An Over-Reaction On The Markets Yesterday?

Several factors weighed on the Indian markets yesterday as the indices saw a heavy downfall, which, in absolute terms, was the second biggest since October 2011. Rating downgrades, depreciation in the rupee and fears over disruption in Syria weighed on the markets heavily. The Sensex fell by 651 points and the Nifty by209 points. Was the fall a tad too much? Will the markets see some upward movement today?

Global markets have been anxious over the reaction of the US against Syria in response to the alleged use of chemical weapons against its civilians that caused nearly 1400 casualties. President Barack Obama met with congressional leaders to discuss the likely action on Syria. He has gotten the support of Speaker John Boehner on his call for military action.

Meanwhile, there was a statement from the Russia defence ministry that it detected two objects that were fired towards the eastern Mediterranean. However, Israel clarified that it carried out a joint missile test with the US. This caused a knee-jerk reaction on the markets and led to a heavy downfall.

The tension around Syria should have ideally affected global markets. However, the Asian markets remained buoyant. True that India had other drastic reasons like the rupee depreciation and downgrade fears to sink upon. But, over the weekend there was a load of manufacturing data that was released. The Purchasing Managers’ Index (PMI) data from China, Germany, UK, Italy and the Euro-zone was robust and showed acceleration. Clearly, the Indian markets didn’t follow global markets and reacted negatively, and heavily, in a panic-selling like situation. Post the manufacturing data from China and Europe, the global markets awaited the next set of data, the ISM manufacturing index in the US.

The Institute of Supply Management’s (ISM) manufacturing index showed an expansion in manufacturing in August 2013 at its fastest pace in more than two years. It came in at 55.7% in August compared to 55.4% in July. This too led to the sweeping of a positive sentiment across the globe.

Domestically, the government has approved 17 FDI proposals totaling Rs 992.61 crore, in the FIPB meeting on July 29, said the Finance Ministry. Moreover, a recommendation for the final clearance of the Jet-Etihad deal has been sent to the Cabinet. This shows some action building up on the foreign inflow front and marks a positive signs.

Although there are many positive economic cues to pick up for the markets, the larger picture doesn’t change. India’s economy continues to remain under tremendous pressure and global fears arising out of the tension in the Middle East continue to nullify the economic acceleration around the globe. Additionally, the rupee depreciation continues posing a threat to the Indian markets.

While, we may see a positive opening today because of yesterday’s over-reaction, the background doesn’t support for an upward trend to ride on. A cautious approach is thus recommended.