Get Ready For A Bad Weekly Close

Economics is anytime heavier a subject than politics. This hypothesis will be proved in the markets today. The euphoria over the BJP coming to power in four states and hence the noise about the probability of its coming to power at the centre in May 2014 was already looking lost in the melee of the taper talk. On one hand with an improvement in the US’ economic scenario, the possibility of the FED hitting the taper button is becoming clear while on the other, economic data points released yesterday on the domestic front have been a complete disappointment.

Retail inflation measured by the Consumer Price Index (CPI) has hit a record high, while industrial growth has shrunk in the month of October after four months of expansion. The Index of Industrial Production (IIP) is down 1.8% in the month of October as compared to what it was in the month of September while the consumer inflation has shot up to 11.24% for the month of November.

This is puts the RBI and Governor Rajan right in front of the firing line once again. Left with no choice another rate hike is a given when the RBI meets for the monetary policy review on the 18^th of this month. Interest rate hikes not having been effective in controlling inflation is as much a known fact as is Dr Rajan’s firm stand that there is a clear case for hiking rates in order to control inflation. Growth cannot come at the cost of rising prices which hurt the masses and hence a rate hike in the forthcoming meet is now a foregone conclusion.

The markets will discount his actions well in advance beginning today. For starters the fall in industrial production comes as a big sentiment spoiler. The case of the economy bottoming out had just begun to take roots. But the industrial growth numbers released yesterday, cast a big shadow of doubt on that. Growth is still elusive and economic fundamentals (as has been earlier pointed out here) are yet to improve for anybody to believe that all is well. The cardinal principle about economic fundamentals not changing overnight has been proved beyond doubt by yesterdays data points.

On the global front Europe continued to reel under the pressure of taper. Markets there, slid for the fourth straight day. What is also adding to their woes is their own economic data which showed that industrial production has declined 1.1% in the Euro zone in the month of October from September. In the US investors played on the lines of the economic data which has been sending mixed signals.

Positive sales figures were contradicted by higher-than-expected jobless claims. According to reports, weekly jobless claims have shot up to 368000 from 300000 during the week ago. This was higher than the 325000 that was expected this week. However, belief that this could be seasonal phenomena was being looked upon as a good way to ignore the negative sentiment surrounding it. The result of this is being felt in the stock markets, which declined for the third day in a row yesterday.

Asian markets are trading mixed this morning with Taiwan, Japan and Malaysia being the only three to be holding their heads above water. The Japanese Nikkei is trading 0.35% higher while the Taiwan Weighted is marginally up and could slip on the lower side if the overall market sentiment dampens further. The Malaysian KLSE Composite is almost mirroring the Japanese market as of now. Korea, Singapore, Indonesia, Hong Kong and China are all down this morning. The Shanghai Composite, the Jakarta Composite and the Hang Seng are trading down an average quarter percent while the Seoul Composite and the Straits Times is down an average half percent as of now.

It needs no rocket science to understand where the Indian markets are headed today. The SGX Nifty is already trading a good 44 points down and that should tell you where to expect the markets on open today. The weak economic data that was released post market hours will weigh in heavily on the markets today. Bracing for a rate hike in the middle of next week, investors will certainly cash out of the markets and stay on the sidelines until the pessimism wares out. That obviously should be a prudent strategy in the current circumstances.