Indian markets have reacted to the fall in US market that are facing multiple headwinds. Indian markets have their own set of issues to deal with apart from external factors
Crude oil prices have plummeted, US Fed Chairman has signalled that the pace of hikes in the US policy rates may slow, the rupee has rebounded from its lows and Presidents Trump and Xi have called a truce in their trade war. One would have expected markets, especially the Indian equity market, to rejoice. Instead, they are very nervous. Even the Reserve Bank of India’s double assurance of a long pause in rate hikes and abundant liquidity failed to enthuse the stock market, although the bond markets celebrated.
What is the problem? The domestic one seems to be the state election results and perhaps the markets are worried about a defeat for the BJP. A defeat would signal uncertainty about the outcome of the general elections which are around the corner and markets hate uncertainty. But it isn’t just Indian markets that are jittery. Markets around the world, taking their cue from the US, have been falling.
And just when traders were expecting a bounce-back in the US markets after 800 points fall on the Dow Jones on Tuesday, developments across the border in Canada only strengthened the bear grip. The arrest of the chief financial officer Meng Wanzhou of China’s mobile giant Huawei Technologies who is also the daughter of the promoter Ren Zhengfei has reignited concerns about US-China tensions. The arrest comes within days of the trade talks between US President Donald Trump and Chinese President Xi Jinping. Experts, in any case, have thrown cold water on hopes of a breakthrough in the trade talks.
To be sure, the dovish statement by the US Federal Reserve Jerome Powell where he talked about slower rate hikes did see markets reacting positively. But this bullishness lasted for only a day. What triggered the fall on Tuesday in the first place was the movement in the bond market. The US Treasury yield curve just inverted for the first time in more than a decade. Many analysts had anticipated the yield would invert but their expectation was for late 2019. That the yield inverted a year earlier than anticipated shook market confidence.
The reason why markets are scared of an inverted yield curve is that in each of the seven recessions that the US has seen the spread between short and long-term Treasury yields has dropped below zero. On Monday the difference between three- and five-year Treasury yields dropped below zero, marking the first portion of the curve to invest in this cycle.
The US markets have already lost $3 billion in market capitalisation since September 2018 and a part of the blame lies with high valuations and expectations of lower growth. A slower interest rate hike by the Fed was also seen as a sign of US growth reaching its limits.
That’s not all. The flip side of low oil prices is that it affects the shale oil industry, which has been one the biggest employment generator in the US. Not only do lower oil prices hurt the US employment but it also puts to risk its banking system who have been very forthcoming in financing the industry. Moreover, a build-up in oil inventory in the US also signals a slowdown in the US markets as well as other global markets.The latest development with the arrest of Huawei’s CFO is only going to keep investors on the edge. Any retaliatory step by China will be the last straw for the markets that are struggling to look for positive news flows after a set of poor quarterly results announced by US companies.
If the trade war between the US and China takes a turn for the worse, commodity prices which are already sliding, will take a big hit.Indian markets cannot stay isolated from these developments. With state election results a week away and the general election a few months from now, investors would prefer to stay on the fences and let the dust settle. The only problem is it might take six months for the dust to settle.