RBI policy may not be a trigger for mkt given Cyprus woes

It wasn’t a great close for the Indian market on Friday, but today it has a bigger problem to face. Suddenly, there is a problem from Europe. The problem is a levy on depositors for banks in Cyprus, which has led to a fear of contagion across the financial system in Europe.

There have been serious reactions across Asian market; the Dow Futures is also pointing down quite a bit. Tomorrow’s monetary policy was expected to be the big trigger for the market, but it might just become a sideshow if these global problems persist for another 24 hours, said CNBC-TV18's managing editor Udayan Mukherjee. Also read: Worst over for India, but uncertainty ahead: India Ratings Below is the verbatim transcript of Udayan Mukherjee’s comments on CNBC-TV18 Just last week, we were all talking about how global risk-on is back and the S&P is going to hit a new high and continue to move higher. Suddenly, out of nowhere comes this news from Cyprus. The point about our market is that it has turned volatile, and just when you start to relax and think it is looking good for a few weeks, you get hit by something entirely unexpected. I don’t think this levy on depositors in banks, in Cyprus was something that people were even talking about. However, the fear is that it may lead to a run in banks and not just in Cyprus but depositors in other vulnerable European Countries will also begin to wonder whether they will follow. It may not follow because Cyprus is very different from other European nations, even the vulnerable ones but it doesn’t take a lot to scare people in that part of the world any longer. Contagion is a big word and we have not used that for a quite a bit of time in the market but in the financial world that is the fear which always dominates when you see one country doing something like this. None of us are experts on European financial systems but the fear is there in the market this morning. One can see that in the euro correcting, I am quite sure that European markets will open up quite nervous and vulnerable this afternoon and it will induce a bit of edginess after a long time from the European space. What implications it has on liquidity and what the EU can do over the next 24 hours to soothe the nerves in the European system saying that was just a one off; it does not follow that other European nations will adopt something like that. In fact, it should not follow. So, it depends on how well the regulator plays this but there is an element of surprise in this move and that’s knocking back sentiment this morning. The next 24 hours are going to be very crucial in how the European authorities deal with this. They have to contain sentiment because something like a run on banks is about sentiment and they have to contain that sentiment. Maybe, it may pass in 48 hours, as we have seen many of these mini crisis pass over the last few months but it is something that the market is justifiably worried about. There is never a good time for something like this because it can knock the market back quite a bit. It looked like we were building above 5,900 and trying to make an assault above 5,970 and see if 6,100 can be achieved in the near-term with some help from Reserve Bank of India (RBI) tomorrow. In that context, if this problem continues for a day or two longer, and threatens to assume more monstrous proportions, it relegates the RBI policy to a bit of a sideshow. Everything is about global liquidity; the euro has taken one step back this morning at 1.29 but if this continues for a bit longer and the euro breaks 1.29 and seeks out lower levels of 1.28 and below, then people will say the euro has broken down. It was not breaking down, it was just hovering around that 1.29-1.30, but now it has broken down and therefore probably will make a bigger move and the dollar will probably stay above 83 for a while. That ushers in some kind of risk-off sentiment in the region. I do not know what that will do to flows but we need to take it one step at a time out here. Because this news has just come about and the first reaction obviously has been negative. We have seen the global market is so fed by liquidity that its ability to digest this kind of bad news and move on is remarkably high this time around. It just frets for a day and may not think this will be such a big thing and moves on, and the markets bounce right back. So, corrections have tended to be 24-48 hour affairs in the past. However, is this time going to be different? One never knows because we are not exports on European financial systems and how other countries’ depositors will react. Let us wait and watch instead of panicking for the day and see whether the EU can cool nerves out there. Maybe things will not be that bad. However, this morning you would be advised to be a bit cautious about positions and see how things are moving. It is an evolving situation. It is the most important trigger at this point in time for all markets and so we need to be watchful. _PAGEBREAK_ This morning there will be gloom and doom but if you just go back three months and see the instances of one-two performances in global markets where it had looked like there has been some trigger, which would trigger a really big correction in global markets because they were extended but one must also note how swiftly these corrections got gobbled up. The latest was the Italian election result and everybody was worried for the market but the it fell for one and a half days and bounced right back. There was also some dissonance on the screen just a few weeks back because of that Fed minutes note on premature withdrawal of QE or not; the market reacted for a bit and people thought it was the correction because markets have gone up in a straight line and it needed a trigger and this is the trigger and markets will now drop 10 percent. However, the correction lasted just two days and we were back to square one and the market made a new high two days after that in the US. I think markets have been remarkably resilient and sometimes these are factors of really ample liquidity in the system. So, every time there is a dip, somebody goes out and buys it and the market bounces back with more vengeance than it fell with. So, keep your antenna up for that kind of possibility as well when there is a failed attempt at a breakdown because of a seeming scare and then the market bounces right back because that’s the groove that global markets have been in. Now the big question is, is this bigger than those episodes that triggered off or seem to trigger off corrections in the previous times? There is no way to know that. Today, this morning it looks bad and we will get cut as well but who is to say that come tomorrow, global markets will take the view that it is just Cyprus, there is no contagion and therefore markets might have overreacted and the S&P goes back to a new high. I am only suggesting this because this has been the established pattern of global markets over the last two months but every time is not the same and sometimes things are different. We need to be cautious but not overly pessimistic and confident that this is the trigger which breaks the back of the market. I think the 24-48 hours will tell us whether this is indeed being seen by global markets as something which is potentially more dangerous than the last few triggers, which have occurred out here. Hence, let the market tell you that this is the big correction that people have been fearing, which is at least an 8-10 percent drawdown in US equities or global equities but we don’t know that for sure this morning. So, trade gingerly and stay with the market but don’t take very large bearish bets yet, till the situation has evolved for the next 24 hours because the first reactions often tend to be a bit misleading. If you were a trader right now, you would be manic because the mood is changing every 48 hours. You suddenly feel very bearish because 5,800 broke on the way down intraday; the market is going back to 5650. Just one day after that, the mood is completely different. We are back above 5,900 with every possibility of going to 5,970, the near-term level which the market turned from and then going on to 6,000 plus. You come back after the weekend and again this morning we will probably be at 5,800 or just above that. So it is volatile. It is the point I have been trying to make over the last three days that don’t get carried away on the way up or on the way down. This could be a trader’s graveyard if the short-term traders get it wrong because there is just no trend. It seems like there is a trend after every 70 point move on the Nifty but there is no trend. It is just completely random and volatile. Things need to settle down a little bit. The spike in the India volatility index (VIX) is suggesting something that the market will be volatile and they have been volatile. Maybe some really smart traders have caught it on both sides and made money. However, for every one guy who has got it right, probably nine guys have lost money in trying to trade both sides of this volatility. The Nifty will probably go to 5,800 or closer to that. Does that break this time or can we get another bounce from 5800 over the next two days, particularly if the RBI gives us good news tomorrow, which will lead to even more conviction in the belief that the market has a near term floor at 5,800 and it will not violate that. There are too many triggers right now; today it is global, tomorrow it is local. So in this volatility, do you want to trade? You have to be really smart to be making money. I think it is that time where you want to be a bit prudent. If somebody else makes 100 points in the Nifty, you pat them on the back and say at least I did not lose 100 points.