Positive Data = Positive Sentiment = Good Trading Day

Positive economic data is raining all over. After a 4.8% rise in GDP for the second quarter, it is the trade data that has come in as a pleasant surprise. Dr Rajan the magician seems to be having a never ending supply of the proverbial rabbits in his hat. And of course, not to forget, that breaking tradition is his style of functioning. The current account deficit (CAD) figures for the September quarter were released yesterday, one month ahead of schedule (normally these are declared at the end of December).

Too much of positive data is being laid on the table. The CAD for the quarter ended September came down sharply to around USD 5.2 billion of 1.2% of the GDP from USD 21 billion or 5% of the GDP during the year ago period. Rising exports and declining imports, mainly on the gold front have actually helped the situation during the quarter.

Another data point that came in yesterday has also helped pump up the positive sentiment of the markets. The HSBC Manufacturing PMI came in at 51.3 points up from 49.6 points in the previous month indicating an expansion in manufacturing activity after almost eight months.

All this data that is flowing in, will now gradually help the belief of a lower CAD for the year and a pick up in the economic recovery look more and more certain. So, the economy is expected to grow at 5% for FY14 and the CAD (according to Dr Rajan’s estimate) will be contained to below USD 56 billion, which works out to 3% of the GDP. No wonder the finance minister is going all out to assure that that the economy in the second half of the financial year is all set to turn corners around.

There are two ways of looking at this data. One is very simply assuming that the measures put in place earlier are yielding results with a lag effect. Curbs on gold import and opening of the dollar swap window have on one side protected the outflow of dollars and on the other pulled back some into the system. If that is the case, lets really soak it up and go all out positive on the return of the India growth story.

But the second scenario could be really a worrying point. The basic premise on which the argument against the first and in favour of the second scenario is based is that economic fundamentals cannot change overnight. An economy which was struggling with its growth just a quarter ago and fire fighting to protect its currency from depreciating against the dollar is suddenly witnessing a reversal of its problems. The rupee is stable, growth is gradually getting back and the CAD situation is actually looking promisingly good. That seems a little too much to digest.

This pessimism is strengthened by the fact that core sectors haven’t really shown that growth which they did in the previous month. The output of the core sectors which comprises of eight infrastructure industries contracted by 0.6% in the month of October. This essentially means that the IIP in which core sectors account for as much as 38% is likely to come in the negative or at least on the lower side.

That is where caution in the markets comes into play. Sure signs of an economic recovery are those where there is an overall improvement in factors without any exception. We seem to be far away from that scenario. But as is always, the market will welcome any kind of positive boosters in the short term and react to them accordingly. Hence today could be a good trading day to begin with which should continue with a positive bias.

Overnight, European stocks were nervous reading too much into the PMI data for China while US investors booked profits releasing their grip over the extended rally. Asian markets have opened mixed this morning with Japan, Singapore and Malaysia trading well into the green. The Nikkei is up almost half a percent followed by the KLSE Composite which is trading up 0.45%. The Straits Times is up marginally. All others are in the red with the Hang Seng (Hong Kong) trading  0.72% down from where it had closed yesterday. The Shanghai Composite (China), the Seoul Composite (Korea) and the Taiwan Weighted are down 0.47%, 0.55% and 0.21% respectively.

As for the Indian markets, you could see a positive open and a good trading day riding on the positive economic data that came in yesterday. There could be some nervousness taking cues from global markets though. As mentioned earlier, be cautious for all is not well as yet.