Equities Took Rest While Commodities Shine

Last week saw emerging market Equities taking a breather after a steep rise from August month lows, while commodities like Gold and Crude Oil scaled new highs. It will be worthwhile that emerging market equities take some consolidation before they start upword march again, it seems stock markets want to see what the US federal reserve does on the interest rate front on October 30. This will be crucial factor in deciding ongoing sharp rally in emerging markets. Also with Japanese central bank deciding to hold rates at 0.5%, implying that deflation might re-surface in the absence of any solid economic growth on consistance basis, money from japanese investors will now look for growth which is happening outside their country, especially in India, China, Taiwan, HongKong, Russia. Having said that, emerging economies will be the key beneficiaries of this huge money flow.

Dow Jones Erupts Again

Dow Jones staged a remarkable 200 point rally yesterday with a strong belief that US fed will again cut the interest rates by 50 basis points in October. Dollar also got support from stock rally. Crude oil also cools down a bit but still hovering around US$80/Barrel. US economy is still not out of deep problems and hence dollar investors are rushing to buy into riskier assets of emerging markets like India, Taiwan, Singapore, HongKong, driving valuations of assets(stocks) in these markets to absurd levels. Well so far so good, if US fed listens to market participants and don't follow economics rationale, then we may be heading for another rate cut and further inflated asset prices.

Wheat, Maize And Crude Oil Prices

Price of commodities like Wheat, Maize And Crude Oil is rising continously for the past few months and they are creating new records. From inflation point of view, it's a cause of concern for monetary policy makers as they have to strike a balance between growth and inflation. Already financial markets are facing a fall out from slower growth expectation in the US, Japan, and Europe.
Asian countires like china are raising interest rates in order to contain a rapidly growing economy and India is also far away from softer monetary policy. Volatile times ahead for stock markets as they have to face lot of uncertainty ranging from elections next year in the US to slower world GDP growth to rising crude oil and food prices to rising fears over a possible attack on Iran and also tighter credit markets across developed nations and narrowing interest rate spread between developed countries and Asian tigers.
Happy Investing.

Fed Rate Cut Or Not?

Will the US federal reserve cut the interest rate in his september 18 meeting, if yes then by how much, is the puzzle that stock markets are grappling with. Any cut above 25 basis points will indicate deep scars left by subprime mortgage mess and subsequent dampening effects on the economy and job losses and thus concern for stocks in the US and on nations which are export dependent on US. Japan is already facing stronger yen problem because of yen carry trade unwinding and its effect on its exports. Asian stocks have shown good resilience and will continue to outperform the US and Europen stocks as money in these developed countries will flow to growing economies(asian) in order to beat low returns available in their home markets.

Asian Stocks Close To Their Old Highs

Asian stock markets are close to re-claiming their heighs they have made prior to stock meltdown due to subprime mortgage mess in the U.S. This shows their resilience towards global shocks because unlike previous shocks like in the late ninetees when Asian financial crisis hit them very hard, this time around they have plenty of foreign exchange reserves with solid backing of a growing economy.

U.S. markets too are stabilising with european markets too following the suit. As mentioned earlier in the blog during the crash that smart money was busy buying strongest businesses in panic moments, their strategy paid off very well this time too.

Chinese Stocks

Chinese stock market has weathered the storm created by U.S. sub-prime mess, all other markets have fallen sharply. Prime reason behind the outperformance of chinese stock markets is that it's domestic investor/trader participation is much more than dependance on foreign institutional money flows in their markets. All other emerging markets largely depend on foreign flows to drive their markets especially Indian and south korean markets where foreign flows are an important barometer for market direction. Also with chinese economy growing consistently 10% and above for more than past one decade is reflective of investor confidence in that market.
It will continue to outperform all other markets if it continues it's growth outperformance as compard to other economies.

Commodities Are Cooling

Commodity prices are cooling off for the past few trading sessions and this is a very welcome sign with regards to overall inflation scenario. Also with concerns of U.S. economy slowing down because of lower consumer spending and weak housing sales and serious credit squeeze in the U.S. mortgage market, commodity prices have began to ease of substantially from their recent highs.

However crude oil is still trading above U.S.$70 per barrel for the past few weeks and is a major concern.

Will The U.S. Fed Cut The Rates?

Market players are placing huge bets on a possible Interest Rate cut by U.S.Fed in it's next speech in September following the liquidity crunch in the financial system due to huge losses suffered by large players in the U.S. sub-prime mortgage paper. They also believe that to give a push to U.S. economy and to stabalise slump in the U.S. housing market, Fed will cut the rates.
However their bets can go wrong due to many reasons, one of them is since Inflation in the U.S. is still a cause of concern as Fed himself pointed out in his many speeches, also due to recent pumping of dollars in the system Inflation has the chances of getting a head up. Crude Oil is still above U.S.$70.
So markets will be watching Fed speech very eagerly and any dissapointment on rate cut can induce volatility and more nervousness among investor/trader fraternity.

Central Banks Pour The Money

Seeing liquidity crunch because of sub-prime mess in the U.S., central banks of major economies are pouring huge money in the financial system.
Several leading funds of major investment banks and institutions have been closed due to losses that they have incured in sub-prime investments in the U.S.
Yen has been strengthning for the past few days and this is also a cause of concern, critical level to watch out for yen against dollar is 115. This is very important from the yen carry trade point of view as it has in the past and in present providing huge liquidity to the financial markets.
It will also be very interesting to see if Japanese central bank raises the interest rates this time or not, again very important for yen carry trade to keep going.