Three on three. That's the score. Yesterday was the third time this fortnight that the Indian market didn't fall in sync with a big selloff in the US. On August 28, the Dow sank 280 points, the next day the Sensex closed 73 up; on September 5, the Dow dropped 143, we closed up 170 the next. This is very encouraging. So much so that even traders are beginning to spot a contrarian trade on any early morning gap down post these US selloffs. Shorts start to cover the moment there is a gap down and the bulls initiate longs. The index starts with a gap and then pulls back to close in the green. This is now getting to be a familiar pattern.
This raises hopes that the mindless day-to-day apeing of the US market is slowly drawing to an end. Sure, in the medium term sharp trends in the US market will find reflection in global emerging markets, it would be naive to assume all correlation has been snapped. Even if that were to happen, it would be a process. It can hardly happen overnight. While it's good that the markets are beginning to appreciate the economic disconnect between the US and Asia, the lingering connect will be because of flows. If the US gets into deep trouble, or global financial institutions do, the damage will be on account of withdrawal of money from emerging markets.
In this context, it is interesting to note that despite the recent sporadic selloffs in the US, not much money is going out of emerging markets. Whether this is simply in anticipation of rate cuts from the US Fed or whether portfolios in India seem very well hedged through Nifty options is difficult to say. Both could be true.
The chances of a rate cut just got higher with the US non-farm jobs data, hence emerging market investors may want to keep risk on the table for the moment. Equally, the vast amounts of Nifty put options bought by FIIs in the last few days suggest they are well hedged against likely drawdowns. That may explain why there's been no meaningful FII selling in the cash market during this round of global volatility.
Just six more trading sessions to go till the 18th and people have now started discussing a 50 bps rate cut. This isn't good news. The higher the expectations the bigger the room for disappointment. There may be few more twists and turns in the global arena in the next ten days.
(The writer is Executive Editor, CNBC-TV 18)