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FITCH Downgrade had the Markets Finally Buckle under Pressure

After having weathered the Badla and MSCI setbacks, the markets finally buckled under pressure from FITCH downgrade giving away 101 points to close at 3557.

After having weathered the Badla and MSCI setbacks, the markets finally buckled under pressure from FITCH downgrade. In a week that witnessed a sharp swing of events and sentiments, the Sensex surrendered all of its early week gains to close the week by 101 points or a loss of 2.78%.

The week took off on a rather upbeat note with rain gods offering the much-needed relief from the summer wave. The turn in sentiment saw active buying across-the-board to help BSE Sensex post a gain of 60 points. However the sharp reversal in the global technology stocks, triggered by the earnings warning from Sun Microsystems and a sweeping downgrade of the data-networking-equipment sector from Morgan Stanley halted the rise. Even as NASDAQ fell sharply reacting to the profit warning, the real problem now seems to be the slowing business in Europe - a stark contrast to the earlier view that Europe was likely to outperform its transatlantic counterpart.

Even as large domestic funds pressed the sell button, for the first time after many weeks, FIIs joined domestic institutions to finish the week with a net sale of Rs 33.2 crore. Even while the foreign markets recovered, the downgrade by the Fitch aborted any such recovery on the Indian bourses. The revision of the India's sovereign ratings outlook to negative from stable saw the Sensex plunge by whopping 184 points in the last three trading sessions alone. However, amid this lackluster week, pharma counters held steady in expectation of the new drug pricing policy, which expects to see many drugs out of the clutches of DPCO.

The downgrade apart, there are enough negatives prevailing - the slowing reforms and industrial activity and the row over the Enron crisis. Further, the profit warning from Sun Microsystems seems to be the beginning of another season of earning downgrades. SEBI has decided to introduce a circuit breaker from July 2 that will halt trading if either the benchmark BSE or NSE Nifty moves 10, 15, or 20 % in either direction. This may not have any major impact as the Sensex has swung by over 10 per cent only on five occasions since 1984. However, with the deadline for the new trading system nearing coupled with beginning of expectations for first quarter results, the near-term certainly looks uncertain.