Fuel price hikes brighten market outlook: Brokers

The government's decision last week to raise prices of diesel, kerosene and cooking gas has brightened prospects of Indian equities . The move has sparked hopes among investors, fretting over the impact of paralysis in policy-making on India's economic growth, that the government may be serious about pushing ahead the next wave of economic reforms, said broking firms.

"The government's decision to hike retail fuel prices in spite of the decline in crude oil prices suggest the government is shaking off its decision-making inertia," said Parul J Saini, strategist, Royal Bank of Scotland. "This should be a positive catalyst for the Indian equity markets," said Saini, in a report.

The Sensex has gained over 5% in the past four trading days. The government announced decision to increase petroleum product prices on Friday evening.

"The move is also a powerful signal to markets that the government is still able to make difficult decisions, in the light of a stalled reform process," said Tushar Poddar and Vishal Vaibhaw of Goldman Sachs. "This move, along with global oil prices coming off and monsoons on track, are positive signs for the economy and for the equity market," they said, in a report.

Analysts perceive India's discussion paper last week, questioning the need for equity caps for foreign direct investment (FDI), as the government's intent to streamline the country's FDI policy.

Investors are hoping that the fuel price increases will result in inflation peaking out over the next few months and signal the end of policy rate tightening by the Reserve Bank of India. Analysts estimate wholesale price inflation will surge 70-100 basis points from 9.06% in May because of higher fuel and cooking has prices.

"From a medium-term perspective, we see the hike in fuel prices as a positive step to incentivise Indian households and companies to ration energy demand, but the near-term inflationary impact," said Sonal Varma and Aman Mohunta of Nomura India, in a report. Economists warn, however, the India's fiscal deficit could widen as the cut in excise and customs duties on diesel and cooking gas will more than offset the benefit of price increases to the government's finances.

"Lower revenue collection owing to slower GDP growth, smaller-than-budgeted disinvestment proceeds, and higher expenditure could potentially push the deficit to 5.8% of GDP, hurting market sentiment, unless the government seeks other ways to raise revenues," said Standard Chartered economists led by Anubhuti Sahay, in a report. India is targeting a fiscal deficit of 5.1% of GDP for 2011-12. Brokers said higher-than-estimated fiscal deficit, especially when the economy is slowing, may not go down well with foreign investors.

Indian markets may underperform in near term

In an interview with ET Now, Manishi Raychaudhuri, MD & HoR, BNP Paribas Securities, shares his views on their latest strategy report and talks about the market. Excerpts:

If I look at your latest strategy report and if I look at the fine print there, you have slashed your Sensex target for the year, you expect Indian markets to underperform and according to your report, there are high inflationary concerns which currently could hit Indian economy going forward. So, rather a bearish report?

You did not ask me a question, but I would still summarise what we have tried to say. In the near term, the Indian market is likely to underperform and by near term, I really mean about maybe 3-4 months, possibly till the October-December quarter. And yes, we have cut the Sensex target because there were a couple of variables on which we went wrong. We were clearly anticipating peaking out of inflation by some time in March-April, which did not happen. Inflation turned out to be a lot more stickier than we had anticipated and as a consequence, even the end to the RBI's tightening cycle, which we were expecting some time in the first quarter of this year, it now seems to be prolonged to sometime in the July-September quarter, maybe till around September.

So to that extent, we actually expect the RBI to tighten about twice more, maybe 25 basis points each. And to have the desired effect on inflationary expectations, it should perhaps be done in rapid fire succession in July and then again in September, which could obviously lead to some degree of underperformance. On top of that, we must not also forget that earnings estimates have been declining.

Our own EPS estimates for Sensex have declined about 4% since the beginning of the year, and we think that there could be another 3-4% downside to the Sensex EPS estimate for fiscal 2012-2013. Combined that with the valuations of India, which compared to India's own history or somewhere in the middle of the road, somewhere close to just lower than the average, but compared to Asia ex Japan and compared to China, they are at about 25-30% premium, which means that valuation premium has to compress.

This is our hypothesis behind arguing that in the near term there could be some underperformance by India. Having said that, I must also argue that by the time, we are in the last quarter of this year, some of these macroeconomic headwinds would be behind us. If the market does come down to a valuation level of close to maybe 12.5-13 times one year forward, that would be the right time to load into the high beta stocks among private banks, infrastructure and autos.

But what's your call, the prognosis is generally once inflation peaks out, the market bottoms out and since that process is now elongated with the recent fuel price hike, inflation is not going to becoming down in any hurry. So what's your call on banks and the entire rate sensitive basket? Would you be a buyer?

First of all, yes, inflation has been elongated. The longevity of high inflation is possibly till about September-October. Till then WPI inflation would remain in the present range that we are seeing that maybe in the range of 8.5-9.5%. Secondly manufactured product inflation, which has been increasing now over last 2-3 months, will be possibly on an upswing till about September-October. After that, the effect of recent decline in commodity prices would begin to catch in and possibly manufactured product inflation would be peaking out by sometime in October.

Now as a consequence, we are kind of neutralist, we are kind of fence-sitters on the rate sensitive pack. Now here again it is essentially stock-specific weight which add up to the sector weight. So we are neutral on both banks and automobiles. In banks, we prefer the private sector banks. In fact, we have closely about 25% weight on the banking sector as a whole and out of that, about 80% of that is in the private sector banks with much smaller weight on the public sector banks. Because we think the private sector banks have relatively lower concern about asset quality and among them the high CASA banks, which have a very strong liability franchise or possibly those, which would be able to weather the storm of net interest margin compression a lot better than the sector average. We are also neutral on the auto space where we have actually cut down weight significantly. We only have the consumer autos in the portfolio, the companies that are engaged in two wheelers and the passenger cars not so much in the commercial vehicle space.

Given the way how commodity prices have corrected in last 10-15 days, is that not a positive but more like a short-term negative for Indian markets because that will also hit earnings and profitability for commodity companies?

Yeah. Paradoxically it is a positive for Indian economy, but perhaps in the short-term a negative for the Indian markets because that's the peculiar structure of the Indian equity market. While the economy tends to benefit from commodity price decline, both metals and oil because we are large importers and as a consequence, both fiscal deficit and current account deficit tends to decline. But if you look at the equity market, close to about 30-35% of earnings stream is somehow related to the global commodity prices, be it in metals, oil or petrochemicals. So paradoxically the commodity market declining tends to lead to some underperformance of Indian equities. This is something that we had seen in 2008 as well. The oil and metal prices came down so sharply by late 2008 and early 2009 that the Indian equity market faltered and it fell by almost 60% from the peak, but actually the economy was not doing all that badly at that time.

What's your call on ONGC post the latest news from Cairn and Vedanta and how it may be beneficiary to companies like ONGC?

We think that there are signs of the Cairn-Vedanta deal getting finalised now. We think it is positive for ONGC. So for ONGC, essentially two positives have kind of got coupled in a matter of a couple of days both the government's decision to increase the oil and other oil product prices. And the possibility of the Cairn-Vedanta deal getting finalized. So we are actually positive on ONGC after these two developments.

Give two high conviction investment ideas?

I would suggest that under the current circumstances, No. 1, one should stick to the consumption theme because pretty much everything, be it income stability or the government's programmes, seems to be supporting consumption a lot more than supporting investments. As a consequence, I would recommend Bajaj Auto under the current scenario. The stock has underperformed because of the concerns relating to the longevity of the DEPB scheme, but we think the fundamentals of that company are much stronger. So Bajaj Auto would obviously be one of the choices at this point.

I would also in a similar vein recommend Bharti, Bharti Tele-Ventures, because revenues in the telecom space are becoming a lot more visible and stable. On top of that, the domestic pricing war scenario, which we had encountered a few months back, seems to have almost come to an end and as a consequence, the revenue growth and earnings growth of the companies are getting more linked to subscription, the number of new subscribers and so on. So the telecom space and the two wheeler space look good under the current circumstances.

Why Bharti now? The stock has already appreciated by 52% in last one year.

First of all I must say that we have had Bharti in the portfolio not now but for quite some time, almost for more than a year. We have captured a significant part of the upside. Having said that even after this upside, Bharti remains one of the best cash generators in this business. Bharti remains a stock where the earnings stream and revenue stream are possibly visible. Under the present circumstances where you have a degree of uncertainty about capex and the investments, it is possibly better to look at the consumption-orientated stocks. So in the present uncertain phase of the market as long as this continues, stocks of this type, of the kind that Bharti represents, would possibly continue to be outperformers.

Nifty resistance seen at 5600-5665

Since last Friday, we had seen heavy buying by FIIs on front-line stocks, which in turn caused short-covering, especially at and around of 5400 levels.

Later on Monday, the Nifty opened with a lower bias on global cues, but once again got support at around 5400. Now, 5414 and 5400 will act as major support levels and the major resistance would be at 5600 and 5665 which can attain in the short term. On the option segment, the Nifty call option open interest has fallen in at-the-money and in-the-money call options which lead the put-call ratio to stabilise above 1.20 levels.

In previous weeks, the Nifty put-call ratio has fallen below 1.20 levels and even tested 0.47 levels, now the scenario has changed dramatically and the current ratio has lend support to bulls. But the major outlook still remains weak, because we are still far below the 200 DMA of 5752, and Dow Jones is also set to break the 200 DMA of 11776 in the short term. The rally which we are seeing is a bounce back and it can be short lived as the June expiry is nearing.

The major heavy weight stocks have participated in the recent bounceback, and the trend may continue for some more time even if there are rough patches of high inflation and high interest burden. The situation can be better capitalised by selling the Nifty and its call options in the July series at higher levels.

July short strangle is considered, and it can be created by selling 5700 Nifty call option and selling 5400 put option. Risk averse can exit from the position as the time values of both options have started to decay. Fresh short positions on Nifty futures can also be considered when the Nifty comes very close to 5665 levels with a strict a stoploss above 5690.

Long call options are advisable in TCS and Maruti; both these stocks are expected to move up due to low implied volatility of its options. Grasim, ACC and Bajaj Auto can witness profit-booking in the near term. Investors can create small short positions in these stocks in June futures segmen

Inflation & possible RBI rate hike

Share investors are likely to cheer the increase in fuel prices that is expected to improve India's deteriorating finances, partly weighed down by fuel subsidies and demonstrate the government's commitment towards reforms. But this optimism is unlikely to translate into gains for stocks as the much-awaited decision on diesel and cooking gas prices will add to inflationary pressures in the short-term and may prompt the central bank to increase rates further.

"It is a bold move by the government after a long time and investors will like it," said Motilal Oswal, chairman & managing director, Motilal Oswal Financial Services . "While the move is inflationary in short term, the market has more or less discounted it, but a lot will depend on the monetary policy reaction," he said.

On June 16, the Reserve Bank of India raised key rates for the tenth time since March 2010 and is widely expected to tighten the screws further in July.

Focus to be on Europe, Crude Oil

Investors fear more rate increases would be excessive and would delay the economy's ability to bounce back once inflation settles around the central bank's comfort level of 6%. India's wholesale price inflation jumped to 9.06% in May. Fund managers expect inflation to accelerate to over 10% over the next few weeks as higher fuel prices would increase transportation costs of food.

In the longer run, most economists say, the higher price of diesel will encourage more rational use of the fuel and benefit the wider economy. "The increase in diesel and LPG prices may have an effect on inflation in the short term and in turn worry the market, but the move is beneficial for the economy and long-term investors will be happy," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance.

Brokers said the focus this week will continue to remain on the debt situation in Europe and the direction of crude oil prices. Benchmark Indian share indices - Sensex and Nifty - rose almost 3% on Friday, as foreign investors bought shares worth Rs 890 crore after global crude oil slid, Europe pledged to rescue Greece, and China hinted that it may be nearing the end of monetary tightening.

In the past few months, the perception of a government in disarray has gained ground as it has increasingly given the impression of being unable to deal with a blizzard of scams and agitations by groups claiming to represent civil society.

A widely-followed CEO poll carried out by industry body Ficci and published by ET in its edition dated June 13 reported that a majority of respondents expected little of the Congress-led UPA government. The price hikes may help reshape the impression of haplessness. Late on Friday, the government raised diesel rates by Rs 3, LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre.

In May, the government had increased petrol prices by Rs 5 per litre. The government last increased prices of diesel and cooking gas on June 26 last year, despite global crude strengthening since then. "If all petro product prices are passed on properly, markets will bottom in the next three months and recover significantly thereafter because growth is still there," said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management.

OMCS TO BENEFIT

Shares of oil marketing companies may surge on Monday as the government's decision to increase petroleum product prices will help trim losses that they incur from subsidised sale of oil and cooking gas. Brokers said the step has brought cheer to investors in these companies as they expected a lesser increase in diesel prices and none in kerosene and cooking gas.

Though the three oil marketing companies - Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) - together will still incur revenue losses from fuel subsidies of Rs 121,000 crore this year, the increase in product prices will reduce their monthly borrowings and improve cash flows.

"Shares of oil marketing companies will rise this week not because the petro price increases will bring these companies back into profits, but that there were very little expectations from the government," said the investment head of a mutual fund owned by a public sector bank. "Also, their valuations are almost at rock bottom because these stocks have hardly seen any movement," he said.

Shares of BPCL and IOC have fallen about 4% so far in 2011 against the 10% fall in the Sensex during the period. HPCL shares, which surged 6% on Friday, have been unchanged since January. BPCL and IOC gained almost 3% each on Friday ahead of the meeting of the government representatives to decide on the prices. Oil marketing companies buy crude at international prices, but sell diesel, kerosene and LPG at subsidised prices fixed by the government.

The government compensates them through a mix of cash subsidies and discounts from oil exploration and production companies, including Oil & Natural Gas Corporation (ONGC) and Oil India. Shares of ONGC and Oil India could also rise on Monday as their share of the overall subsidies will drop after the price increases. "Outlook of upstream companies have been clouded by the ad hoc nature of the subsidy-sharing formula. Lack of concrete subsidy-sharing mechanism has resulted in earnings/valuations of upstream companies being contingent upon government directives," said Enam Securities, in a note prior to the rise in prices.

Experts See Action Packed Week For Bourses

After the last week's rally that saw key market index Sensex regaining 18,000 level, investors expect strong domestic trends to take the market further up, experts said.

"Stock market may witness some action with an added dose of volatility due to the F&O expiry. With July 1st falling on the last trading day, the markets will also closely watch data on auto and cement sales, besides economic statistics on trade and manufacturing," IIFL - India Private Clients Head of Research Amar Ambani said.

During the past week, the BSE key index Sensex went up by 370.15 points, or 2 per cent to end the week at 18,240.68. The Sensex surged by over 500 points on Friday on the back of sharp dip in global crude oil prices and firm overseas cues.

Analysts opined that global events will continue to have some bearing on local sentiment. Greece and the US economy will remain in focus and the Chinese manufacturing PMI data will also be on the investors' radar.

The government on Friday decided to increase diesel price by Rs 3 per litre, domestic LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre, while slashing customs and excise duties on crude oil and products.

Market analysts said that government policy on fuel price hike will influence the market trend, and added that the hike in diesel and LPG prices will be well received by the markets.

"We expect the rally may continue after the fall in crude oil price and recovery in the global market. Many frontline and mid-cap stocks are trading at an attractive valuation with a few weeks left to first quarter FY12 quarterly result announcement.

"Improvement in monsoon is also an important factor that will influence the market trend," Motilal Oswal Securities Associate VP Sr Analyst -Technical-Equities Parag Doctor said.

Oil prices fell on Thursday after International Energy Agency decided to release 60 million barrels of crude, giving global economy relief from high energy costs.

The New York crude on Friday tumbled nearly 5 per cent to about USD 90 a barrel, while Brent Crude plunged USD 7 to about USD 107 a barrel.

Some experts were of the opinion that markets will open slight higher on Monday, but profit-booking can bring down some of the gains.

Retail Investor Waiting For PSU Share

Seven years into power the UPA government’s much publicized promise to offer every Indian the opportunity to own shares of public sector companies remains very much a proposal on paper. Corporate India has done better offering a higher share to the retail investor during the period.

A study revealed that between May 2004 and May 2011 the retail investors held merely about 24 per cent of total public sector stocks listed during the period under review. During the same period, retail investors cornered 30 per cent share in public offerings made by private sector, revealed data furnished by IPO tracker Prime Database.

UPA government led by Dr Manmohan Singh proclaimed in its Common Minimum Programme (CMP) drafted in 2004 that “public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors”

The government reiterated its promise to make common man a part of the equity success story in India when it announced in its manifesto in 2009 that “Indian people have every right to own part of the shares of public sector companies.” (Para 6, Page 16)

An analysis of figures available shows that from May 2004 to May 2011, seventeen public sector enterprises’ (PSU) IPOs and FPOs raised Rs 73,916.97 crore, out of which retail investors were allotted only Rs 17,812.26 crore.

While as the aggregate share of retail investors over the last seven year period stood at 24 per cent, it came down further in select top PSU offerings. NTPC Ltd, NDMC Ltd and Rural Electrification Corporation Ltd offered in their respective FPOs retail investor 4.87 per cent, 7.02 per cent and 7.74 per cent shares respectively.

The three PSU IPOs which gave the best share to retail investors included Power Finance Corporation (PFC), Power Grid of India, and Coal India which allotted 34.25 per cent, 34.15 per cent and 33.53 per cent shares respectively.

As regards best returns to retail investors in FPOs, retail investors were allotted maximum shares with Shipping Corporation of India, which allotted 33.82 per cent of its shares, followed by Power Grid Corporation and Engineers India, which allotted 33.71 and 33.47 per cent shares respectively.

The lowest share of retail investors in IPOs raised during the last seven years happened at NTPC which allotted 24.40 per cent shares, followed by Oil India Ltd and NHPC Ltd, with allotment of 27.27 per cent and 29.25 per cent shares respectively.

Lamenting the “inadequate” representation to the retail investor, Prime Database chairman and managing director, Prithvi Haldea said, “For the PSU offerings the government should reserve all shares only for the retail investor. In this manner the wealth created by public enterprises through domestic public resources shall be shared rightfully only with the public.” This will also be in keeping with the political manifesto which had proclaimed that every Indian has the right to own shares in PSUs, he added.

The overall share of retail investors in the PSU IPOs and FPOs issued during the last seven years would work out to be much lesser if one were to exclude the performance during the last financial year (2010-11).

During this time of a total of 27,066.59 crores raised by the government through PSU IPO and FPO format, a 33 per cent allotment was made to the retail investor. During 2009-10, however, retail investors got as little as 12 per cent of about Rs 30,756.38 crore raised.

But why is it that the retail investor has turned away from the PSU IPO market? Rajesh Jain, EVP, retail research, Religare Securities, said, “Barring one or two issues, Coal India being one of them, most of the issues didn’t leave much for investors on the table. On a lighter note, they even took the chair with them.”

This view is endorsed by Jagannadham Thunuguntla, head, research, SMC Global Securities: “The quality of IPOs is quite bad. Also, valuations are quite high. So, returns were bad.” He argued for discount mechanism to engage continually with the retail investor.

Prime Databases’ Haldea said, “A retail policy for PSU offerings accompanied by a realistic price would be an excellent opportunity to mobilize the household savings of millions of countrymen.” It would ensure a very wide distribution, reducing post-listing selling pressures, he added.

The government has fixed itself a disinvestment target of Rs 40,000 crore for this year. But the success of the offerings would depend on the pricing. Jain at Religare said, “Giving token discounts which may not last even by the time the issue is listed is meaningless. Remember IPO route is the best route that you can expect retail participation in stock markets.”

SMC’s Thunguntula agreed saying, “The IPO scene is very lackluster with the PSUs being the only hope, that too if the valuations are right.”

Indian Stock Market Decline - Best Stock For Investment

Currently all asset classes are witnessing what could be called a synchronised sell-off. What do you make of that?

They are all very highly correlated asset classes except US treasury . So when they rally, they usually rally together. When they fall, they crack together as well. So, it is not very surprising at all.

So where do you see the fundamental base for this market -- 16000, 15000, or sub-15000?

I do not think we are headed sub-15000 unless we have absolute collapse of earnings or some big risk on legislature or regulation. 15000-15500-16000, I do not think we are going to break that.

You have always had a contra approach. In beginning of the year, your recommendation was to sell emerging markets and buy developed markets, last year your top recommendation was to buy Ranbaxy and sell Reliance Industries . Given the kind of environment we are in, where do you think margin of safety is missing and where do you think margin of safety is present?

Shankar Sharma: That's hard to say, but obviously some of the retail players look very expensive, that's one. I do not think infrastructure is still cheap enough to get very attractive. I do not think power utilities are cheap enough to look attractive. So there is a reasonable mis-pricing even now.

After the kind of correction that the entire auto space has seen and in particular Tata Motors, is it cheap enough to get in now?

It was cheap enough at 1100, the market's concerns over higher capex numbers and some margin contraction has lead to the stock correcting quite sharply. I do not think there is huge immediate downside to the stock.

But at a time when cost of capital is moving up, disposable income could come under pressure. Why are you still bullish on autos?

They are currently already showing signs of fatigue and obviously they have run really long and hard for the last three years. So it is probably due even cyclically for a slowdown.

Given the current environment, why do you like stocks like Tata Motors and Bajaj Auto?

No, Tata Motors we do not like because of the domestic situation anyway. Our call has been always the JLR end of the business and as far as Bajaj is concerned, that's a relatively more immune part of the auto space given its export dependence. The problem there obviously has surfaced because of the DEPB, but we will see how Bajaj Auto ends up handling that.

If I look at the pecking order for large-cap IT, Infosys Technologies is underperforming the sector and it is also underperforming the market leader TCS, do you think the scales could reverse in favour of Infosys Technologies going forward?

I do not think so. It is very hard to replicate what Narayan Murthy and Nandan Nilekani were. On the other hand, I am told by insiders and TCS that the new management is very aggressive, very entrepreneurial, very drilldown, very micro focussed and he is really driving the business very hard and that's clearly showing results. So the gap is going to keep widening between TCS and Infosys.

What are your thoughts on Wipro?

True, management model is also coming under threat. Again these two are very venerated companies, Infosys, Wipro and it is unfortunate they are going through these problems. I do not think it is easy to fix management problems, especially for the kind of companies these are because whilst they have been professionally managed at one level, they are still very dependent on the family or the founding people in these companies. So it will take time for them to fix the management issues. I do not think it can happen overnight.

Are PSU banks looking attractive for a 10-15% trade in and trade out?

Yeah, 10-15% you can buy a lot of stocks and make those kinds of moneys, but whether you can make 50% because any serious investor or institutional investor, they want to make at least that much. That currently does not seem very likely.

Tick mark some names for us, stocks which you would like to buy on decline, stocks where you think a 15-20% appreciation should be expected or anticipated in next 12 months?

No, I would be buyers, and we are very aggressive buyers of pharma on declines because both the domestic and the export stories are very robust. The domestic stories again are big consumption stories. So we have liked the sector for two years, and we think at any decline, they would be great bets.

What about the entire pharma space? Apart from Ranbaxy, all other pharma companies are approaching or already sitting at near all-time highs. Why is it a buy for you when the market itself is looking weak?

I do not think that is a bad thought at all. If you have to remain invested, then being defensive is probably more rewarding. If for nothing else, it is showing great relative strength, which is always a good sign. So the pure macro momentum looks to be in their favour, but even on a fundamental basis, we like what they have to offer on the export side, which is the big global opportunity and the domestic side, which on the chronic side is showing great growth potential. The lifestyle diseases, that segment is really becoming very important here.

What about OMCs? Would they classify as a buy for you if crude prices are to come down further from these levels?

Usually they work in that fashion but obviously there has been a cloud over them, whether it will finally see the full decontrol come through or not but as a trade, they are always good for a 10-20% move if you bet on crude coming to $70 or $80 or $85.

Final thoughts from you on Reliance and what would you do with this stock sub 900 levels?

The problems seem to be refusing to go away. The core fundamental problem remains the production on the KG-D6, but around that there are issues and as recently as what the CAG has pointed out that they have gold plated the capex and CBI is probing that as per the news reports today. So all those things are not very comforting for investors in the Reliance stock.

US equity markets end mixed amid Greece debt woes

The US equity markets ended mixed in thin & choppy session amid Greece's ongoing debt woes and ahead of the quadruple witching today as better than estimated housing starts and jobless claims tempered concerns of a economic slowdown.

The Dow Jones Industrial Average gained 64.25 points or 0.54%, to close at 11,961.52 and S&P 500 Index rose 2.22 points or 0.18%, to end at 1,267.64. However, NASDAQ Composite fell 7.76 points or 0.29%, to finish at 2,623.70.

Richard Ross, technical analyst, Auerbach Grayson said, "All of our work continues to suggest that the S&P remains vulnerable to an extension of the decline down to 1150 level, on a sector level, on an intra-market level, on a macro level - all signs point to lower levels in the S&P 500."
On economic data front, there was some better-than-expected news. Housing starts rose more than expected and permits for future construction touched a five month high in May. New applications for jobless benefits fell to 414,000 in the latest week from an upwardly revised 430,000 in the week before.

The US current account deficit increased in the first quarter on strong imports. The deficit represented 3.2% of US gross domestic product.

In economic data to watch out for, the consumer sentiment index for June is expected to deliver a slight rise. Consensus figures depict a rise from 74.3 for May to 74.5.

European markets fell to a three-month low as political instability in Greece added on to the investor worries over the country's acute debt issues. France's CAC fell 0.4% and Britain's FTSE lost 0.76%. Germany's DAX was flat.

Meanwhile the Greek state television says prime minister, George Papandreaou will announce his new cabinet line up today. The PM's plan to form a new government yesterday fell into disarray after two key party members resigned citing disagreements with his economic policy.
There was some reassurances from the EU's top economic official Ollie Rehn. Rehn said that the next tranche of aid about 12 billion euros will be released early next month.

In the currency space, the euro pared its decline against the dollar after reaching a three-week low amid speculation that an agreement between the European Union and the International Monetary Fund may allow Greece to avoid a debt default.

In commodities, oil gains for a second day after reports showed that US housing starts rose more than forecast in May and fewer Americans filed applications for unemployment benefit, signaling fuel demand may increase.
Copper declines for a second straight day, weighed down by economic recovery fears reflected in weak manufacturing growth in the United States and a deteriorating debt situation in Greece.