Markets rebound hinges on hitting the lowest point

What signals do major asset classes offer?

Currency is the largest market of all and also the most understated and ignored. Since Independence, India has been import-dependent. Our currency peg determines our inflation to a large extent. A strong rupee will signal a robust economy, lower landed costs of fossil fuels, which constitute two thirds of our total imports, and essential imports. It also means lower payouts towards interest on foreign borrowings. There is a misconception that a weaker currency facilitates exports. In this day and age, a renegotiation clause is included in the contract and the buyer denies you gains on account of currency fluctuations.

How are investors reading bond yields?

Bonds are the second-largest market in terms of turnover. They are the fountainhead of liquidity, which moves the financial markets. At present bond yields are falling as nervous investors ditch other riskier assets and hide behind the safety of sovereign guaranteed bonds. As high net worth individuals, who actually move the needles and gauges in the markets, park their money in sovereign bonds, that money is denied to other asset classes such as equities. Bond yields must stabilize or even rise a bit from the sub-6% level that was reached on 8 May in order to give investors some assurance.

What about commodities and metals that shine?

Commodities, the third-largest market by turnover, are raw materials consumed by corporates. This consumption needs to start increasing to indicate that the engines are humming again. It is crucial that the bullion stabilizes and industrial metals and energy counters also rise as consumption and manufacturing activity pick up pace in the days ahead.

What clues does the share market provide?

Equities is the smallest market by turnover, but one with the highest recall value among investors. At present, there is some disconnect between the cash (spot) markets and the derivatives segment. The indices (Nifty and Nifty Bank) are rising higher in the spot segment and lagging in futures. Old-timers called it “undha badla" or basis inversion. This is a sign of selling at higher levels in the derivatives segment. To reflect any optimism about the economy, the market has to rise sustainably and the futures must trade higher than the spot.

Are the major asset classes all that matter?

No, confidence does too. There is a crisis of confidence in the market now, which is showing up in poor volumes and low open interest across asset classes. The market regulator’s move to raise margin deposits to protect the markets from rampant speculation also played a part in curbing traded turnover. These curbs will likely be lifted in June and will go a long way in bringing traders back to the markets. All these conditions must be met simultaneously.

Vijay Bhambwani is the editor of Fast Profits Daily.