26 May 2006 !!!
26 May 2006 !!!
This post is not a signal to buy : -
It’s a bright morning if you are bulls, and very bad morning, if you are bear. Global Asset markets are rallying in unison, be it US, Asia, Commodity, Crude, and Gold. It’s a strong bounce back from oversold equity markets across the world. Remember, few days back I mentioned in my newsletter, never carry futures position overnight – Sentiments can change overnight from bearish to bullish and vice-versa.
Now, let me explain a small issue which I have been confronting since last many months –
Why all asset classes were rallying at the same time, and now declining at the same time?
Few months back, I used to wonder why every asset class be it crude, gold, commodities, stocks, bonds and real estate are rallying at the same time. It used to sound absurd. And suddenly, after latest inflation report in US, every asset class has started declining, which again is perplexing. We all have studied – corelation coefficient – that some assets are negatively correlated. If one rallies, the other should decline. Why it’s irrelevant in today’s time?
The most confusing behavior is of Gold. The metal is the classic inflation hedge, and yet gold sold off, on back of threat of inflation. So what is happening all of a sudden? Why is Gold falling? It means we are missing some other piece of puzzle.
I am not a great economist who can understand how all the pieces of the moving parts come together – but common sense points me to this direction – Global money supply is tightening – and is becoming expensive to speculate (interest rates are rising). As a result, a large speculative unwinding is happening across all asset classes especially where a phenomenal bull run has happened. You take any economy across the world, and you hear the news of rise of interest rates, and money supply tightening. And so, the same logic by which all asset classes were rising at the same time applies to why all are declining at the same time.
We have been in global liquidity boom since last four-five years with US and Japan, two large economies having negligible interest rates. The liquidity boom led to surge in asset prices across the world. It became cheaper to speculate, and take the prices to astronomical heights be it real estate, stocks or commodities. Central bank policies around the world made it easier to maintain lifestyles with debt. USA is a shining example of personal consumption and debt. This is what I say is Central Bank’s job – first create inflation, and then fight with it.
We need money tankers, as money supply is gone.
FIIs were net sellers yesterday, when our market rallied by 93 points. But how long we can sustain ourselves on small domestic liquidity?
Earlier, the money supply tap was fully open, and now economies across the world are slowly closing the tap. During the first wave of selling we saw after May 11, the financial markets, across the world, were adjusting to new fundamental conditions of change in global liquidity. What we saw in India – was the impact of slowing down the liquidity tap. It looks like the way we are solving the water supply problem in cities, the same way, we will have to solve liquidity problem in our markets – Where are the tankers?
We need new inflows of cash to keep the economic momentum moving. We need strong institutional money (tankers) for our financial sector. One of the ways is pension sector reforms. FM, are you listening?
Outlook for the day:
Bullish Start
The entire equity market across the globe is rallying, and rallying strongly. Why I will tell you little later. We may rally even stronger. I am really concerned about bears. Nifty June futures yesterday closed at a steep discount of 83 points over spot closing of 3177. This discount may make this rally ever stronger. Bears can take solace from the fact that FIIs continue to sell. They were net sellers yesterday.
Asian markets have opened stronger, and most of them are up by 1 to 2% taking cue from US market. Remember, we are living in an era of instant price discovery, which means we may have a gap up opening of 50-100 points.
Indian market will open gap up by 50 points, and may rally through out the day, but it would be interesting to watch last one hour of trade. Will bull have the conviction to hold the long position through the weekend, considering that we are so sensitive to world economic data?
What is the trigger for this global equity rally?
The U.S. Commerce Department revised GDP growth in the first quarter higher, from an annual rate of 4.8% to 5.3%, less than expected, but still strong. This is just a piece of economic data which can be construed positively, that US economy still has momentum.
Does this change anything fundamentally?
I don’t think so.
The equity markets across the world have become very sensitive to economic data. The reason – US Fed has said that next rate hike will depend on economic data.
Is Bull market back?
I don’t know.
What I know – Global equity market is very nervous and has no clue on the economic direction the world is taking. It will always react strongly and differently to every piece of economic news. It means, on positive news, the market will rally strongly, and on negative news, it may fall very strongly. This may continue till some consensus emerges on World economic growth outlook – How price rise across different asset class will impact the world economy? FII’s were net sellers yesterday, when our market rallied by 90 points.
cheers,
nkpanjiyar