Last week, the US Federal Reserve stayed on its course on lowering its assets purchase program, dropping it by USD 10 billion to bring it down to USD 55 billion a month. It also released interest rate forecasts that predicted rates would go up by 1% by end 2015 and 2.25% by end 2016. Janet Yellen stated that rates would start rising six months after the asset purchase program got over and that should be over by end 2014. Markets quickly discounted the development. Dollar Index rose, gold prices fell and yields in the US rose. Another development has been the stand off between Russia and the West over Crimea. Market analysts believe that any escalation of the crises will hurt emerging markets.
Regardless of all these headwinds, Nifty is inching upwards on course to achieving historic peaks by the time the elections got over.
Last week saw metal stocks getting hammered on account of growth concerns in China. IT and pharma sector underperformed the Nifty. Overall, the market was subdued.
Now, Crimea has voted in favour of Russia in a referendum. The US and EU are preparing to slap sanctions on Russia. Depending on the natureof the sanctions, the yellow metal may remain firm and equities may remain under pressure this week.
Market is showing signs of strong bullish sentiment partly on account of healthy Q3 CAD (current account deficit) number at $4.2 billion and partly on account of probable BJP led ruling coalition at the centre in the upcoming elections. India is also offering a better investment destination as compared to China within the Asian region and also amongst the fastest growing nations in the world. The nervousness with regard to the murky shadow banking system in China and its likely fallout, is working in India's favour.
The heavy selling pressure in the Chinese Yuan continues unabated. This may cause unwinding
of the Yuan carry trade at some point of time. This development coupled with the acceleration,
if undertaken by the US Federal Reserve Bank, of tapering of the Quantitative Easing program
could trigger a cascading effect in the global markets.
Carry trades involve borrowing funds in a nation with low interest rates to purchase high yielding
assets elsewhere. The initial cracks in the Chinese shadow banking system appears to be
surfacing. The dragon is stumbling.