Mumbai: Equity markets are moved by uncertainty at the best of times, but now they seem to behave like a teenager with wild mood swings. Consider this: In the past 30 trading sessions, the percentage change in closing prices for the Sensex has been less than 0.5% for only five days. This was supported by the India VIX, the volatility index, which has inched up to around 30 points, up by nearly half since the beginning of the fiscal year.
All these wild swings are driven by an event or the other which leads investors to paint a rosy or a black picture in the broad sense. Thus, a Sarkozy-Merkel meeting for dinner is seen as a signal that Europe might contain the debt crisis and so on. But the devil is in the details and those details are fuzzy in most cases.
Today’s 421-point gain in the Sensex was similar and shouldn’t be seen as some kind of turning point. Sure, one can ascribe some fundamental reasons for the build-up in equities. For one, Infosys Ltd, considered by some as a bellwether stock, reported better-than-expected second-quarter earnings. Moreover, it has guided for better rupee earnings for the rest of the year. Note that Infosys has a 9% weight in the Sensex and it would have carried the index some way up on its own, besides adding to sentiment.
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Secondly, take the IIP numbers. At first blush, the numbers are weak, they are worse than the modest expectations of pundits. But the weakness in factory output and the slowing economy story has been baked into stock prices for long now. So, investors might have actually taken that as a signal that the Reserve Bank may now finally pause on hiking interest rates.
Thirdly, Europe is looking up – we are not even going to get into reasons here; and US Treasury yields have fallen for a sixth day. So, perhaps, there is a feeling that risk appetite is coming back slightly. The rupee’s bounceback does suggest that there may have been some foreign buying though we have to wait for data.
All these reasons sound logical and provide a justification for the rise in the markets today, but have things really changed?
The short answer is No.
While Infosys might have beaten the market, there is no guarantee that other companies will do so. Earnings downgrades continue at a fast pace as Mint’s Mark to Market column pointed out. Inflation still hovers around 9%. The European crisis is still dragging on -- yes, despite all those meetings and dinners. Some US numbers might seem to be showing an improvement – but the standards for these have been lowered a long time ago.
Citigroup sums it up in a recent note: “Our risk lover indicator suggests that investors have fallen to the ‘distress’ level that was last seen in 2008/09.”