The broad based fall in commodity prices has been accompanied by a bounce in the US Dollar where the USD index has rallied by nearly 5% from its bottom. After the first week of correction most analysts started giving out buy reports on these commodities despite the fact that there is a real demand destruction happening in a large number of commodities due to increased prices. Given the state of the global economy where real income growth continues to remain very low on an aggregate basis, this kind of price up move is difficult to absorb. We are today not in the hay days of 2005-2007 where issues of unemployment, low growth, and Fiscal deficit issues did not exist. The money printing by the US Fed has played the biggest part in the commodity rally given the fact that the actual credit growth by banks in the
The other important factor to note is that when corrections start after a blowout rally they never end in one week. As such irrespective of the price damage in the first week there will be further corrections over the next few weeks as the speculative fervor turns from buy on dips to sell on rise and the large scale long positions start converting into shorts. Although it is difficult to give the extent of correction to follow, intuitively I would believe that the follow through correction will be similar in magnitude to what we have already seen over the last 10 days. Crude prices are back to levels where they were when the Libyan crisis had started to unfold. This just shows how much speculation was contributing to the oil price upsurge as the Libyan crisis is nowhere near to resolution at this stage. A resolution in
Various economies have started to slow down and the growth figures coming out of various high growth emerging economies like
Subsequent to the RBI's monetary policy the Indian markets have underperformed due to concerns of slower growth and impact on profits and investments due to higher interest rates. The biggest concern for the Indian markets since November last year has been that of inflation. It first started with food inflation, went on to primary products inflation and then finally to manufacturing inflation. As per figures released today food inflation on a Year on Year basis is now down to 7.7% from levels of 20% in January 2011. These are figures pertaining to end of April when the global commodity price correction had not yet started. The index of Food Articles in the WPI was at a level of 196.5 as on 1st of January 2011 and has come down to 184.7 as on 30th of April. As such on an overall YoY comparison inflation is still high but sequentially over the last 4 months it is down by nearly 6%. Similar is the case with primary articles where on a YoY basis inflation is at around 12% but from 1st of January it is a negative 2.5%.
As such in my view inflation will fall much faster than what RBI has projected in its recent monetary policy. This will reduce one of the biggest roadblocks to
The other fear in the minds of investors is the impact of the end of QE2 on the Indian markets. The answer to this is not simple. Once the overall money printing from the US Fed stops and all other major economies remain in a tightening mode the stock of money available will get constrained. This will have a more profound impact on commodities rather than stock markets in my view. The Indian markets have infact fallen in the tenure of QE2 as such its withdrawal, mainly due to its impact on curtailing inflationary pressures would be positive for
As such the second half of this year should see a reversal of the inflation trade and a strong bounce back in performance of high growth Emerging markets including
The results season is past the half way stage and it has been a mixed one which has largely led to downgrades and earning expectations for the current year i.e. 2011-12 have on an aggregate basis seen downgrades of 4-5%. This has also been reflected in the way the markets have moved. Analysts are today building in high cost pressures due to input costs, slower growth and a much tighter monetary policy into their projects. All of these might not necessarily fructify.
I continue to maintain my view that the February/March low is now a good base for the markets and if we get to those levels sometime during this month that should be the bottom for the current year from where we should see a 25% kind of rally by the end of the year.