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Market watch | Fear is the key

When markets sell off 7-8 per cent in two days, as most emerging markets have, you know panic is setting in, writes Udayan Mukherjee.

business Updated: Aug 16, 2007 23:22 IST
Udayan Mukherjee

The cut deepens, as the plot thickens in the US. Over the last couple of days we have seen the first real signs of capitulation across global markets.

When markets sell off 7-8 per cent in two days, as most emerging markets have, you know panic is setting in. Particularly so when currencies start falling as well.

Sales from foreign institutional investors are picking up in most Asian markets; a clear sign that hedge funds are beginning to see redemption pressures. Even the Yen has soared to above 114 to the dollar, a red light for carry trade watchers. The liquidity squeeze is on.

So far, India has not done too badly in a relative sense. Most Asian markets, with the exception of China, are down anywhere between 12 and 15 per cent.

India is down about 8 per cent. Hopefully, we will not catch up as more money gets pulled out of our market. That is a key number to watch: how much money is getting sucked out of the cash market. On Thursday, we did witness delivery-based selling in many large-cap names.

The fact that we saw our second biggest fall ever with the Nifty futures discount only at 33 points tells us that this was not a Nifty futures led sell-off alone, there was more to it.

Equally, stocks like Tata Steel, Reliance Industries, Bharti and ICICI Bank fell more than many liquid F&O mid-cap counters. This is diametrically opposite to what was happening in May 2006; back then it was the mid-caps that were getting butchered as the technicals adjusted. Now there seems to be serious selling from the global funds that were riding the emerging market party.

Having slipped 10 per cent from its recent highs, the market is reaching a crossroads again. As it approaches the 200-day moving average, the intermediate trend is in question.

Even if it falls to around 4,000 for the Nifty and bounces back, things will be okay. Any more and real carnage may ensue. Then it may get to a May 2006 kind of situation. Around those levels, however, some value buying should emerge from longer-term investors. For now, global markets are set to enter the phase where the ‘fear’ bit will be overdone. As it always does, on both sides.