Jun 12, 2013, 08.50 AM | Source: CNBC-TV18
CNBC-TV18's Udayan Mukherjee believes rupee woes are likely to continue. Also, Nifty isn't showing a positive movement this morning.
Udayan Mukherjee (more)
Consulting Editor, CNBC-TV18 |
Below is the verbatim transcript of his analysis on the channel
On global market influence
Right now the sensible thing is not to track what is going on with the Dow Jones and the S&P because that is what we have been fed on. Every morning we wake up, watch the US market and see if it is flashing green then we will be okay, if it is flashing red then we start to worry. I think now things are quite different.
It is clearly established that the US market movement and performance has little or no connection with the emerging market universe. These two are like chalk and cheese at this point in time.
We should track two things that are important indicators for us. One, what is the US benchmark bond yield doing and just get a handle of what other emerging market currencies that we can compare ourselves with, are doing. Those have the crucial fulcrum to where Indian markets might move in the near-term.
These are not difficult to track and the US bond yield it is difficult for most lay investors to think about US bond yields but the important thing is in which direction it is moving. Since the start of May, it has gone up from 1.6 to 2.2. That is a humongous change in the US bond yield. If it is moving in the northward direction without getting much analysis that should indicate unsophisticated investors that it is bad news for liquidity coming into emerging markets and therefore, bad news for the rupee.
It usually synchronies with some weakness across the board and other emerging market currencies like the Brazilian real indicating that rupee could still remain under pressure.
Those two things with some loose attention to what is happening with Asian emerging markets are the absolutely critical things to watch at this point. This is because they are the real problems and not whether the US is doing well or doing poorly because the US could be in a different planet for all practical purposes.
Equities versus currencies
It is more a function of a telltale sign of what markets are pricing in, in terms of global liquidity not now but maybe in three-six months time. The first wind vane usually shows up the currency and then the equity markets pick it up as well.
So, if you are trying to gage an early sensitivity to what is worrying markets right now globally in the emerging markets space, the first cuts will generally be in the currency space. The cuts may not be as deep as the equity markets, which tend to fall in much greater magnitude.
In the last few days currencies have made small moves but you will get a sense from the currency market quite immediately on which way the wind is blowing. Then the equity markets more often than not pick it up. A lot of people have pointed out that the equity markets in the last few days have been more resilient than the currency but I would not derive too much comfort out of that because one usually follows the other.
On foreign flows
The alarming thing is that market is struggling to strike out even minor pullbacks. It attempted one in the morning on Monday and fizzled out quickly. Once again we are down to 5,880 kind of mark. These failed pullback attempts after a fairly significant decline over the last many sessions conveys the impression of a market, which has become intrinsically quite weak. The traders are more prone to going short in every small rally rather than using this dip to buy with any great conviction.
Also, this market is quite sapped of any kind of liquidity momentum at this point, foreign institutional investors (FIIs) are not buying, domestic institutions were never. So, it is also a question of who is going to buy this dip, who will provide leadership in a pullback and that question vexes a lot of traders. T
hey can see which way the wind is blowing globally and can see a lot of diminishing of the FII flows in both fixed income and equity markets. The way that has played out over the last few days, it reflects back on who is going to buy and take the market higher, which is important for Indian markets, fed on a diet of global liquidity. The answer is unclear at this point and that is why traders want to sell the rallies.
Is the market going to break down from here? So far you will have to say it is resilient because the rupee has gone down to more than 58/USD but the equity market is still standing at 5,900, which is a good 7-8 percent higher than 5,500 low that we bounced back from.
Equities and rupee have moved in the same direction but not in the same extent for sure. The big call is whether this gap actually gets filled in the next few days and the equity market compensates for the lack of intensity of the fall that the currency has seen because of the weakening of the macro factors.
On Nifty levels
The Shree Renuka Sugars and Opto Circuits India kind of experiences will happen now. The rupee will drill holes into a lot of individual balance sheets and global investors are targeting countries with big current account deficits. There is a bit of run on those currencies, at an individual stock level people will start targeting companies, which have very large forex debt exposure.
Market is hungry and will just feed out the points of weakness and go for the jugular. So globally people are doing it with the EM currencies and locally you will find people doing it to some of the vulnerable midcaps. That is inevitable. We have seen this picture play out in the past. Every time the rupee threatens to break down, you will see such accidents.
Even if the market stays in a range, it could be 5,500 to 6,200 for a few more months. The local crowd will just sit on the sidelines and watch the fun and say, "No, you guys do the jumping around, we are not convinced about equities right now." They will completely sit out and feel vindicated every time there are these phases that we are going through.