Are we bracing for a big market fall next week?

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Are we bracing for a big market fall next week?
On Friday, emerging market currencies slumped, including the South African Rand, Turkish Lira, Argentinian Peso and the Ukraine's Hryvnia.

India's own currency fell to a 9-week low as foreigners dumped emerging market assets on account of slowing growth and political worries.

For two consecutive days on Wednesday and Thursday the Sensex closed at record closings. Better than expected corporate results, waning credibility of the Aam Aadmi party and Opinion Polls pointing to robust gains for the Modi led BJP government, helped propel sentiments.

On Friday all of the week's gains were eroded, thanks to a rout on emerging market assets and fall in emerging market currencies. As we head into next week, it's likely that the Sensex will fall on Monday, given that the US markets closed sharply lower and the Dow saw its worst drop since 2012. If the contagion of emerging market risk-off continues, brace for substantial losses.

Going into next week there are two key events, which would also determine the market direction. One is the RBI Monetary Policy and the second is the Federal Reserve Open Market committee

The Reserve Bank of India (RBI) may hold interest rates next week, even as the central bank has always surprised in the past.

In it's last policy most analysts had expected the central bank to hike rates, after an ugly CPI inflation reading. However, the RBI held interest rates steady largely on the premise that the inflation reading was on account of high food inflation, which would eventually fall.

The Federal Reserve may also not surprise and this time may keep its QE3 tapering decision on hold. Read more on QE3 tapering here. Of course, should the Fed decide to taper, expect a sharp fall in the markets.

Along with these two developments individual stocks would react to their respective earnings. Eagerly watched would be the earnings of India's largest private sector bank, ICICI Bank. A deteriorating in the asset quality might see some selling pressure emerge.

Overall, it's likely to be a volatile session with markets closely watching the two important events of the week and whether a rout on emerging market assets, that began late this week, continues into the next week.

Story first published: Saturday, January 25, 2014, 10:00 [IST]
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