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Market Watch: Fed may be the decider

Despite solid breadth, large-cap names are simply unable to keep the Nifty and Sensex above their old highs, writes Udayan Mukherjee.

india Updated: Dec 10, 2007 21:48 IST

The Sensex is clearly labouring to stay above the 20,000 mark. Despite solid breadth, large-cap names are simply unable to keep the Nifty and Sensex above their old highs. Now this kind of dithering, that too so close to significant levels typically does not last too long. Either the index will break through or turn back. At such a juncture, tomorrow's FOMC meeting assumes significance. It could potentially be the trigger that pushes the index over its hump. Or force it to retrace.

The most likely outcome: a 25 bps cut is pretty much factored in. That should not surprise the street or spark off a significant emerging market rally. Surprises, however, cannot be ruled out as the current emerging market rally started with that unexpected 50 bps rate cut a few months back. A no-cut scenario is extremely unlikely as that would rattle sentiment, something the Fed would not like to do. It will be interesting to note how Emerging Markets move if there is a 25 bps cut. Would it be shrugged off as a non event or will markets latch on to this slender positive to start a year-end rally? Market reactions to even expected events are sometimes unpredictable. Tomorrow's meet seems like the only obvious trigger till the end of this year. Till fresh allocations and the earnings season commence in January.

Meanwhile, local sentiment remains robust, amply reflected in mid-cap outperformance. Traders seem quite content to see the Nifty in a range while they make money in stock futures. The strength is now spilling over to the small-cap universe as well, stocks which are not in F&O. A certain degree of complacence is visible as there are no obvious negative triggers which loom. It is a seasonally strong patch for markets with expectations of more institutional flows and pre- budget sentiment stacked up ahead, in the new year. Corrections do not come with prior appointment, yet traders must be wondering what could drive the market into a deep fall from here and coming up empty handed. In the market's current frame of mind, no news is certainly good news.

Executive Editor, CNBC-TV18