected winter in the Northern Hemisphere this year.

OPEC concluded September's meeting and announced to keep production quotas unchanged Wednesday. Apparently, the meeting was a non-event as the outcome was widely anticipated. However, comments from member countries, especially Saudi Arabia, suggested OPEC's goal to tighten stock level has been dropped.

After the meeting, Saudi Arabia's oil minister Ali al-Naimi commented that 'we are enjoying a good, fair price' and 'Inventories are irrelevant, they can be 70 days... It has no bearing on price'. This was compared with the comment in May that industry-held stockpiles in developed nations needed to be brought down to the equivalent of about 52 to 54 days worth of consumption, from 62 days. Concerning compliance, Ali al-Naimi did not see the need to put pressure on overproducing members as 'people are complying anyway, 70% compliance is great'.

Obviously, the members were satisfied with the current price level and Saudi Arabia explicitly mentioned that the current 68-73 level is 'going to be there for a while'. Giving the OPEC's significance in affect oil price, we do believe that the current price level can hold in the medium term. The members will increase output should oil price increases. When price drops, say below 60, large producers such as Saudi can reduce supplies, thereby limiting the fall. In this way, crude oil price will consolidate for some time, given global economy improves in a gradual but uncertain manner.

BRIC Meet June 16 2009

Brazil, Russia, India and China have been slow to embrace the BRIC acronym, coined in 2001 to describe the four giant emerging markets. But now they're trying to convert their shared bulk into clout—and none more so than Brazil. On June 16, at Brazil's urging, BRIC leaders will meet in Russia to discuss an ambitious agenda: overhauling the international financial system, enlarging the United Nations Security Council and dumping the dollar as the world's reserve currency. The powwow is being billed as a test of whether the BRICs can shift the global power equation. But perhaps the biggest test will be for Brazil.

Brazil has always been the outlier of the four. It's the slowest-growing, expanding at half the rate that China and India have over the last decade, and at two thirds the pace Russia has. It alone has no nuclear weapons. It's more enthusiastic about free trade than Russia and China are, and it sided with the U.S. against India in favor of opening agricultural markets. "China, India and Russia already count as global players," says a senior Brazilian diplomat. "We do not."

Even as Brazil pushes for a united BRIC front, it is touting its advantages over its outsized peers. Minister of Strategic Affairs Roberto Mangabeira Unger recently pressed Brazil's coded claims to lead the BRICs by calling it a "flawed but vibrant democracy" with "real national unity" (unlike India), "no enemies" (unlike Russia) and enjoying "nearly universal sympathy" (unlike China). When the four meet, the real issue may not be whether the West is listening, but whether they can see eye to eye.