Ok, this post isn't about connecting Markets and Bond, though Casino Royale did attempt that...Its about re-looking at major factors that can move the markets from here in either of the 3 directions (sideways is also a direction ;)).
Post QE II (where US released some USD 600 bn to induce growth into the system), everyone and their pets were bullish on the emerging markets and inflation in some pockets thereof. However, Chinese counter measures for preventing money flowing in freely into their system, combined with the Europe crisis, has clearly shown the world the other side of the coin. Where do we go from here, is a question people have started asking again now.
So I thought I'll compile a list of global and domestic (India centric) factors that can affect the markets significantly in either direction:
Although Ireland has agreed to the bailout by IMF, Portugal and Spain have already started to look bad if we take cues from the bond markets. Ireland story is not done yet though; it looks like they got the raw end of the deal - IMF has gotten them to agree on spending their Pension Funds first (for repaying their debt which is coming due soon) and only after that they should touch the 1st dollar (or Euro) given by IMF. What this implies is by the time Ireland gets to spend IMF money, they are already bankrupt...and hence completely dependent for quite some time on IMF. Irish are not very happy with this...protests will happen, heads will topple, and may be, just may be, terms and conditions will be re-looked into.
Portugal is not as big an issue as Spain - given the massive difference between the size of their economies. Its like saying I have a tooth-ache...may be a tooth has gone bad and needs to be pulled out...and o yes...I have brain tumor too...but thats not aching so much...!
Spain is a bigger problem than Portugal, and this time around, the markets are not waiting for crisis to come up before it tanks again. Money is flowing out of Europe. And to top it all, there are some bank runs being planned as well (No, I'm not kidding!). December 7 is being planned as the day when civilians across Europe are getting together to take out all their deposits from various bank accounts...(read this article from
Zero Hedge). That means banks had better spruce up their cash levels to meet sudden surge in requirements, and if they don't...well, we'll know which banks were naked behind the curtains ! Can't say how much support is there for this cause, but it's been on for quite some time now. [As an aside, Wikileaks has said that early next year, they're going to do a big leak on a major US Based bank...read
here. So if we miss solid action on banks in Europe on Dec 7th, we can still look forward to action from US banking circles early next year.]
India and China are reeling under severe inflation...(while US is praying it'll have some of it !) and are unable despite all their efforts to bring it down. They are also growing at a scorching pace...India has grown @ 8.9% last quarter as compared to 8.2% in the same quarter last year. Indirectly, the growth and inflation impact is even causing intermittent cash crunch in call-money markets in India (these are short term borrowing markets, in which companies borrow for 1-3 days to tide over their working capital gaps). In fact, RBI has recently made some temporary changes to CRR to infuse more liquidity in the market to cool down the lending rates in call-money market. Too much of inflation and uncontrolled growth always poses a risk of a hard landing...bringing in crash scenarios for markets to consider. If these scenarios persist, RBI is quite likely to raise interest rates / suck out liquidity from medium term perspective (especially by clamping down on lending to Real estate sector), which will further push the markets down (though not lead to a crash).
Dollar is clearly appreciating against all major currencies...very unlike what was envisaged just some time back. Euro is retreating...and no big support will come in till clarity comes in on the extent of crisis in the rest of Euro zone. China, Russia, Brazil, some other SE Asian markets have started trading in their local / preferred currencies apart from Dollar, as "Dollar is better than Euro" is not being seen as a convincing argument by markets. India is not a major market in the world, in fact, it is not even a significant part of the portfolio for many major funds, who, anticipating more scams, hard landing, might take money out of the markets, pushing rupee further down. Export lobbyists wont complain though. But its not that all's well for dollar from here, as soon as Europe crisis is played out / contained, dollar too will take a hit, 'coz fundamentals of US economy are not exactly confidence boosters.
- Interest Rates, Growth cooling
Interest rates are very likely to continue hardening in China and India, both to cool down inflation, contain growth, and avoid adverse effects of QE II money flowing in. Meanwhile, other SE Asian economies - Singapore, Thailand, Indonesia, Malaysia, are too cooling off. And "Japanese economic growth" has long been accepted as an Oxymoronic term, like Military Intelligence - the words exist separately, but sewn together, mean nothing. Every time high-growth economies like China increase their interest rates (there is already talk about another increase, after the recent one), commodity prices are going to take a huge hit, and so are equity markets (partially due to contagion effect, and partially due to prospects of reduced growth). A lot really depends on how central banks act at this stage...the question is no longer whether, rather how much, and when.
There are some other such factors, but I believe these are the ones with most far-reaching consequences. So while most of the factors are pointing towards a gloomy scenario, its still too early to write off the bullish scenario for the markets that we had envisaged earlier. It all really depends on how each of the above factors plays out...and how well or badly the central banks tread the thin line between inflation and growth. US too is not out of the woods yet...it just keeps postponing its problems, right from contingent liabilities of social security to medical expenses, from unemployment to huge fiscal deficit...
The time is running out for Europe, US,...at some point of time, something's gotta give...just then we'll know really how decoupled we are from the developed world...till then...stay tuned to the markets, and never forget to take cues from the Bond markets - for its him who'll tell whether the markets will be served shaken or stirred.
