The US stock market may have plunged below the lows of last November, but that is certainly not true of markets such as India and China. While the MSCI World index is down 14.4% year to date (as on 25 February), the MSCI Bric Index is lower by just 4.76%.
Are we seeing some kind of decoupling over here? Or, are we merely seeing the US and other developed country indices lose ground now simply because they hadn’t gone down as much as the emerging markets?
But there are many other differences between the current markets and the markets in October and November last year. Consider, for instance, that the Chicago Board Options Exchange Volatility Index, VIX, popularly known as the “fear gauge”, is much lower than the heights it soared to late last year.
There has been some improvement in the credit markets. Inter-bank rates such as Libor are now much lower than late last year. The TED spread, or the difference between the gap between three-month Libor (an average of interest rates offered in the London inter-bank market for three-month dollar-denominated loans) and the three-month treasury bill rate, has come down substantially.
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Yields on US treasuries have also come down, although they’re well above the lows of last year. Gold and silver indices are well above their October/November levels.
The US dollar index, however, has been once again going up, much as it rallied in October and November. And dollar-yen rate, which fell steadily from around 105 at the beginning of October to less than 90 at the end of last month, is back up to around 95.
To cut a long story short, while US equities may have broken through their November supports, the world is very different from what it was three months ago.
What could the changes mean? VIX seems to tell us that while the US markets may not be in panic mode, the prospect of a rapid rally from current levels is also not on the cards.
The problems in the inter-bank markets seem to have been sorted out, but it’s now the real economy that’s weighing on markets. That accounts for the low bond yields.
At the same time, the recent rise in yields globally are signalling that the bond markets are concerned about the impact of the massive government spending.
The rise in the dollar index is because of deteriorating conditions in the rest of the world, especially Japan.
And finally, while gold usually goes up when the US dollar depreciates, its latest rally has been in spite of a stronger dollar. That underlines continued risk aversion.
To sum up, the current indicators seem to show that while the credit markets have thawed a bit, the problem has now spread to the economy, which in turn is affecting the financial markets. Credit card delinquencies, for instance, have been rising rapidly in the US.
The market still seems to have a lot of faith in the governments’ ability to bail them out. The next down leg will come when that hope fades.
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Graphics by Ahmed Raza Khan / Mint