A Slightly Negative Open & A Nervous Day Ahead

The Federal Reserve has been looming quite ominously over the markets over the past couple of trading sessions. Yesterday, they (the markets) were dragged down by anticipatory pressures exerted on them ahead of the US Feds’ monetary policy review meet to be held today. Despite some valiant efforts they failed to come up and ended the day decisively in the red. The slide of the Rupee has to be arrested soon in order to avoid any major damage is what we had said yesterday and that very factor hurt the markets badly yesterday. The Rupee has hit a new closing low of Rs 58.77 to a dollar. This looks like a clear disaster in the making for the markets. You have already got a taste of it yesterday and if things do not improve soon, the damage could be worse going further.

The government already seems to be getting into the damage control mode. A panel has recommended drastic changes to the FDI rules suggesting a hike in FDI limit for multi-brand retail to 74% and also allowing 100% FDI in certain sectors including telecom and aviation. On one hand these provisions if they go through will help some ailing sectors revive and on the other, they would see some good foreign money flow in. Well, a good attempt at assuaging the market mood! But, will it really work? As said yesterday, there are too many worries surrounding the market on the macro-economic, political and global front in the short to medium term. You could see some mild impact of these positive announcements, but as far as a clear turnaround in sentiment is concerned, that seems to be a bit far.

One principal factor that could impact markets over today and tomorrow is the Federal Reserves’ meeting scheduled to be held today. In fact it has been the single most important factor that is being awaited eagerly by global markets. How does one actually react to the Fed’s actions? Depending on the quality of improvement in economic fundamentals, the Fed will take a call on tapering off the bond buying that it is currently doing. So what is good? The bond buying, or a decisive US economic recovery? Well for now, whatever be the result of that debate, markets globally remain worried about a pull back from the bond buying exercise which could choke liquidity. After all, it is that gush of liquidity which has kept the markets on the higher side so far.

Fears of the bank going in for a gradual easing on the asset purchase front saw European markets tread cautiously lower yesterday. On the other hand, In the US, stocks rallied, signaling what most would love to hear from the Fed tonight. Like all, we too hope that this be the reality tonight. But our own experience with the central banker back home has been pretty disappointing. Should Bernanke spring a surprise, it could mean some prolonged pain for the markets not just in the US but also globally and more so for us in India.

Asian markets have opened the day on a mixed note and are trading quite nervously. Japan, Malaysia, Indonesia and Taiwan are on the winning side but Korea, Singapore, Hong Kong and China are trading in the red.  What happens to India? The positive cues are very less compared to the negative ones and hence you cannot expect much from the markets today. As we said, the Rupee is the biggest worry as of now and the situation could further aggravate if the Fed springs a surprise of any kind. All in all, it looks like the markets are headed for a negative open and a weak day today. Keeping your bets slightly on the safer side by playing the larger counters should help in avoiding any knee jerk reaction that may emerge following developments on the global front during the day.