What has caused a 900-point rally in the Sensex?
And how long will the gains last under the influence of these four short-term factors?
From a level of 15,749 the Sensex has rallied to 16,681 over the last few four days. Just last week, the markets were in a crash mode. Has anything changed suddenly in fundamental terms? If yes, what is it? If not, what is the likely path the market will take?
There have been several developments over the last two days that has caused this massive rally. The first is speculative burst caused by risk-on mood of global investors. In a risk-on situation—emerging markets, precious metals (risk assets)—suddenly see a gush of speculative money from the large pool of global capital. What signifies that the risk-on trade is getting switched on? This signal is something rarely talked about in India—the strength of Australian dollar. If the Australian dollar strengthens, risk assets rise. If the Aussie falls, risk assets fall in tandem. That at least has been the correlation so far. The Aussie has just completed a long decline that started in mid-April and has turned up sharply. Simultaneously, Australia has cut interest rates and its GDP growth has grown at a scorching pace, adding fuel to fire. This is first and real reason for the lift the Indian equities got on Wednesday. Of course, it is not necessary that this correlation will continue. Indeed inter-market correlations like these have a habit of breaking down just when you think it is axiomatic.
What powered the bulls further was at last some action from the government on the ‘reforms’. There are talks again that foreign investment in multi-brand retail and aviation would be allowed (Vijay Mallya needs a new source of money) and the PM himself called a meeting to clear stalled infrastructure projects. All this has emboldened the bulls (like it has many times in the past) that it can only get better from now on.
Finally, the switch has been flipped all over the world that the US Federal Reserve and Erocrats will do “all that is possible” to prevent a breakup of Euro and supply the world with enough of liquidity to keep the asset prices up. Today, Ben Bernanke, the US Fed chief is supposed to be addressing the Congressional Joint Economic Committee where he is supposed to hint at more “monetary accommodation.”
In short, a short-term virtuous cycle has kicked in: Risk-on mood, lower dollar, promise of reforms and global liquidity. All this has combined to electrify the equity markets. Notice that the commodity markets are rather subdued and that is an important indicator. Neither more monetary accommodation nor talk of reforms will mean much to the course of corporate earnings. Also, it is unlikely that the PM can do much to boost infrastructure investment. He simply is not the man to cut across ministries and states to get things done. Put it another way, at around 17,000+ the Sensex would start to look overvalued. It would need more of the same hopes to stay up, or a significant new set of hopes.
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