Global equity markets seem to sulking a bit going into the end of 2007. The chain of events following the last Federal Open Market Committee (FOMC) meeting has not exactly gone down well with the street. First, the 50 basis points surprise did not materialise this time. That took some wind out of the sails.
The US Fed’s statements on inflation fears and worsening growth soured the mood further. Then came the November CPI numbers in the US, ahead of expectations, further raising inflationary fears. The dollar strengthened, now to a 7-week high. All indicative of a growing feeling that rates may not be cut very sharply going forward. All this, even as the newsflow continues to be a bit tricky for the US financial sector with giants like Merrill Mynch expected to reveal more sub-prime scars. This is not exactly music to the ears of emerging market investors. On one hand US growth continues to weaken, while on the other assumptions of continued rate cutting are under threat from higher inflation. No surprise then that emerging market equities have sold off.
To be sure, this has not ballooned into an outright crisis yet. Emerging markets have got into these moods before but they have been shortlived. Maybe it is a bout of anticipatory selling before global investors pull the shutters down for the year. In any case, huge global swings are not expected in the last fortnight of the year. Yet, the unhappy coincidence of news events have sort of put paid to expectations of a year-end rally. 2007 has been a great year for emerging market equities but it probably will not end on a high.
{{/usCountry}}To be sure, this has not ballooned into an outright crisis yet. Emerging markets have got into these moods before but they have been shortlived. Maybe it is a bout of anticipatory selling before global investors pull the shutters down for the year. In any case, huge global swings are not expected in the last fortnight of the year. Yet, the unhappy coincidence of news events have sort of put paid to expectations of a year-end rally. 2007 has been a great year for emerging market equities but it probably will not end on a high.
{{/usCountry}}Does not matter, emerging markets still remain the place to be, over the medium term. Relatively speaking, at least.
The global weakness perhaps explains our savage selloff yesterday. The breakout above 6,000, which promised to take the Nifty to 6,300-6,500 levels, has not materialised. Instead, the index has got pegged back into the 5,500-6,000 range yet again, which is disheartening for the bulls. While there has not been large- scale unwinding in stock futures, some cracks opened up in the mid-cap universe too. Since traders have a healthy cushion of profit from recent gains, they should not panic too easily but if this global bloodletting continues for a few more days, unwinding could begin.
It is time to be vigilant, though not complacent. If stock prices come off very sharply, maybe it will provide some opportunities to get in and ride it into the first quarter of 2008.
Executive Editor, CNBC-TV18