Timely good news from US markets:

We saw it coming the market might have figured it out that the US market had got oversold over the last couple of days and something would have to happen and it’s been a safe bet these last many months that when the US markets gets into sticky spot, the Fed usually rushes to the rescue and I think that’s been a safe bet that emerging market investors have also been betting on. So consistently since the start of this week there has been a buzz in the market that the Fed will do something, people didn’t know exactly what they will do exactly some said rate cuts, some said this and they had a targeted package which has come out, which will aid liquidity.

US markets have rallied from over sold grounds and emerging markets too have hit a important retest of January lows and bounced from there. The billion dollar and trillion dollar question is whether this is a durable rally or is it just a 10% kind of bounce, which fizzles out in a bit when everybody gets excited but for the day the news is good, we have rallied leading upto it and may rally some more this morning then we’ll take it from there. 

Asian Indices:

Big rally in US and Asia is responding to it. The Nikkei is up 2.25%, China was in the green but is now 0.5% down in the red, Korea Composite Index is up nearly 2%, Hang Seng is up just above 2%, so you don’t have those 3-4% rallies but Asia rallied before the event, so may be the rallies are seeming a little bit more muted but they have been in the green for the last couple of sessions.

How do markets takeaway from this liquidity package from the Fed, it has happened before and it’s had shorter reactions sometimes?

Yes, but it’s a good package. The problem with what the Fed does and how people react to things nowadays is because of people pre-stated so if one asks a bearish house they will say, “this will not matter more than the next couple of days because the markets will once again look at economic data and it will fall.” If the house is bullish then they will say, “This is exactly what the market wanted. The Fed is solving the liquidity crunch in the system and now stock markets will bounce meaningfully.” But that is all opinion. If one asks oneself without the hangover of a bullish or bearish stance that’s a pre-taken position in the market one would have to say, “It’s a well targeted move.”

The problem earlier was that the Fed kept on cutting rates but it’s not a question of the cost of money at this point in time but the ability of people to actually lend; there was a liquidity freeze in the system. So now the Fed is saying, “Okay we cut rates quite a bit how much more can we go. We don’t have too much room on the way down so maybe we need to throw a bit more money specifically at the problem.” and I think that’s what they are doing.

I don’t know if this is a solution to the entire problem as one of the gentleman remarked. But if one asks whether without this or with this which situation looks good I would think one would have to say, “This Fed move makes some sense and it certainly will act as a little bit of a pain alleviator.” Whether it takes away all the pain? I don’t think so but at least in the near-term there is reason to be positive about what the Fed is doing.

It’s an oversold market in the US; there is no question about that, the way it fell over the last one-week or so. So when an oversold market gets some policy action, the reactions can on the way up or the pullbacks can be quite violent and that’s pretty much from what we have seen from the US market. But as one of the experts was suggesting, now it would be interesting what the 18th March outcome would be because while the Dow and the Nasdaq and the S&P celebrated last night, the Fed futures also retraced a bit on their probability of a 75 bps cut next week. So maybe the Fed say, “I am throwing money directly at you but I am not going to make the cost of money dramatically lower now and go down to 1%” as some people have been talking about.

It could be a mixed bag, I think the whole policy action needs to be looked at in its entirety but for the near-term for oversold markets like the US, can it lead to slightly higher levels even from here in a short covering bounce? It’s entirely possible. So it’s a near-term positive there is no other way to read it. 

contd on pg 2..