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Market Watch | The French connection

Earlier it was the Dow and Asian markets that dominated mind space, at least for people who watch out for global cues every day, reports Udayan Mukherjee.

business Updated: Aug 09, 2007 20:59 IST

Earlier, it was the Dow and Asian markets that dominated mind space, at least for people who watch out for global cues every day. Now, after the French kiss of death, Europe has to be taken seriously as well. The sub-prime problem is no longer a localised cancer, it is spreading to other parts of the world. France's biggest bank BNP Paribas has frozen three of its funds, claiming it can no longer calculate their net asset values from sticky underlying assets.

More European banks and funds may follow.

Whatever the US Fed may say, this problem has not quite blown over yet.

The way our markets reacted on Thursday was also quite telling. This was a market that had just rallied 600 points from its lows and it just fell off a cliff at the first hint of trouble from a European bank. That is the extent of underlying edginess at this point. The screen may be flashing green but fear is lurking just beneath the surface. Fear of the unknown; this is not about local interest rates or an earnings slowdown, things we understand and can quantify; it is something most of us do not have the foggiest idea about. Also, we do not know if the impact is only on sentiment or serious liquidity withdrawals are to be expected from our market as a consequence of this global turmoil. Since there are very few answers, it is a case of the blind leading the blind, with all global markets mimicking each other.

Trading continues to be fraught with hazard. The sell-the-morning-rally strategy did not work out, people who went long would have lost money too on Thursday. This is a graveyard for traders. While investors are okay with a buy-the-dips strategy so far, they may need to modify it to buy the dips "slowly". The problem with a market that keeps bouncing back to new highs is that investors' eyes start lighting up on every pullback. This time, maybe it is prudent to go slow and let the global situation play out for a bit, even if that means missing out on a few opportunities. Better safe than sorry, as they say.

(The writer is Executive Editor, CNBC-TV 18)