The Swirling Markets
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Global stock markets are in uptrend, especially the US stocks with the Dow Jones, S&P 500 and Nasdaq indices closing at all time highs last Friday at 35,062, 4,412 and 14,837 respectively.
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Read more: Fed Tapering is Postponed
Several investors are sceptical of the extreme optimism in the markets. This has been the state of affairs for the past one year after markets rose spectacularly from their violent lows in March of 2020, following the outbreak of Corona Virus pandemic.
It's not always a good idea to look for reasons behind market movements. Maybe, we should consider drifting along the markets for some time. That doesn't mean we should throw away our caution to the wind.
It may be argued that global stock markets are at elevated levels due to a combination of easy money policies of central banks and optimism about global growth in the next two to three years.
Indian stock movement seems to be a blend of global and local. At the global level, markets may be forcing the hands of monetary and fiscal authorities to continue to remain accommodative.
The BSE Sensex and NSE Nifty 50 indices are near to their all-time highs, closing at 52,976 and 15,856 respectively last Friday. The USD-INR (dollar-rupee) closed at 74.41 and the 10-year G-Sec yield (6.10% mat 2031) at 6.16 per cent. Year-to-date, mid-cap and small-cap stocks have been doing much better than large-cap stocks in India.
The US 10-year Treasury yield has been moving in extreme range year to date. From a low of 0.92 per cent at the start of 2021, the yield quickly moved to a high of 1.75 per cent by end of March and now the yield has cooled off currently to 1.28 per cent.
Even the US 30-year bond yield exhibited the same swings, moving from 1.65 per cent in January 2021 to 2.50 per cent by mid-March before climbing down quickly currently to 1.92 per cent.
Even though the markets interpreted the FOMC (Federal Open Market Committee) statement of June 16th as hawkish, the US yields have fallen substantially since then. It is significant to note that the narrative of a hawkish Fed has proven to be wrong by bond markets.
As you know, asset prices (be it stocks, bonds or currencies) are not showing their real values because central banks around the world have distorted and destroyed the natural price discovery mechanism of markets. With so much zero-cost money sloshing around, how do we know the correct price of these assets?
It's better to watch the movement of major currencies, rather than looking at stocks and bonds alone. Any big movement in macro economy should reflect first in currencies. The US dollar index, DXY, moved from 103 to 90 in the past past 18 months. And now it's around 93--not a big movement if you consider a slightly longer period.
My theory is recent market movements in stocks indicate that markets may be expecting or may be forcing the hands of central banks (like the Fed and ECB) to remain accommodative and keep the liquidity taps open.
Risks always come from the unknown. The risk may not be from the virulent Delta variant of the Corona Virus or from rising inflationary expectations.
Let's wait and watch. As discussed earlier, it's no use scratching our heads over market movements very often. There are always some under currents, which we fail to notice very often.
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
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