Either ways, India to benefit from global central banks' moves

There will be a lot of volatility and there may be sharp reversal in direction as well

 

Central bank actions and statements are again at centrestage and likely to shape the narrative and the trading trends across the world this week. The US Federal Reserve is unlikely to do anything substantial but Chariperson Yellen's statement will be parsed, with great care for nuances. The optimists believe that the statement will be generally upbeat. The pessimists believe the statement will be downbeat.

There are differences of opinion as to what would be upbeat or downbeat. The primary consideration for most traders is liquidity. The biggest fear for most traders is that the Fed will hike interest rates soon and that will reduce the cash available for speculation.

Read more from our special coverage on "FEDERAL RESERVE"

• Fed debated April rate hike but caution reigned due to global fears: minutes
• Global stocks dip, dollar strengthens on Fed talk
• Feds dovish stance supports metals and crude oil
• Wall Street closes at 2016 high as Fed signals fewer rate hikes
• Stocks and dollar hold breath for Fed, oil bounces

Nobody expects the Fed to hike immediately but it's possible that the Fed might hike in June and almost certain that it will hike inside calendar 2016. The Fed would only hike in a hurry if it saw strong the gross domestic product (GDP) growth in the US and a tightening labour market, which could create the preconditions for inflation.

Hence, reasonably steady GDP growth in the USA along with steady employment gains might actually be considered bad news. US labour markets are tightening now with unemployment down to levels last seen in the 1970s. This is resulting in higher wages and it could soon mean inflationary pressures. In itself, that would be an inducement for the Fed to hike policy rates.

Yet, the last time Yellen made a statement, which was about a month ago, she said the Fed would proceed with caution citing heightened risks in the global economy. If the Fed feels the global economy is facing less risks now, it could be more prone to hiking soon. Any statement that indicated such actions would be considered bad news, even though it be driven by strong fundamentals.

The Bank of Japan (BoJ) is also reviewing policy this week. Unlike the Fed, BoJ has a massive ongoing quantitative expansion. BoJ also has ongoing negative interest rates, which in theory, should encourage more speculation and dabbling in risky assets.

Unfortunately it doesn't seem to have worked. Japan's economy appears to be on the verge of recession again, if it hasn't actually slipped into negative territory already. What is more, the yen has strengthened, hurting Japan's exporters. The chances of BoJ taking more action in terms of either expanding the QE programme or pushing interest rates further down into negative territory seems to be high. There are already bets being taken on a weaker yen in the forex markets.

This is a puzzling situation at many levels. A bearish trend could develop, if the fundamentals are strong while a bullish trend could develop if fundamentals are weak. Arguably, India could benefit either way. If there is a promise of high liquidity, money would flow into "risky" Emerging Market assets. If liquidity nosedives, India could still receive investment because it is a front runner in terms of growth.

The inherent contradictions of good fundamentals driving bearish sentiment and poor fundamentals driving good sentiment imply that the trend may be unsettled. There will be a lot of volatility and there may be sharp reversal in direction. As such, the consensus opinion is that there will be an accommodative speech by the Fed Chairperson and some liquidity-enhancing action by BoJ. That would send the equity rally that started on Budget-day into its eighth week.

However, any positions should be taken with carefully maintained stop-losses because there could be sudden sharp reversals. The rally has already yielded a return of 17 per cent in the last seven weeks. It could be increasingly vulnerable as the rally hits resistance at higher levels.

The author is a technical and equity analyst