One way to find one's way through this maze of risks is to work with some thumb rules or trading themes that have emerged in the financial markets. Let us list them.
No more cheer on oil price fall: The assumption that falling oil prices was net positive for the economy is no longer in vogue. Oil prices are now a proxy for global economic prospects and if they drop, markets panic and go into what traders call "risk off". Never mind that often the price declines come on the back of news flow on supply factors, especially from Saudi Arabia and Russia. On a day that oil prices fall, expect equities to weaken and non-dollar currencies to take a beating.
Good news is bad news or is it: Bad economic data, especially weak unemployment figures from the US, increases the likelihood of its central bank holding rates, making sure that global liquidity remains cheap. This could trigger a brief rally in asset markets. However, this is a tricky one and all depends on the market mood. If the market starts fretting over another recession in the US, they could move the other way. Play this carefully.
Beware of a strong yen: Negative interest rates (for banks wanting to park excess reserves with the central bank) and a sea of yen liquidity mean that it has become a principal "carry" currency or the currency that investors borrow in to buy other more high yielding (and riskier) assets. When "carry trades" are active, the yen depreciates, as borrowers sell yen to buy non-yen denominated assets. Things work the other way round when the yen appreciates: it is a signal that investors are getting out of risky assets or unwinding the "carry trade". Thus, a strengthening yen means risk-aversion and bad news for our markets.
Be careful about China's service sector: That China's industry economy is wobbling is well known and this is reflected in the prices of the stuff that the economy used to guzzle - metals, oil and so on. However, what is holding it up is its expanding services sector that has fared much better. Thus, bad news of China's service economy would mean the entire economy is headed for trouble. News on China's services sector (available every month) is key for the market mood. A little aside is warranted here. The time for assuming that what's bad for China will be good for us is long gone. Any further hiccups on China's front will have immediate ripple effects on India. Bad news would raise the prospect of China letting its currency slip further and that will immediately hurt the rupee. Besides, China is seen as a driver for all Asian emerging markets and thus, adverse China news will drag all markets down.
The pound will remain weak: The fear of a Brexit along with the associated implications of a slowdown in UK-Europe trade, relocation of foreign direct investments away from Britain, a possible departure of Scotland from the UK and myriad problems regarding immigration and labour mobility are likely to play on the market's mind. The momentum, as traders call it, is against the UK and the British pound. Thus, selling the pound on rallies seems like a quick way to make money.
The caveat is that in the world of markets the only constant is change. While these themes make sense now, they could turn on a dime. Watch this space.
Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is principal economist, CII