Markets - On the Roller Coaster

The excessive market euphoria that was apparent in the beginning of the month has faded and has given way to apprehensions for investors worldwide.

Even as the markets seemed to recover from the concerns over Cyprus bank run, tagging it a one off event, the news of political turmoil in Italy shook the European stock markets. Greece's ATHEX Composite was off 4.8%. US indexes opened in red today. This certainly signals nervousness and dampened sentiments of investors. The Asian markets will also be impacted negatively.

Bank deposits that were so far considered as safe investment options, no longer seem to be safe after the Cyprus government decided to levy taxes on deposits, in a bid to secure bailout package from the European Union. The banks have remained closed for about a week and are likely to reopen with the imposition of capital controls by Cypriot authorities. This will limit the ability of the customers to access and withdraw money for a certain period of time, and thus save the banks from bankruptcy. Either ways it is a no-win situation. A bailout deal will send the country into recession, encourage small investors to hoard cash, and prompt foreign depositors to shift to other investment bases.

The fear that banking crisis may spread over to other European countries has spooked the investors. Adding another element of uncertainty to Euro Zone, is the inability of Italian politicians so far, to put together a new coalition government since parliamentary elections in late February. All these factors put together may cause a decrease in the inflow of global funds arising from the loss of investor confidence in the Euro Zone.

In India too, the United Progressive Alliance (UPA) coalition government may find it difficult to sustain due to withdrawal of support from alliances, thus creating conditions for early elections. After DMK pulled out of the  last week, the Samajwadi party has threatened to withdraw support too. If the Foreign Institutional Investors perceive that the Indian government will not have with enough bandwidth to carry out the envisaged and much needed economic reforms this year, then India too will see a decrease in the inflow of FII funds, which provide liquidity to the market.

As the sentiments have turned pessimistic, global markets will look up to political stability and announcement of measures for risk / crisis management to continue with the further run. 

Global Markets - Riding high on sentiments

Worldwide markets are echoing bullish sentiments.

The US Dow Jones Industrial Average index has surpassed its 2007 high and continues to make new all-time highs. The Standard & Poor’s 500 Index too is trading at post-2007 highs. Asian & European markets are rallying too based on cues from the US market. Indian markets are recovering from February lows.

All this barely a week after the US sequestration set in on March 1, 2013!!

The bullish markets have revived positive sentiments and created excitement, but it also warrants cautiousness. In wake of the upsurge, the markets appear to be discounting all negative news and taking ahead the rally based on selective good news or on expectations of continued monetary easing by the respective Central Banks.

The US market has chosen to focus on and celebrate the news of drop in US jobless claims monthly average to a 5 yr low, while ignoring the data that US trade deficit has widened in January to $44 billion and the US year end productivity has dropped to 1.9%, the biggest decline since 2008. As per the Sequester, about $85 billion in spending reductions will automatically occur in US by the end of Fiscal Year 2013.

The UK market was up on hope of cut in interest rates by Bank of England (BOE). UK’s manufacturing sector has contracted and this posses a major challenge for UK’s economy. BOE left its key lending rate unchanged in March. The European stock markets fell marginally after the European Central Bank kept rates on hold as expected.

Bank of Japan too kept its policy unchanged and decided not to step up monetary stimulus. Nikkei has been trading strong.

In India, on 28th Feb, the Finance Minister had presented the annual budget, aimed at reducing the widening fiscal deficit by cutting down government expenditure, increasing revenue and promoting growth. The quarterly GDP growth figure has slipped to 4.5%, the lowest in a decade. The market crashed after the budget speech was delivered by the Finance Minister, but recovered in the 1st week of March, following global cues. The uptrend may remain intact if the global markets are up as the speculation build up around Reserve Bank of India cutting interest rates to spur growth.

The markets are climbing higher, raising the hope that maybe the worst is behind us. But the question is whether the new highs will hold and for how long, particularly when the rally seems to be based more on market optimism rather than fundamentals.