What price buoyancy?

Perhaps the most striking feature about the current run up the stock market charts has been the diffident tone of market participants, with many of them grumbling that the rally lacks confidence.

That may change in the wake of the Ambani settlement in Reliance, but such a fall-out will be temporary. It's noteworthy, nevertheless, that the Sensex closed above 6,900 on Friday in spite of rising international crude prices, on the one hand, and worries about the delay in the monsoon, on the other.

True, fears on this count may be premature, but then the market is notorious for reacting first and asking questions later. Other concerns include the relative overvaluation of the Indian market, a probable easing of growth in corporate earnings, slightly higher interest rates and, of course, the continuing global uncertainties.

Some of the buoyancy in the Sensex has been the result of speculation (accurate, as it has turned out) that a settlement between the Ambani brothers will be reached.

And finally, there have been warnings about the relatively low volumes in the market, the lack of market breadth, and an unhealthy building up of open interest in the derivatives segment.

The bears have for long argued that the bull run in emerging market stocks in the last two years has been the result of the unprecedented liquidity unleashed by the US Federal Reserve; and they have predicted that, as soon as steps are taken to curb liquidity, asset prices globally would fall.

But reality has not been so simple. In spite of a series of interest rate increases by the US Federal Reserve, long-term interest rates in the US have been falling, a trend that even Alan Greenspan has called a conundrum.

There are other conundrums. The US trade deficit continues to grow, and the dollar goes from strength to strength despite the trade deficit. And although flows to emerging markets were widely predicted to be dependent on a soft dollar, flows have picked up in spite of the US currency's new-found strength.

Yet another puzzle exists in Europe. Although the continent's economies are mired in stagnation, stocks there are at a three-year high.

Chinese industrial production and investment are reaching new heights, brushing aside talk of a slowdown. And finally, despite all the talk of the carry trade being affected by higher US interest rates and hedge funds being in trouble, foreign institutional flows to emerging markets have turned positive again.

In India, the fears of a slowdown in industrial production have dissipated.

Buying by mutual funds that had mopped up money through new issues buoyed the market in May, and the return of the FIIs has led to a fresh source of liquidity this month. Ultimately, global liquidity is still strong enough to prop up asset markets.

That is probably the reason why stock markets across the world have rallied from their lows in April. Whether the rally is sustainable in spite of all the global imbalances is the biggest conundrum of them all.