DSIJ Mindshare

Disturbing Global Cues Will Depress Markets

Just a couple of days back, media headlines were screaming about the worlds’ largest investment bank, Goldman Sachs upgrading India to market weight from underweight on the perception that BJP-led National Democratic Alliance “could prevail” in the 2014 elections while adding that better corporate profitability and signs of an early pickup in cyclical sectors have also played a part. Normally, the markets would have jumped to latch on to such a positive public demonstration of confidence by someone of the likes of Goldman. Surprisingly, they traded volatile, and, in fact, even lost ground to end in the red that day.

Lets consider that to be an aberration and forget it. But what is transpiring after that, is keeping the Goldman call in sharp focus. A leading business daily has published some very vocal statements of Commerce and Industry Minister, Anand Sharma wherein the honourable minister hit out at Goldman for “messing around with India’s domestic politics”. “I think banks such as Goldman Sachs should stay focused only on doing what they claim to specialize in.” Sharma has been reported to be saying.

There are a whole lot of other things that Mr Sharma has said about Goldman. For now, what is stated above is sufficient to build a context in which we are quoting him. Barely a day after Goldman went positive on the prospects of a BJP led government coming to power at the centre, another big gun from the west has warned of a rating cut if the new government fails to set its house in order. Standard & Poor’s has maintained its ‘negative’ outlook on India’s sovereign rating, which is currently at the lowest investment grade and also warned that it may revise it downwards to ‘speculative’ grade should the new government fail to put things in order on the economic front.

While the markets didn’t react to Goldman’s optimism, it surely lost nerve on S&P’s pessimism. The market always reacts in a disproportionate manner to factors that can influence it. While degree of pessimistic reactions to bad news is always higher than the degree of optimistic reactions to good news flows. But the point that remains is that, there was no reason for S&P to have come up with such a jibe against India at this point in time. Or, there is probably something more to it, than just countering an opponents view. The political slugfest has already hurt the Indian economy, which is struggling to regain its growth path and in turn the Indian market, which is fighting volatility amid uncertainty. Another round of it, will only push us into an abyss of no return. Time Indian politics and governance improves for the better.

While the upgrades and the downgrades will happen sometime in future depending upon the outcome of the elections, here is what we need to focus on to close the trading week today. Despite the European Central Bank cutting interest rates, European stocks closed almost flat yesterday. The initial enthusiasm of a rate cut faded away as investors kept busy in figuring out the reasons for the ECBs largesse of easing out. In the US, profit booking brought down the markets which have run up quite a bit placing the benchmark indices at all time highs. A very interesting event in yesterdays’ trades was the listing of Twitter which closed up a whopping 73%. Money seems to have moved out of other tech stocks which were seen trading lower into Twitter.

Asian stocks are reportedly reeling under a renewed pressure of fears that the US Fed will soon begin its taper of the monetary easing. This pessimism is based on the better than expected initial reading for the US GDP growth in the third quarter. According to the initial reading, GDP rose 2.8% in the third quarter, which is higher than the 2.5% seen in the second quarter and more than the 2% which was forecasted. Every Asian market is today trading in absolute red. Japan is down 1% with the Nikkei trading 144 points down, followed by Hong Kong which is down 0.58% with the Hang Seng trading down 133 points. The Shanghai Composite is down by a quarter percent as of now with Indonesia, Malaysia, Korea and Taiwan trading down by more than a quarter of a percent each. Singapore is down almost half a percent with the Straits Times trading 9 points down while the SGX Nifty is trading 32 points below its yesterdays close.

The S&P warning is yet to wane and the overnight developments in the US are already weighing on peer markets in Asia. In circumstances like these, the Indian markets seem to be poised for another volatile trading session and in all probability will see a negative opening this morning. But it would certainly be important to keep in mind that RBI has already sounded off its preparedness to counter any impact that the US Fed’s decision to taper could have. Worry could only be a herd reaction to what is happening globally. Close the week rather safely by continuing with cautious trades and avoiding any gush of exuberance. 

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