Mr Bernanke! stock markets are all ears

Tonight all eyes will be on cues from US market. Ben Bernanke will speak tonight and that is the event which all global market participants have been waiting for.

However, one will have to wait and see if Indian market starts the day with nervousness or it goes in strong expecting Bernanke to say the right things. Because while the US equity markets have rallied and gold has slipped, the emerging market (EM) equities and currencies do not seem to be going in with great confidence, said CNBC-TV18's managing editor Udayan Mukherjee.

According to him some of the EM plays don't seem to be playing this event with much confidence, Therefore, the outlook on global liquidity and emerging market equities, currencies too hinges on Fed speech tonight.

Also read: See little impact of FOMC meet; buy JSW Steel: Experts

On Federal Reserve meeting

The event in some sense has been discounted by many asset classes. If one looks at the way US equities have moved in the last three days, they are going in, saying that they will hear what they want to hear from the Federal Reserve chief. Gold has also eased off, which is what you would expect to see given expectations of a fairly dovish kind of language from the Fed today.

Equities and gold have sort of discounted this event. Curiously the US bond yield has not done that yet because the way it closed yesterday 2.18-2.19 that is not going in very strong into the event. That is probably a little concerning the fact that the bond has refused to back off the yield, despite expectations of Ben not saying anything terribly hawkish.

It is a difficult call but with so much talk over the last few days, and the way some of these asset classes have moved it seems like the event has been discounted and people do understand that the Fed cannot afford to roil the market too much beyond a point. So he will say the right things.

One must keep in mind that last time too, he did not say anything very hawkish but still the market interpreted one line from somewhere in the conference and choose to slip on that.

It looks like the market almost wants to believe that Fed’s call about Quantitative Easing (QE) ending sooner than later is actually right. Therefore the market may be looking at any kind of language to draw an inference of that. So, may be the Fed will say the right things but how the market will react given the last time reaction which lot of people thought was a misinterpretation to begin with could be quite interesting.

The other thing is that while the US equity markets have rallied and gold has slipped. In the EM equity space or even the currency space there is no sign that people are going in with great confidence that post tonight’s event there will be a massive rally out in these asset classes. Asia is lying absolutely quite; you know what has happened with the rupee the last couple of days. Some of these EM plays don't seem to be playing this event with so much confidence as the US equity market has these last couple of days.

On rupee

What is most alarming is what happened to the rupee yesterday; the market on the day of the trade deficit numbers sort of shrugged it off but the next morning it has come back close at a fresh low. This is a disappointing price trajectory. The fact that the rupee went to almost 59 and then pulled right back quite a bit, about a rupee and half and just when people were beginning to say it is done for the moment, we are approaching that 59 level once again and with speed and momentum.

This kind of price action is never very good and it has got the government very worried. All this flurry of meetings, FDI, etc is a lot to do with the renewed slide in the rupee. So they need to fix it and it is just not getting fixed. That has the stock market worried as it should. Therefore, yesterday the way the rupee closed around 58.80 is perhaps one of the more important reasons why the stock market also lost its nerve a little bit towards the end of the day.

Market is okay; it is too early to say whether the two day pullback has come to an end. Tonight is a big event; you could certainly have a rally post that though it seems like people know what’s coming. Tomorrow one will be in a better position to judge whether we are indeed getting that rally to 5950, maybe even 6000 kind of levels or this is all that you will get in this pullback. Today, we are just before an event so it’s a little tricky to call.

On Nifty

Today is difficult to call because we are going into an event and sometime before an event the market does adjust prices. So, if it is going in with optimism though it was not visible yesterday - you could see an attempt to move higher and then go into the event trying to price in some good news.

On how much will the market be able to flesh out depends on the rupee also because this morning if we start the day at 59 and there is a semblance of panic in the forex market again, then that changes equations for the equity market regardless of what is going to happen later this evening. Global markets may have discounted what Ben Bernanke has to say and therefore post the event you might not see a terrific reaction beyond a day.

One often sees markets reading up to particular event; for three days they trend and probably do a last bit on the day of the announcement and then they lose that trend because the market was anyway discounting the event before the announcement came in. So, maybe that is the pattern which is playing out, which is what is making EMs a bit edgy even today. China, Hong Kong are looking edgy, yesterday Indian market closing was not great.

Therefore, one is  not very certain about whether the Nifty can pullback to 5,950-6,000 as was the trajectory of this pullback or it may get aborted before that unless the news tonight is very good on which fresh phase of risk-on starts in the market.

It is also important to note that despite the pullback of 150- points on the Nifty, the Foreign Institutional Investors (FIIs) remain consistent sellers in the cash market. It is not looking like the earlier phases where we have seen this one-two day kind of FII selling phenomenon which quickly used to get arrested the moment the market bounces back. However nowadays over the last four-five sessions it seems like a consistent trickle of outflow which is going out from the equity space, also from bonds. Even in the Futures market, FIIs are not building very large long positions or no long positions and they continue to be on the sell side on Nifty Futures.

All of this makes one a little apprehensive about the continuation and the potential for how much the market might scale up in the near term. So tomorrow morning, we will get a better sense of how much the Nifty can move in this pullback but some of the signs which have been coming in since yesterday are not encouraging particularly from the rupee front.

Q: It may have been India specific as well, the recent data from morning start indicated that between May and June, there has been nearly USD 600 million of selling purely on India based exchange traded funds (ETF) or India based funds. As we were discussing earlier, Foreign Direct Investment (FDI) is one way of approaching this. Everyone agrees that it is the more durable money or at least is seen to be but it just looks like it’s a very ambitious kind of plan right now.

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On Foreign Direct Investment (FDI)

As Department of Economic Affairs (DEA) Secretary Arvind Mayaram was quick to point out, these are recommendations and not policy announcements. Therefore, some of it may come through, some of it might have to wait. I think telecom will take a bit longer because of the defence clearances, etc.

Some of this is going to be sentiment positive and not dollar flow positive in near-term. It is quite simplistic to say that the moment the government announces FDI or limits going up in FDI, billions of dollars will start flowing in. That has not been the experience with retail. In telecom, the current headroom is not exhausted by long margin. So first that headroom needs to be exhausted before FDI limits going up make a material difference. We are nowhere close to sucking in lot of billions of dollars in telecom as a sector which is top of the discussion list.

Then it is aviation, and the current limits are nowhere close to being exhausted even in most aviation companies. I didn’t hear much about FDI in defence yesterday in the discussion, one is not sure if that has been kicked out into the long grass once again.

Some of these announcements could be good, like if two-three sectors get opened up, some of these control definitions get ironed out - all these are good things, constructive things and on the margin they are positive. But, if the government’s intension in doing this quickly is to arrest the slide in the rupee, then barring a day or two of some sentiment impact, this will not help because between the announcement and the money coming in, several quarters may pass. We have got a little bit of a fire burning with the currency right now which needs to be doused.

Next time, whenever there is a more constructive global and local scenario, all these things will help so not disparaging it for a moment but I doubt whether it will have an immediate impact on great flows into India looking at the sectoral caps. I also doubt whether beyond a day or two it will douse the rupee or the currency fire at all.

On policy movement

Let us see this fortnight; if we go through the first week of July and still nothing has happened then it will be hugely sentiment negative.

In the next 10 days you need to get gas fixed for power plants. If that happens then that is going to be not just a sentiment positive but a material positive. There are some rumblings about coal as well, if that can get addressed because that has taken long enough. Then you get a couple of these FDI things on the margins which might just be sentiment positive.

If one borrows the finance minister’s analogy from the earlier press conference a few days back, he was talking about one day internationals (ODI) versus test matches and all of that. This long-term policy approach like a test match is all very good. Right now, the rupee needs not just ODI but I think a 20-20 approach because we don’t have that much time.  If you play a test match, the rupee goes to 62 per dollar. Then the story is broken and then it will take some repairing. It has to be fixed right now and we don’t have the luxury of waiting for six months to fix the problem, because if the rupee goes to 61-62 per dollar, after that to rein the damage in, will take a lot of fixing and the government does not want to walk down that path at all.