Grim picture for equity mkts

Udayan Mukherjee forecasts that it will not be a promising Thursday. According to him, all the worst situations have come together at the same time. From horrible commodity environment, bad inflation to rise in interest rates, nothing seems to be in favour of equity market globally. Henceforth, it is the worst environment for equity markets.

He believes that if we hold the bottom at current levels (14000-15000), it will be a sign of a strong market.

Asian Indices

Asia is a bit of mess this morning, there is across the board sell off. China is down 3.25%, Hang Seng is down 2.5% and so is Taiwan, Nikkei is down more than 2% and Korea is down nearly 2% so its terrible opening for the Asian markets.

On the repo rate hike, these intermitting hikes are such jolts to the system?

The market was going more braced for the CRR hike perhaps because of what Reserve Bank of India (RBI) Governor said the last time around so the repo rate hike comes as a little bit of surprise.

It is not good news and one can mask it in many ways and say its only 25 bps and the market was expecting it anyway but my sense is that equity markets will not take it very well particularly because there is no sign that this is the end of it. From everything that is happening around us and what the RBI is signaling, one has to go with the presumption that there is more tightening. I don’t know if the next move is the CRR move or there is another repo rate hike happening sometime in the next couple of months but it doesn’t seem like its conclusive and done with and to that extent I don’t think equity markets can bury this and move on and say its happened, its behind us, we price it in and we move on because there is not indication that this is end of it.

The uncertainty lingers. Are higher interest rates bad for equity markets? -  Unequivocally yes. If at the start of the year had you asked anybody they would have said rates would have come down by this point, now not only have rates remained stable, there has been a serial CRR tightening, tightening the liquidity situation and now there is sign of interest rates going up and whatever bankers might say this morning make no mistake rates are heading up in this system from here on.

One can chose to be in denial and say, so what it’s already priced in and ofcourse banks will not raise rates but rates are going up, the bond yield has gone up 8.36% and I have no doubt that we will see the benchmark yield between 8.5-9% very soon.

This is a terrible situation and it worsens the environment for equities. The only thing in favour of this move is that the bond markets might have priced it partly in or fully in and maybe the bank stocks have to that extent. Maybe everything need not be priced in this morning but it is bad news and will sour sentiment.

We got Index of Industrial Production (IIP) data as well in an environment where we are now more concerned about growth?

Yes but the thing about these macro numbers is that as we saw with the Gross Domestic Product (GDP) numbers which came in and which were good and much better than expectations, the markets not focused on these backward looking numbers at all because if that was the case then the market would not have broken down quite so easily.

I think the market is now saying that “we do not want to look at data which has come for earlier periods.” The market’s belief is that things are going to slowdown quite distinctly and substantially in the next three-four quarters because of what’s happening with inflation because of what’s happened yesterday with interest rates and because of crude prices.

The markets believe that the way to look is looking forward. So whether the IIP numbers today are 6.4% or 6% or 7%, I doubt if that will any have impact on sentiment because the markets taken its call on what lies ahead rather than what has already been delivered behind.

If one read the fine print of what the SBI Chairman told us 24 hours back that he sees distinct signs of slowing in manufacturing growth. He the country’s largest Public Sector Undertaking (PSU) bank making a statement that manufacturing growth is slowing down and that is far more an indicative statement for the market rather than previous month’s IIP numbers to deal with. So I suspect that the market will not be feeling good about growth prospects going forward regardless of what IIP throws up today. 

Global cues:

The global situation has become distinctly worse over the last few days and it is a new beast that has suddenly come to the fore. From worrying about recession and the growth slow downs, the market over the last one-week has worried just about one thing and that is inflation. When that has become the primary worry then every small uptick in the crude oil price is making the global markets increasingly nervous.

The speed with which the Dow has broken down to 12,000 is very discomforting and just to put things in perspective; the Dow Jones index is now merely 4% away from 2008 low. So I do not think we are in a very constructive phase in global equity markets and the US has been one of the strongest markets in any case. The kind of interest rate signals we are picking up for most of the parts of emerging with almost everybody now suggesting that rates will go up, the way crude is moving, the way the Dow has broken down it is all piling on the straws on our backs. It is just too many negatives are coming together at the same time and it does look like we will be made to go down to the lows where we came from. 

What’s on the cards for the Nifty?

We will fall to where we came back from, so it’s extremely likely and plausible that we see the Nifty at sub 4,400 once again this morning, In the last couple of days we had a bit of a short covering, so the traders were getting little bit optimistic that we’ll get back to 4,700 kind of levels but just put your fingers out little bit and it gets rapped, so you withdraw once again into a bit of a shell. This is not a great environment for bullish traders and I think next time around they will be even more cautious.

Could it be possible that after the first gap down there is a bit of a short covering once again because the shorts also got a little bit squeezed yesterday, so it is possible that after the initial gap down the shorts too might want to take some profits after yesterday’s experience but as these are all daily moves and hourly moves.

The overall set up for equity market is not good at all right now, and it needs a die hard optimist to see any ray of sunshine over the next 2-3 months. I think die-hard bulls would only be saying that in 2009 things will be fixed and there is lot more hope than conviction out there in that statement, for the moment you would have to say that the headwinds are far many more in numbers.