Blasé Capital Looking West

Over the past few weeks, a strange unnoticed trend has beset the Indian stock markets. More so than before, although this was partly true in the past, Indian equities are moved by the previous night’s movements in the US markets. If the American indices go up while the Indian markets are closed, and investors are asleep, there is a leap forward in the morning, as excitement grips the buying. If the American markets are subdued, or lower, there is a selling wave in India. Rather than look at the Indian scenario, Indians take cues from the West. This seems logical because the US markets are more tuned in to the nuances of the Iran war, which was initiated by Donald Trump, and which can be stopped by him. Hence, how the American investors view the changes, and developments, becomes

critical for the others. If the US shows optimism, something good and tasty is cooking. If it shows signs of weaknesses, the food on the table is stale. In essence, we are constantly looking towards the west, beyond West Asia.

Obviously, in retrospect, more factors are added to explain the movement of the Indian indices. For example, yesterday, the Sensex, or the Bombay Stock Exchange index, was up by more than 1,250 points. According to a media report, “In the previous session, both the US and European markets had closed firmly higher. The tech-heavy Nasdaq Composite advanced nearly two per cent, and the S&P 500 rose more than one per cent. In Europe, Germany’s DAX and France’s CAC 40 each gained over one per cent, while the UK’s FTSE 100 ended with modest gains.” Amid the optimistic diplomatic scenario, with another round of war-ending talks in Pakistan on the anvil, Japan rose more than one per cent, and neared its late-February peak, South Korea surged three per cent, and Hong Kong was up one per cent. Even China was modestly up. The foreign cues, especially from the west, were positive for India, which were coupled with those from the east. Hence, as foreigners exit, Indians do not look at them but their markets.

Oil invariably plays a role. In effect, it is the bell-weather price that drives the stock markets across the globe. If it goes up, the indices dive down. If oil settles or comes down, stocks zoom. Thus, when oil was over $100 a barrel, equities nosedived. Now that the prices are below $100, and for two days in a row in the high $90s, investors see many positives. In the end, oil will determine the fate of most economies and, hence, the stock markets, and other asset prices. If it remains over $100, global growth will plunge, inflation will rise, as will interest rates, and currencies and real estate will take a beating. If the dollar remains high, bullion, including gold, will be depressed. If oil comes down to $90, or better mid $80s, the shock on the economies will be muted. If the peace talks progress, and near a ceasefire, and oil settles at $70, the stock markets and other assets will skyrocket. In the past few weeks, oil, instead of oscillating due to the war news, is fluctuating based on the nature of the peace talks, and peace-related statements.

Of course, what happens to national currencies matters. In the case of the rupee, this seems disconnected slightly with war and peace, especially in the past week or so. Strict measures by the central banks, seen as stringent by experts, have almost stopped short selling, and short positions. Forced to wind up the positions, the speculators, and even genuine banks took a beating, which pushed the rupee up. In the past few days, the rupee has weakened a bit, after gaining hugely in strength, but this is logical. The rupee is being strongly protected by the central bank despite its public claims that it has no support level in mind. Indeed, many feel that the support level is around INR 93, with a desire to not let it go beyond INR 95. The idea is to safeguard the Rs 100 mark at any cost, whether it implies reforms or no reforms, temporary or permanent. Criticism is acceptable, not the fall of the rupee. The stronger rupee provides fuel to the stock-buying pressure.

An analyst told a newspaper, “Hopes of resumption of US-Iran talks, Israel-Lebanon talks, and crash in Brent crude by $10 in two days augur well for the market in the near-term. The resilience of markets worldwide, despite the IMF’s warning about a global recession if the conflict prolongs, is an indication that the market is discounting an end to the conflict soon.” Other experts think that the large caps in India may go up this week but face pressure later. The trends will depend on the factors like the sale by the foreign investors. If the South Korean and Taiwanese markets continue to perform well, as they did in the recent past, money will move out of India to these emerging markets. Large caps will take a huge hit. In such a scenario, as was witnessed during the falling indices in March and April, the real gainers may surprisingly be the anti-heroes, small-caps and midcaps.