Will the much-hyped summit of European leaders this week reach a solution to stem the growing Eurozone debt crisis? That's the question which has been nagging investors on the heels of the best weekly gains by the market in more than two years on Friday.
Investors need positive news to justify the recent strength, but the European Union (EU) finance ministers' meet last week and a proposed summit this week are unlikely to give them much comfort. News over the weekend that the government has put on hold the decision to open up the nation's retail sector to foreign giants could weigh on the domestic stock market, mainly the shares of retailers early this week.
Such a move will be seen by investors as the government's inability to push through key economic decisions in the face of determined opposition. Opening up the sector to foreign multi-brand retail investors such as Walmart was hailed by many as a bold move after many months of inactivity.
Brokers said any reversal of decision on foreign direct investment in the country's supermarket sector may not go down well with investors. On Friday, German chancellor Angela Merkel threw cold water over investors' expectations from the EU summit, saying that resolving the crisis may take years. US markets reacted to Merkel's remark on Friday, erasing gains spurred by a decline in the jobless rate.
Fund managers said Indian stocks could follow suit early next week. "There are very little expectations that the EU summit would be able to deliver a quick-fix solution to the Eurozone crisis. And so one is not looking forward to a return of optimism," said Anand Shah, chief investment officer, BNP Paribas Mutual Fund.
"The recent market rally globally could fizzle out even before the event," he said. India's main indices gained almost 8% last week. A commitment from Eurozone politicians to restore fiscal discipline at the EU summit will be key to calming Europe's nervous bond markets, which have been the key sentiment driver for financial markets in recent weeks.
Investors fear a further rise in yields on sovereign bonds in Europe will trigger a crisis similar to the one after the collapse of Lehman Brothers.
"Germany will probably accept an aggressive programme of bond purchases by the ECB if they can quickly get all the members of the Eurozone to accept a supervision of their fiscal budgets by the technocrats of the EC," said Ed Yardeni, president and chief investment strategist of US-based Yardeni Research Investors will closely watch China's inflation data in November on Friday that is considered key to the next monetary policy move of the nation's central bank.
China's consumer inflation may slow down in November to 4.5%, the lowest so far in 2011, according to Barclays Capital. The People's Bank of China cut banks' reserve requirement ratio last week suggesting the government is shifting focus to growth than managing inflation. At home, a widely anticipated cut in cash reserve ratio - the percentage of cash that banks need to keep with the Reserve Bank of India - will boost investor sentiment.
But investors remain skeptical about the recent market strength as it was largely driven by short-covering.
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