Not A Very Good Start To The Week

The whole of last week saw the markets seesawing to the tune of economic data emerging from various parts of the world. The pull from pessimism was far greater than the push of optimism, resulting in the markets finally giving away almost all that it had gained over the last trading week preceding Diwali. There is an interesting news report today. It suggests that the Sensex is currently at 16000 levels if you cut the FII flab. This should not come as surprise to many of our readers and regular followers. Throughout its rise to those so called new highs, we have been raising one critical question. How have fundamentals of the economy changed to support that rise? Every time we tried to find a viable answer to that, we have hit a wall.

Interest rates are at an all time high. New projects have been sanctioned, but are yet to take off and will probably find it more difficult to do so because of the high interest rate regime. Tie up of finances for these mega projects are not going to be an easy task in such a high interest rate regime. Inflation is at a level which is making everyone from policy makers to the man on the street feel uncomfortable. The supply side constraints have been huge, thereby negating efforts being made towards controlling inflation. So, expecting interest rates to come down in the near future is going to be futile.

Global worries are there to stay. The biggest among them is the taper of the US bond buying which could start any time soon. The Jobs data that was released towards the end of the preceding week in the US suggests an improvement in the condition of the economy and hence the fears of the unwinding of quantitative easing have raised their heads once again. We are not really sure whether it could really happen earlier than expected, or, is it just a wind that blows time and again. But the fact remains that markets are jittery and are reacting adversely to these fears.

Last week’s trading pattern is just about reflecting all that is stated above. Unless growth picks up in real earnest and other factors too fall in place there is no use getting euphoric in the markets. Playing the markets cautiously with a longer term perspective is the need of the hour. That is the only way to ensure that unnecessary wealth erosion does not happen.

Coming back to the week in focus, European markets have been reeling under the pressure of the French downgrade by the Standard & Poor’s. This, coupled with fears of a US tapering (this term ‘tapering’ has been used so often that explaining what it means is becoming a bit boring now) has impacted the psyche of the markets in that part of the world rather badly.

While fears in anticipation of the Fed action have been hurting stocks globally, US markets per se have been going the other way round. A better than expected jobs data helped the Dow Jones Industrial Average jump to its record close. The US markets have been consistently closing higher and last week was the fifth in a row that it ended up from its previous close.

This clearly shows how global markets are increasingly dependent on the dollar flows from the US. But the US has nothing to lose. A good jobs data means economic recovery and hence unwinding of the QE which makes perfect sense. But the unwinding of the QE is big trouble for the markets that have seen dollar inflows. India has a big share of those inflows and that could be our biggest worry thought the RBI has been continuously harping on the fact that we are prepared to handle the situation that may arise out of the taper.

For now Asian markets aren’t looking good this morning. Except for China and Japan, all others are trading almost flat. The tilt could be on any side. The Japanese Nikkei is trading up 1.16%, while the Shanghai Composite is up 0.20%. The Seoul Composite of Korea and the Straits Times of Singapore are trading absolutely on the border. Taiwan, Malaysia, Indonesia and Hong Kong are trading red.

The Indian market is likely to take off this week from where it ended the previous one. There are not many triggers in the market at least for now. Trade data likely to be released later in the day could provide some direction going ahead.  As for the open, you could see a negative open today. The overall bias is towards a pressured trading week with lots of volatility. Continue to be cautious while placing bigger and speculative bets.