Bad News Is Now Good News

The behaviour of the global markets has been rather erratic over the last few months. One thing for certain, the leash is in the hands of the central bank, and well, everything surrounding the actions and the prospective actions of the central bank. The epitome - the tremendous amount of stir that the speculation around the Federal Reserve’s steps has been causing in the markets. From direct comments about the future of Quantitative Easing to economic data, reactions have only been centric to the ‘tapering’ of the monetary stimulus.

In a manner that defies common directional sense of the markets, the trend we are seeing these days is that the markets are cheering to bad macroeconomic data. Higher inflation, lower economic growth and lagging industrial growth are ideally perceived to be negative data points. However, because they increase the chances of a rate cut or reduce the possibility of an imminent tapering in central bank asset purchases, the markets react positively to it.

A Commerce Department report said yesterday that Gross Domestic Product expanded 1.8% in the US from January to March 2013. This figure is lower than an earlier estimate of 2.4%. This led to a positive reaction on the bourses as the street now expects the Fed to not undergo immediate chopping on its balance sheet. With this, the Dow, Nasdaq and S&P saw gains of 1.01%, 0.84% and 0.94% respectively. The US dollar rose for the sixth straight session.

Also adding to positive sentiment globally was the fact that the Gfk consumer-climate study showing German consumer confidence forecasted a value of 6.8 points in July 2013 compared to 6.5 points in June 2013. In China, the National Bureau of Statistics said that profit at major Chinese industrial firms in May 2013 rose by 15.5% from the corresponding period in the previous year. This led to European indices gaining between 1.03% and 2.09% and Asia opening positively with gains between 0.69% and 2.07%.

The global sentiment is clearly and substantially positive. But will this apply to the Indian markets?

Positive sentiment has resulted in an upward momentum in stocks across the globe. The SGX Nifty too was seen trading higher by 68 points at 08:05 AM earlier today. However, the Indian markets have been seeing some pressure because of the currency situation. The rupee closed yesterday 60.72 to the dollar. Nervousness has been on the rise and FII outflows have been taking centre stage. Moreover, we have the futures and options expiry that will cause a high amount of volatility in the markets.

Although the start seems positive due to global cues, the day ahead is expected to be volatile. Market direction can swing later as the day progresses.