Relief rally sees gains for global markets

Relief rally sees gains for global markets

Mumbai: An unprecedented sell-off in global equity markets that eroded several trillions of dollars of global investor wealth and pulled India’s bellwether Sensex stock index down by some 28% since September, did a U-turn Monday as most markets bounced back strongly.

While cheered by analysts and fund managers, nobody was willing to bet how long this relief rally might last in what is still an unprecedented global financial turmoil. Or call a bottoming of losses.

The Bombay Stock Exchange’s (BSE) Sensex gained 781.24 points, or 7.4%, the largest one-day percentage gain in at least four years, to close at 11,309.09, even as all Asian and European markets gained significantly. The broader 50-stock Nifty index of the National Stock Exchange gained 211 points, or 6.43%, to close at 3,490.70.


And the Dow Jones Industrial Average was off to a strong start in early trading on the New York Stock Exchange, up about 525.84 points, or 6.2%, to 8,977.03 at 9pm India time.

India’s finance minister P. Chidambaram helped pave the path for the market bounce, after other Asian markets opened strongly, by reiterating ahead of trading that the Indian economy is in a good shape and promising that the government will take new measures to boost liquidity in the local financial system.

“If all the players in the economy remain confident and take informed decisions, I have no doubt that the Indian economy will weather the current storm and emerge stronger," Chidambaram said.

Temporary calm? Traders at the Bombay Stock Exchange on Monday after the Sensex gained 7.4%. The loss on the Sensex this year was about 48% till Friday. After Monday’s gain, the loss came down to 44.25%. Santosh Hirlekar / PTI

“The rupee’s rise was more because of the sentiment arising out of the equity market and the finance minister’s statement," said V. Kumar, chief dealer with State Bank of Travancore.

The rally was also a result of the Reserve Bank of India’s 1.5 percentage cut in CRR, or the banks’ cash reserve kept with the central bank, which kicked in on Saturday, releasing Rs60,000 crore into the system and bringing in temporary relief from the liquidity crunch, while halving the overnight call money rates from about 20%.

Elsewhere, after a week-long firefighting by central banks across the world, in the form of concerted rate cuts, bailout packages and infusion of capital, 15 European nations of the euro single currency bloc announced rescue plans, including guaranteeing inter-bank lending and buying of banks, during a Sunday summit in Paris. In the first step of the earlier announced bailout plan, the UK government on Monday pumped $63 billion (Rs3 trillion) into Royal Bank of Scotland, HBOS and Lloyds TSB. Germany and France also announced €500 billion and €360 billion plans, respectively. European central banks also set up credit facility for their commercial banks. The Japanese central bank is also expected to follow this line.

All these measures finally helped bring back a semblance of investors’ confidence, leading to a strong rally across global markets on Monday. In Asia, Hong Kong was up 10%, Australia gained 5.55% and Thailand 5.39%. Japan, however, was closed for a holiday after losing about one-fourth of its value last week.

Among sectoral indices, BSE’s banking index, or the Bankex, rose the maximum 12.3%. Among other indices, capital goods and consumer durables rose more than 9%. Among the Sensex stocks, Reliance Communications Ltd and Reliance Infrastructure Ltdwere the biggest gainers, rising 18.93% and 16.76%, respectively. ICICI Bank Ltd gained 16.75%.

Some of the global analysts and institutional investors are expecting a long relief rally, as equities world over remain highly oversold.

“If it is not the end of the world, we should see a rally in a week," said Andre Marini, president of French fund house Ceres Asset Management, a foreign institutional investor (FII) with portfolio exposure to Indian markets, in a telephone interview from Paris. According to Marini, markets are not too far from the bottom.

Equity investors suffered back home and across the world since September, when global markets began their sharp slump, as financial institutions in the US and then in Europe, succumbed to their increasing losses and lack of liquidity after the credit freeze.

The bear market in September, according to an estimate by Howard Silverblatt, senior index analyst at rating agency Standard and Poor’s, alone resulted in more than $4 trillion loss in global equity markets.

“We are experiencing a fear-driven crash that has created the most oversold market of the past 25 years," said Sean Hannon president of US-based Epic Advisors Llc., in a report last week.

The volatility index in the US is now about 60% higher than its previous high during the spectacular failure of Long Term Capital Management in the late 1990s. “Applying probabilities to this market, it is likely that we are approaching a large, positive rally," Hannon said.

The loss on the Sensex this year was about 48% till Friday. After Monday’s gain, the loss came down to 44.25%.

Deflationary risk

Though many are now expecting a relief rally of sorts after global investors started acknowledging the confidence building measures and rescue operations by policymakers to repair the world’s financial system, this may not immediately reverse the direction of portfolio fund flows across the Asian markets.

Also, most investors believe that the current financial crisis and its ripples will take a long time to settle down and longer for markets to go back to their bull market valuations.

“We are not going back there anytime soon, there could beyears of struggle," said Fraser Howie, head of structured products at regional brokerage CLSA Asia Pacific Markets, in a Friday interview from Singapore.

On the other hand, the biggest near-term risk for Asian markets, according to analysts, is the deflationary reality posed by the unwinding of structured finance. Regional equities are being dumped almost entirely because they are one of the easiest ways to raise quick cash.

Christopher Wood, chief strategist at CLSA, in his Greed and Fear report on Monday, said, “There is a real risk of more forced liquidation of Asian equities, along with other equities."

FIIs have so far sold a net $10.8 billion worth of Indian shares after buying a record $17.4 billion in 2007. The relief rally has not reversed the trend, as provisional data of BSE shows they net sold stocks worth Rs1,060 crore on Monday.

While risk aversion was the principal cause for capital outflow during the first half of this year, the need for quick cash will witness Western investors continuing to sell Asian stocks.

“Clearly, the quicker all this unwinds, the quicker asset prices bottom," Wood said.

Meanwhile, the six-member committee, headed by finance secretary Arun Ramanathan, to make an assessment of liquidity requirements in the economy met for the first time. It is scheduled to meet again in Mumbai on Wednesday.

Sanjiv Sankaran and Ashwin Ramarathinam of Mint, and Swati Bhat of Reuters contributed to this story.

Graphics by Sandeep Bhatnagar / Mint