Markets in Crisis of Confidence?

The equity and commodity markets saw sharp swings on Monday as a crisis of confidence continued to haunt players amidst the global turmoil

In the international commodities market, gold tumbled more than $100 intra-day before recovering in afternoon trade to recoup most of the lost ground. Spot gold closed the day lower by 2.44 per cent at $1,616.38.

Similarly, silver fell more than 16 per cent to $26.09 in initial trade before recovering to $30.14 -- down 3.24 per cent. In the last three days, silver has plunged 30 per cent.

High volatility was seen in the stock markets as well. The Bombay Stock Exchange Sensex dipped as much as 280 points before recovering to close 0.69 per cent or 111 points. At the National Stock Exchange (NSE), the 50-share NSE Nifty index ended 0.7 per cent lower at 4,835.40. The NSE Volatility Index or VIX hit the highest this calendar year at 35.43.

Sources reveal, "We expect the market to remain volatile till there is an end to the Europe problem. That decision is getting postponed and the uncertainty is going up day-by-day,"We are just tracking the global markets. Since Europe and US futures turned positive, there was short-covering,"

Given the fall in commodity markets, metal and mining shares were among the worst hit after copper futures in Shanghai and London crashed as fears of a Greek default caused panic about a possibly sharp slowdown in global demand for industrial metals.

State-run Coal India, the world's largest coal miner, lost 5.2 per cent. The rupee also continued to be volatile. According to Clearing Corporation of India data, the rupee opened lower at 49.66 a dollar from the previous close of 49.43 at the Interbank Foreign Exchange market. It touched a low of 49.78 in intra-day trading in line with sluggish local stocks.

To counter the negative sentiment, the largest bullion trading platform globally, raised the margin requirements on gold and silver trading, after the morning crash in prices.

The minimum cash deposit for gold futures will rise 21 per cent to $11,475 per 100-ounce contract at the close of trading on Monday, while the minimum cash deposit for silver was raised to 15.6 per cent to $24,975. Following that, the Multi Commodity Exchange has also increased its value at risk-based margin to 8.5 per cent from four per cent earlier.

According to Research firm, "Industrial commodities hit the block before recovering a bit on marginal interest by investors to book afresh on lows. So, this trend of volatility with a downward bias is likely to continue."

Source: Business Standard/ http://news.in.msn.com/business
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Update - Indian Stock Market

It’s becoming increasingly difficult to make sense of what's driving the Indian markets.

While outward indicators seem to suggest a downward trend, a sudden spike seems to challenge this view altogether.

No wonder, mutual fund managers have been stuck with non-performing stocks over the last several years, as it's becoming difficult to predict where the markets are headed.

While many would say volatility is the new normal, it wouldn't be far off the mark to say this turnaround may be short-lived, as India's domestic problems and global risk aversion continue.

Nearly a month after the S&P downgrade, emerging markets (and equity as an asset-class) have underperformed the developed markets, as the all too familiar risk aversion comes into play.

India's year-to-date underperformance has meant it has performed relatively better than other emerging markets on a monthly basis.

So, what can one make of the sudden upward swings in the benchmark indices?

Undoubtedly, this looks like 2008, when emerging markets bore the brunt of the risk-averse behaviour of foreign institutional investors.

This time, the sell-off is not that drastic. For four consecutive days, the Nifty has closed above the 5,000-mark and technical chartists expect the same to continue.

Despite this temporary relief rally (where selective buying may happen), the downward pressure on equity could remain.

For starters, despite the sell-off, India's valuations have not yet come off meaningfully, or so believe analysts. India's valuation premium over emerging markets has corrected over the course of the year, but not meaningfully.

Also, with GDP growth slowing to 7.7 per cent in the first quarter of FY12, corporate earnings may continue to slow down, triggering off a fresh round of EPS downgrades.
This is expected after the second quarter earnings season kicks off in October. To make matters worse, the investment cycle is showing no signs of reviving.

The Reserve Bank of India's (RBI) own projection of credit growth is lower than its deposit growth rates. Immediately, there seems to be no indication to suggest major FII fund inflows into India, as near-term concerns remain.

For equity investors in India, it is somewhat paradoxical to note that another wave of global risk aversion would actually be quite positive. This is because it would be likely to deter the RBI India from further tightening at its next policy meeting on September 16. This is because such increased risk aversion would likely lead to commodity price weakness

While most economists expect a 25-basis-point rise, all eyes will be on a sign on the stance of the central bank governor.

Source: http://www.rediff.com/business/slide-show
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