Markets in Panic Mode, 20th June 2013

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Markets in panic mode

Thursday | June 20, 2013

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Withdrawal symptoms seen as Fed prepares to taper

The panic seen after Federal Reserve Chairman Ben Bernanke’s announcement yesterday clearly shows that the world

financial markets witnessed withdrawal symptoms much ahead of the stimulus pullback process. Fear of removal of

excess liquidity from markets and its impact on the world economy led to sharp selling across risky asset classes

immediately after the Fed’s announcement.

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Withdrawal symptoms seen as Fed prepares to taper

The panic seen after Federal Reserve Chairman Ben Bernanke’s announcement yesterday clearly shows

that the world financial markets witnessed withdrawal symptoms much ahead of the stimulus pullback

process. Fear of removal of excess liquidity from markets and its impact on the world economy led to

sharp selling across risky asset classes immediately after the Fed’s announcement.

Since the spreading of the financial crisis, the world economy has been dependent on boosting

measures by central bankers. These actions helped sustain market sentiments even during testing times

and hence the withdrawal of the bond-buying program by the Federal Reserve, although expected since

the start of the year, is making markets react badly.

Emerging markets are witnessing withdrawal symptoms already, with capital flows receding and

currencies depreciating. Foreign Institutional Investors (FIIs) are not finding India a very attractive

investment destination and the improving US economic scenario is leading to a shift in investment

patterns from emerging and developing economies to the world’s largest economy – the US.

The time has come to reflect over the ideology that has been doing rounds in the global markets, that

the role of the US economy will fade in the years to come. Although phenomenal growth has been seen

in the emerging and developing economies in the past few years, the sustenance of growth is extremely

crucial and with the base and strong platform of the US economy, we feel that the country’s impact on

the world markets is of immense importance and its role as a lead market mover is likely to continue in

the years to come.

The Dollar Index in itself has a very important role in the world markets and when the tapering actually

begins, the currency is expected to strengthen, leading to a sell-off across commodities. After the

announcement the Dollar Index strengthened sharply by 1 percent and put pressure on commoditieslike precious metals, base metals and crude oil. What we have seen in yesterday’s sell-off, is a knee-jerk

reaction to the already expected move.

The Indian economy too will face a repercussion of the withdrawal and the markets have seen a major

negative reaction and the Sensex and Nifty have slipped sharply by almost 3 percent. A rise in US

Treasury yields is seen, while the Indian 10-year benchmark yield is seen declining.

The arbitrage opportunity for Foreign Institutional Investors (FIIs) is vanishing in the Indian markets due

to the increase in hedging cost as the Rupee has depreciated sharply. Hence, Treasury yields in the US

look more attractive at this point in time, making the Indian bond market situation less attractive.

In general, emerging markets would face the burden of this withdrawal plan as investors would move

towards fixed income assets, while riskier investment classes will face downside pressure. World equity

markets and the economy at large will undergo a weak economic phase once the withdrawal begins.

Capital flows to emerging markets could be hit in a big way, thus affecting economic fundamentals.






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Today’s Performance (Intra-Day Performance till 3.00pm IST)

Column1 % Chg LTP Near-term Trend

Dollar Index 0.6 82.13 Up

Rupee 1.9 59.8 Depreciate

Euro (0.7) 1.3193 Down

Spot Gold ($/oz) (3.7) 1301 Down

MCX Gold (Rs/10gm) (3.5) 27102 Down

Spot Silver ($/oz) (5.7) 20.1 Down

MCX Silver (Rs/kg) (5.3) 41638 Down

LME Copper ($/tonne) (2.1) 6830 Down

MCX Copper (Rs/kg) (0.2) 407.3 Down

LME Aluminum ($/tonne) (2.1) 1796 Down

MCX Aluminum (Rs/kg) (0.3) 105.3 Down

LME Nickel ($/tonne) (3.0) 13812 Down

MCX Nickel (Rs/kg) (1.1) 824.9 Down

LME Lead ($/tonne) (2.7) 2015 DownMCX Lead (Rs/kg) (1.0) 120 Down

LME Zinc ($/tonne) (1.9) 1829 Down

MCX Zinc (Rs/kg) (0.1) 107.4 Down

Nymex Crude Oil ($/bbl) (1.9) 96.38 Down

MCX Crude (Rs/bbl) 0.1 5787 Down

Gold prices slip below the $1300/mark..further downside seen in today’s trade

If Dollar Index strength continues in the

near-term, Spot Gold prices could

continue to trade with a downside bias






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MCX Gold Prices fall below Rs27,000….

Indian Equities Correct Sharply

The stable trend seen post the April

crash was due to Rupee depreciation






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World markets over react to the Fed’s statement……

Federal Reserve Chairman Ben Bernanke confirmed that the US economy was growing at a strong pace

and that the central bank could now begin with the tapering in stimulus. World stocks, commodities andbonds slumped on this statement. However, US Treasury yields on the 10-year note rose to a 15-month

high of 2.36 percent. The Fed is more confident about its growth than before and this has set the

sentiments that improved economic activity would surely lead to a removal of liquidity that boosted

asset classes.

However, Ben Bernanke left two cues in terms of the future as he said that – the Fed could stop

reducing its bond purchases or raise it again if the job market does not stabilize. It was reiterated in the

Fed’s policy meet that interest rates would not be increased until the unemployment rate hits 6.5

percent or lower, given that the inflation outlook remains below 2.5 percent. Also, the withdrawal

process would begin once the unemployment rate comes around the comfort level of 7 percent.

Gold ETF Holdings fall, investors panic

The yellow metal has slipped below the lows seen in April’13 and the reaction of investors has been

extremely bearish as Gold ETFs were shunned aggressively and the SPDR Gold Holdings fell below the

1000 mark to 999.56b tonnes yesterday, eroding $23 billion in the funds value. Over the year, holdings

in the SPDR Gold Trust are down around 26 percent and further decline could be seen if sentiments

continue to remain choppy.

Rupee Depreciation

From curbing gold imports to an increase in duty on gold imports, the government has been making

efforts to reduce its high current account deficit and curb depreciation in the currency. Investment

inflows are witnessing a reversal and efforts are now being directed towards increase in FDI so that the

risk associated with the capital outflows is minimized.

However, looking at the current scenario, it is clearly evident that the world markets are impacted by

the Fed’s move and for the second-half of this year, further developments by the Federal Reserve will

provide direction to the international markets.

Stability in the Rupee is expected after the initial pain is absorbed in the markets and when the Indian

economic fundamentals correct. However, this in our opinion will take a long course and until theeconomic platform looks steady, weakness in the Rupee will continue.





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Gold has lost its safe-haven status… other asset classes eyed

The April’13 crash in gold prices in itself indicates that the safe-haven status of the yellow metal almost

vanished as investors shunned gold ETFs and moved away from gold. While physical demand had

increased due to a sharp correction in prices, what cannot be ignored is the fact that the price decline is

continuing steadily. Faith in the commodity has faded and we feel that overall risky assets will also feel

the pain, leading to increase in investment towards the fixed income market.

A weaker Rupee – worrying factor for commodity imports, inflation risks seen

Cost of commodity imports in India is expected to rise from the current levels despite a correction in

commodity prices as the Rupee has weakened sharply, thereby threatening rise in inflation. This will

make the government struggle amid a situation of high current account deficit, lower capital inflows and

an overall slowing economy.

Higher foreign debt portfolio to affect Indian companies

The current value of the Rupee will lead to sharp increase in the debt costs for companies with a foreign

loan portfolio. Hence, a weaker Rupee is impacting the overall Indian economy and performance of

markets in the short-term is expected to be negative.

Markets in Panic Mode, 20th June 2013

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