QE3 may get temporary rejoice in global markets: Udayan

Things are moving along very nicely for our market. We are knocking on the doors of 5,450 despite macro news not being great for sometime now. The market seems to be focused only on global liquidity. In that context today is an important day because the FOMC meet ends today, said Udayan Mukherjee, managing editor, CNBC-TV18.

The Fed will decide whether to oblige the market with QE3 i.e. the next round of quantitative easing. Is that priced in already, does the market know it is coming or can that unleash yet another liquidity surge across global markets extending the risk-on rally that we have seen for the last many days? That is the big event to watch today.

The Sensex has hit 18,000, but a lot of should be already in the price. It’s a well advertised event. We have been talking about it for the last many days. We saw what happened to Europe yesterday, 12th September was built as a big day when the German constitutional court will bless the ESM. It blessed the ESM, but it did not cause any great ripples in the stock market as such.

So these days the hue and cry around the event is so loud that market factor in what is possible and what is coming well before the event. It won’t surprise me if today is another case in point where Ben Bernanke does oblige the market as he usually does with some form of quantitative easing, but the markets initially rejoice and then say we saw it coming and then it just becomes flat.

There is high probability of that happening because of the way markets have moved up already. However, if he surprises the market with the quantum, which today is not priced in, there could be a more durable rally. But given the global context whether the Fed goes on purchasing USD 60-70 billion a month for a few more months or quarters – I do not think is a bit of a game changer. But one thing it will ensure that liquidity conditions globally will remain benign for longer and that’s been the premise on which our market has held up so far this year.

Even if markets do not go up dramatically the case for a significant correction at least from a global liquidity point of view does not appear very eminent at this point in time. Upsides could be capped because the market has priced it in but downsides could be limited as well. Europe dealt its cards well for the near term; there is no event that one can see which can break the euro down immediately. One could see a mild pullback as the events exhausts themselves, but a major correction from a liquidity perspective is not impossible but seems unlikely for the moment.

This is one trick market; it is just focused on one thing. In the current context, if you say the government has fallen, it may react for half a day and then move on because global liquidity is there. It has become such a unifocused market at this point that something has to change with global liquidity or the perception of risk-on to change the contours of the market now.

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Periodically, you might see some pauses and consolidation, but one has seen these kinds of phases in the market where you go through many weeks on the trot when nothing else seems to matter. You can give the market whatever bad news, but it will not fall because liquidity is strong and that proverbial market is climbing on the wall of worry will come to the fore. We are in that kind of market, not to criticize it because liquidity is what bullish trends are based on.

QE1 was a big rally, QE2 was not that impactful even from market perspective, but for a few weeks of risk-on that seems to be quite enough. We have already had a three month kind of risk-on phase whether all that is happening in Europe and US can pave the way for a month more of this kind of extension and a month in these conditions at 7-8% on the index.

So that could still be quite meaningful, you need to be aware of that possibility, but you cannot get carried away as an investor because all that you see around you is not very supportive for stock price performance.

Nifty is on course for 5,450 and today there is a global event. Tomorrow morning we could get a situation where it is possible that global markets have a big day overnight. Coupled with that if the CCPA meet on fuel delivers this evening, even some kind of a token fuel price hike then tomorrow there is a possibility that the market is opened with some kind of a gap-up.

Our markets sometimes have a habit of pre-empting these events. Rather than tomorrow morning’s gap-up if the market is quite convinced that atleast they will do a diesel price hike of some magnitude this evening plus QE3 will come then the rally might come in the last one hour of trade today as well. That should be able to clear 5,450. If we do take 5,450 out then it maybe unlikely that the market stops at 5,480 or 5,500, we could then extend it to atleast 5,600 in the near-term particularly, if global liquidity remain abundant.

But there is an event, we do not know maybe the fuel meeting gets called off again and Ben Bernanke does something which does not please the markets. In that which case 5,450 may not be taken out convincingly in the near-term, so they are possibilities. By tomorrow morning you will know one way or the other whether we are forming some kind of a double top around here or we are going back to the February high. That is the call for the Nifty. But my sense is that traders will probably want to position themselves on the long side betting for an extension of this rally beyond 5,450 because of the confluence of liquidity events, which might shape up over the next 24 hours.

A lot of people are talking about how the Reserve Bank of India (RBI) needs to cut rates because of the index of industrial production (IIP) number. The RBI may not have much time for that kind of an argument, but whichever way it pans out, I do not think a rate cut from the RBI should galvanize the economy or indeed the market.

The market is not going up with that in mind; the market is going up because of other factors as we all know. I do not think the economy is in such a state that a 25 bps cut will do something, which will breathe fire into it or even a 50 bps rate cut will make such a dramatic difference. The problems lie elsewhere with the economy.

Tonight’s fuel price decision might have some bearing on the RBI so maybe tomorrow is a better time to talk about whether there is even a slim possibility of a rate action on Monday when the RBI meets. The two important triggers right now are what happens with the government decision this evening and more importantly what happens with QE3.