The Week To Begin Weakly

Last week, the Fed spooked the markets with Ben Bernanke announcing the likely withdrawal of the fiscal stimulus in phases. The announcement came in as a rude shock to markets globally and they tanked as though there was no tomorrow. This was particularly so, because the world was not expecting the Fed to come up with such an announcement. No matter how prepared you are for a particular outcome, disappointment over expectations leads to panic. This is exactly what happened last week. But for those who have been following us closely, it would have certainly been a different story. We had mentioned that there was a possibility of the Fed Chairman springing a surprise like out own RBI Governor does. It so happened and what followed is there for everyone to see.

Coming back to the main premise of why the Fed talked about phasing out the fiscal stimulus it has provided, it seems that there are indications of a pick up in economic growth in the US. Well, reports over the weekend certainly do not point toward the same. According to reports, two critical sectors; housing and manufacturing will see only marginal gains. Spending by consumers was good in May after it declined in April. The US economy is growing at around 2%, but is this pace enough to justify the Federal Reserves’ optimism? Not really, feel many. The US economy needs to grow at a much faster pace as compared to this if the Federal Reserves basic assumptions are to come true. So, does that put to rest worries about whether the Fed will really curtail the fiscal stimulus as it has said? The jury is still out on this but the worry will probably be the single most important factor to drive markets globally over the short term.

The week seems to be headed for a weak start. Asian markets have opened in the red and are trading with a negative bias as of now. Except for Indonesia all others are decisively on the losing end this morning. Japan is down a quarter of a percent while Singapore, Korea, Taiwan and Malaysia are trading down an average half a percent today. Hong Kong and China remain the worst performers with the Hang Seng and Shanghai Composite trading down by more than one-and-a-half percent as of now.

What happens back home? Well, things haven’t been really great on the domestic front over the past week. The same gloom will be carried into the new week and the markets are likely to open on a flat to negative note today. The currency remains the biggest worry having hit an all time low last week. What is it that will help it hold up? Nothing as of now is visible. It could well remain precariously poised over the week or so until the specter changes even slightly. While the rupees’ free fall has been the most important factor ruling the market psyche over the past week or so, the NCAERs reports about Indian economy not being able to growth at more than 4.8% during the 12^th Five Year Plan comes in as a double whammy. The markets will certainly react to this.

Amidst all this, the government has been trying to pacify nerves by pushing through some reforms including the hike in foreign investment limits in some sectors. Frankly, how much of this will eventually go through is a big question. This is probably the reason why all that talk has not been able to cheer a sulking market. Right now, the macro worries are far larger to be overshadowed and ignored for the market. For now, there is just one advice that every market operand worth his salt will follow – be cautious and limit exposures. It could take at least some days for the market to come out of all this and settle down before it finds its next direction.