Dow rebound may trigger a relief rally today
MUMBAI: Domestic equities will, in all likelihood, rebound on Monday, tracing the trend in the US markets, which snapped their six-session losing run on Friday after the Federal Reserve cut its discount rate. The rate cut, which is aimed at easing the money supply situation in the world’s largest economy, may temporarily allay investor concerns.
But, the investor mood is likely to remain cautious in the near-term due to an uncertainty about the impact of any further adverse news in the US subprime market. Analysts said the discount rate cut, which will enable US commercial banks to borrow from their central bank at lower rates, is more of a sentiment booster.
“This move does not mean that banks will continue to lend and will not pull out money from emerging markets (including India), as the risk appetite has dwindled in a major way,” said a CIO with a private mutual fund.
Morgan Stanley, in its latest research note, said, “We believe that market participants, arguing for serious decoupling of India’s growth, do not fully appreciate that India is excessively reliant on external sources of risk capital and that these suppliers of risk capital tend to be indiscriminate in their behaviour at times of turbulence.”
Many top banks and hedge funds are reeling under the impact of the crisis in the US subprime mortgage market. This has resulted in many of them tightening their purse strings and withdrawing capital from several emerging market equities. Its impact was seen on Indian markets last week, which fell roughly 5% from the previous week’s.
Investors, who believe that the cut in discount rate could be a precursor to a cut in Fed funds rate, are likely to up their buying spree. They said a cut in the Fed funds rate — the rate at which banks and private deposit accepting institutions lend balances at the Fed to other institutions overnight — would have been a bigger boost for investor sentiment, as it lowers the cost of funds of banks and has an impact on consumer loans.
On Friday, US markets ended 1-3% higher, as investors were calmed by the cut in the discount rate by 50 basis points to 5.75%, despite the US Fed’s statement that “downside risks to the economy have increased appreciably”.
In the derivatives segment, analysts recommend investors to create long positions in the futures segment on Monday, but advice them to square it off the same day. Many analysts are reluctant to provide a target at higher levels as uncertainty persists.
