The Hindu Business Line : Equities await clues from disturbed global markets

Overseas players took some wind out of the Sensex sail last week as it was getting ready to score the quickest 1,000 riding on better-than-expected profit numbers. The agenda for 16,000 has been shelved. Downside protection is the immediate priority for Dalal Street.

FIIs appear to have sucked up just a part of the profit pile they were on. They also mopped up some liquidity and put a sudden break. But, most importantly, they could instil an element of fear.

It may be justified as a function of a herd mentality that caught on in the global markets as a first reaction to the 2-day rout in the US.

A simplistic weather forecast for the equities in the eastern hemisphere this week would read like this: A weak opening on Monday and followed by additional pump-outs if Wall Street falls further.

Deepening of depression in the valuations horizon is likely. A note may also be appended – There can be some tangible co-relation in the slump here to the overnight drop in the US indices, if any.

FIIs - the driving force

Is the FII ownership of India Inc a trend-determining factor on Dalal Street? In the short term perspective, very few would utter a clear no.

Granted that the realities of the US markets are removed from what we have here, either in scale or in character, but even in a partially integrated environ, immunities of the local markets to the global climate change have of late been reduced considerably.

But as long as Wall Street is not sure whether it is imagining a rapidly spreading credit crunch or a real danger lurking around, it is merely an uncertainty – a fear of fear – at times worse than actual one.

As of now, it has not been dispelled by any authoritative voice.

But it is not evidently manifest either. In such a situation the leveraged liquidity tends to go off the table double quick initially on successive loss minimisation and capital preservation strategies.

In the global asset markets now, leveraged positions, interlinked by cross-border illiquidity, represent more than 50 per cent of the activity. As fear feeds fear, cross border liquidity flow pattern goes awry as an immediate response. There is always a time lag before it returns to the usual risk-return trail.

Leveraged fears

Barely a week after Dow crossed its uncharted peak above 14000, fears of large scale defaults in the sub-prime market evidently spilled over to the leveraged buy-out finance and corporate lending markets. It, in turn, dented confidence on Wall Street.

In the next few days disturbed global markets would try to find a new level of sustainable leveraging and investments.

However, if a panic strikes and short selling replaces unwinding of longs, the global financial markets may see a crisis much broader than it witnessed in 1997 and this time India may not perhaps avoid it.

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