Business Daily from THE HINDU group of publications
Thursday, Jun 22, 2006
Business Daily from THE HINDU group of publications Thursday, Jun 22, 2006 |
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Money & Banking
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Interest Rates Markets - Stock Markets Columns - Financial Scan S. Balakrishnan
One must hope global progress does not get derailed because of artless Fed talk and even more artless stock traders.
Are they prescient, omnipotent wise men or blind men trying to describe an elephant? So confusing are the signals emanating from the members of the Federal Open Market Committee, the interest rate setting body of the US Federal Reserve. First off the mark was the Fed (and FOMC) Chairman, Mr Ben Bernanke, with his talk of a pause in the monotonous increase of 25 bps in interest rates at every Fed meeting since June 2004. Just when everyone thought it was a done deal, he switched tracks, voicing concerns about inflation, which means more rate hikes are on the way. His latest speech was another about turn - the pass through of rising costs to final prices has thus far been weak. As a result, markets have become unusually twitchy. They are on edge reacting violently to every little twist and turn in language. Mr Eisuke Sakakibara, one of Japan's high priests of finance (once dubbed Mr Yen) advises Bernanke to mind what he says, as, globally, a lot rolls on Fed chief speak. Volatility has, become a way of life - in fact a lot of sophisticated players thrive on it. But it can - and does - unsettle consumer and business confidence.
IPOs struggle
The recent gyrations in the Indian stock market have forced IPOs to postpone and that could affect the pace of new investments. It is also unfortunate but true that predatory IPO pricing is the order of the day. For issuers, it is extraordinarily cheap money with no obligation to give returns or repay. But investors are no fools. Their response is overwhelming in booming markets but crashes to zero in falling markets. In short, both want quick money and profits. Lost in the wayside are the fundamentals of the issuers' projects and businesses. The sufferer: none other than the economy because badly - needed new investments are deferred and become hostage to the whims of the stock market. What has happened in recent weeks is the other side of the globalisation coin. When the going is good, it is all milk and honey, but if the tide turns, domestic sentiment is also hit by bad news abroad and overflows into the economy. The cataclysmic fall of stock prices is easily explained by the huge leveraging, i.e., investing mostly with borrowed money. These players take fright and flight when they face margin calls made worse by short sellers. Recall the old saying, for want of a horseshoe, a kingdom was lost? To stretch a point, one must hope global progress does not get derailed because of artless Fed talk and even more artless stock traders.
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