It’s Tuesday morning and it is your last chance to react before the Fed speaks tonight. This has been built up as a mother of all events. Tomorrow, this hype may turn out to be a damp squib but today the markets will react to that. I think the Fed will cut rates by 25 bps.
Bugle or drums or both:
Both I think, everybody is being talking about this event for the last many weeks its become the focal point of all global attention as we have been saying repeatedly its not insignificant but it’s probably not that big event that people have made it out to be at least for us.
I think life will carry on tomorrow unless there is a big surprise. Bernanke gets pressurized by what the markets doing and so he will probably deliver something along the middle, which leaves bit for the bulls and bit for the bears, and everything doesn’t go out of the whack completely.
I suspect we will go with 25 basis points tomorrow and hope that there is no nasty surprise and if that’s the case then this Friday onwards we will not be discussing the Fed and we would have moved our attention to other matters squarely.
Asian Indices:
Nikkei has come back after a day’s holiday and not too strong for it 2% down, China is okay, Straits Times down 3%, Kospi is down 1.2%, Hang Seng down a bit so more red than green - going in a bit circumspect which is always good to go into events feeling little less bullish.
Nervousness in the system:
There is a bit of it. All Asian markets have had a very meaningful rally and this rally started with the feeling that the Fed has no option but to cut so now that you have rallied on that premise, just the day before you would probably have second thoughts that what if they don’t. In the last couple of days people have started talking about the discount rate again and saying what if they touch that and not the Fed’s fund rates.
There is an element of nervousness which is great which means some of the lighter hands may check out before the event, which makes the post event situation a bit more stable because you do not want a big sell off if the market does not get 50 bps or anything like that.
I think we are pretty okay but there is no great problem, I do not think that there is any huge India expectation, which has been built up on the Fed rate we have also been playing around looking at it because the world is watching so why should we be very brave against it but I think the way the Indian market is probably approaching it, it is a thing which you do not want to act before, just let it get out of the way.
It is like the Union budget in a sense, not much gets done and everybody works himself into a tizzy before the budget and when the budget is done it is a bit of a damp squib, people forget about it in two days but it needs to get out of the way, it do not want to take brave calls before the Union budget and I think this is probably a good analogy that it has become that kind of an event once it gets out in two-three days unless there is something dramatic, I do not think there will be any great change at all.
How does one prepare for tomorrow?
The US Fed Chairman actually respects and thinks about the markets quite a bit. The fair assumption that you make today is that - in the shoes of the Fed Governor do you want to rattle a market, which is quite rattled in any case. The financial markets are completely tizzy there right now. Do you want to, in that kinds of a situation inject more panic into the system by doing something, which they do not expect? You don’t want to do that - you just want to pat them on the back, don’t ruffle the feather saying guys we are behind you, its alright we will take care of the problem. We are the United States and we always bail out people and we never want to ruffle the system if what if we have to print a few more dollars.
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That’s generally what the US stance is. It is unlikely that they will come out with something, which is very dire this evening and we will all be surprised if they do not have any rate cuts at all. That’s the only scenario which we should worry about tomorrow morning, that the Fed comes up and when Bernanke says those are sins of Alan Greenspan, which I do not want to wash with my own hands, so I do not think we are ready for a rate cut right now, inflation is still a problem.
If that’s the body language or if that’s the message from the Fed tonight then we have a problem on our hands because there will certainly be a global sell off but short of that 25 bps, we fall a couple of 100 points in the Sensex, carry on from there, life wont change for us and if its 50 bps we are all happy, everybody rally, we also rally so it can be neutral, it could be positive. I am struggling how it could be very negative tomorrow morning but lets see how it goes keep fingers crossed in order tomorrow morning but after that I things will carry on.
Index and Midcaps:
The key thing is whether the market actually in the guise 3:16 of the US Fed meet is actually getting worried about something else. The IIP numbers are not very comforting, we are getting close to earning season so if this is the market we are saying we have had a great rally and Fed or no Fed, we need to pause a little bit and consolidate here maybe trade in a bit of a range, go back and test, not 4,000 but 4,200-4,300, trade in this 4,300-4,600 range for a bit before we are ready for new highs or it just wants to have this event out of the way and it is just waiting for that and then we go to new highs because not too many people are expecting it.
If you ask people, are we going to significant new highs? - Not too many people will tell you that right now. Given that people are not expecting it, it is entirely possible that the market actually makes that move once the Fed meeting is out of the way and does not correct now but corrects later when people get more optimistic and start talking about 5,000.
I don’t know but I think tomorrow will give you a good answer, not particularly bothered about what the early morning reaction is after the Fed meeting but tomorrow during the course of the day and day after you will probably get a sense of what the market is thinking. Does it want to pullback and consolidate some more or is it ready to go into new highs once this event is out of the way. So tomorrow the whole day of trading is quite significant because the screen will tell you what it wants to do next given that it is just circling in this 4,500 zone for the last few days.
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