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.