Narrow Trade Deficit + Yellen’s Remarks = A Positive Open But Volatile Trades

The market has been in a total state of flux over a couple of the past months. Political developments have had a greater bearing on its psyche over this period. The war of words between the two principal factions vying for power is getting hotter by the day. The need for a strong leadership and a stable government is currently one of the most important factors from the market’s future perspective.

All this has put economic growth on the agenda of one and all. That has become the focal point of every single person from the Central Banker to the Finance Minister and not to forget the opposition which is gunning for power based on the promise of putting India back on the growth path that not very long ago was being envied by even the West.

Talking of economic growth, reading economic forecasts is becoming more like fishing in the deep blue sea without knowing how to swim. Global and domestic agencies have made it a habit to release two equally opposite forecasts for the Indian economy simultaneously. While one predicts a good future, the other bares the challenges that await us as we go forward.

The latest in the trend is a report from the global rating agency Moody’s which pointed toward an unforeseen eventuality of a third front coming to power following the general elections. According to the report a third front government coming to power could lead to a capital flight and delay economic recovery. The creditworthiness of the Indian economy has been questioned by Moody’s, according to which any government of coalition, howsoever strong is bound to result in a weaker economic growth and hit capital flows to the country.

While this sounds gloomy, here is another opposing view presented by Standard Chartered Bank. According to report released by it, India’s GDP growth is expected to improve to 5.3% from 4.7% in 2014. Of course, that report too places a caveat. It says, a lot would depend on the outcome of the elections in May 2014.

All this talk about elections, their outcome and hence an impact on the economic growth have had a telling effect on the markets so far. As days near to the most awaited event in probably decades, the shorter term movements of the markets are likely to remain volatile. Macro data and global developments are likely to drive the markets at least in the shorter term. Foreign trade data released yesterday will be set the mood of the markets today. But more importantly, Janet Yellen’s remarks would be read cautiously and discounted by the markets.  Talk of the Fed continuing to taper its stimulus will be a major point of consideration, but holding on to interest rates at near zero levels is what comes as a reprieve.

European markets reacted positively to these remarks and traded strongly yesterday. Closing in the green for the fifth straight day, indications are, very short term worries over the US Fed’s actions are currently out of the way. In the US too, stocks rose extending their four-day winning streak following the same set of reasons.

Asian markets have taken cues from their western counterparts and are currently trading quite positive. Except for China and Malaysia all others are trading in the green. Japan came back after a holiday and is doing well, with the Nikkei trading up almost 0.80%. Taiwan, Korea, Indonesia and Hong Kong are trading well in the green with benchmark indices in these regions up in the range of 0.40 – 0.70%. Singapore is following suit with the Straits Times up 0.25%. The SGX Nifty is trading strongly up at this point in time.

A narrowing down of the trade deficit, thanks to a rise in exports (though very marginal in comparison to what had happened in the preceding month) and lower imports will primarily drive the market psyche today. Expectations of a lower CAD will come to lift the sentiment up. This combined with a cautious reading of Janet Yellen’s remarks should see the markets open in the green but trade in a tight band. Wait for the inflation data to be released today before you take a leap and participate in any euphoria that could be witnessed.