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Market watch: A global scare

The sheer trajectory of the global rally, low volatility and the widespread complacency was suggesting that a bad fall was on its way, writes Udayan Mukherjee.

india Updated: Jul 27, 2007 23:56 IST
Udayan Mukherjee
Udayan Mukherjee
Hindustan Times

One should have seen it coming. It was just getting too easy out there. The sheer trajectory of the global rally, low volatility and the widespread complacency was suggesting that a bad fall was on its way. Now that the first jolt has set in, the trillion dollar question is: is this going to be one of those short, sharp affairs or a more protracted, painful process of purging?

Both scenarios look probable. It is possible that the fundamental problems of the US economy are far deeper than the equity markets seem to have priced in. There could be a can of worms out there. What has started with a sub-prime issue may spill over to the broader financial system and may trigger an unravelling of the credit-led mergers and acquisitions spree that has been pumping billions into the global financial system. Maybe the second half will bring worse news from the US economy, news that dents equity markets across the world. There are differing opinions on this issue, time alone can tell us how it will pan out.

Equally, it could be that the situation is not as bad and the markets, ripe for an overdue correction, are simply latching on to this as an excuse. Let us face it, it was beginning to look a bit unreal out there. Something had to give, markets had to correct. They always do. If this is simply a near-term trigger to let some steam off , then it may not be such a deep correction. Then it may fall a bit more and then consolidate, assess realities and move back up later during the year. For that, though, the fundamentals need to be in place. If the latter scenario is the one that plays out, this correction could be a godsend. It will skim off the froth, burn the complacence a bit and even get stock prices down to more realistic levels. All great building blocks for the next upmove.

To bet on either scenario is a tough call. The situation is fluid, the next week will be crucial. Maybe we will know this time next week whether this was a passing storm or the onset of a long, hard winter.

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

First Published: Jul 27, 2007 23:42 IST