Volatility set to continue

MARKET WATCH

After a volatile and a crisis-ridden week, markets are set for a good opening on Monday. The US Fed decision to cut discount rates has improved the sentiments across the globe. Most markets were over sold as the fall was sharp and sudden. But markets may stay volatile next week as profit booking at higher levels is not ruled out.

Meanwhile, according to a poll by Business Standard online, 43.68 per cent out of the 174 votes polled said that the market has bottomed out. But the majority, 56.32 per cent voters, said that it was yet to bottom out.

The US Fed has cut only discount rate, the rate at which it provides loans to banks and said that it would remain in force till the liquidity situation improves.

This doesn't mean that the subprime mortgage crisis is over. Funds are facing liquidity crunch because they could not dispose of their bond portfolio would get liquidity support. Foreign investors are unlikely to resume investing in markets such as India as they did in July though valuations of Indian market are now slightly more attractive.

Broadly it can be said that for the time being, Sensex at 13,800 and Nifty at 4,000 are strong supports as the markets have bounced back with a vengeance from that level and they are expected to go further up when they open on Monday.

Though Indian markets do not have direct exposure to subprime assets, they fell because overseas hedge funds and FIIs were forced to book profits here to cover losses in the US as many of them had to provide more for marking their debt portfolios to market. From the stock market perspective, India will get more overseas funds when valuations are right.

Recently Morgan Stanley raised Russia's weightage because from valuations point of view, it became attractive. This has not happened here indicating that India is still not a cheap market. More than the valuations, appreciating yen suggests that the subprime crisis, limited to stocks and US bonds, is now spreading to other markets such as currencies.

Yen started strengthening against all most all currencies as investors started selling risky assets which they bought by borrowing in cheaper yen. This unwinding of carry trade resulted in yen getting strengthened by 5-8 per cent against many currencies.

Said Vibhav Kapoor, Group Chief Investment Officer, IL&FS, "Unwinding of carry trade is expected to continue as yen is traded above the level of $115." Once the markets are stabilised, more fundamental issues will come to the fore. Bank of Japan is meeting on August 23 to review interest rates. It may not raise the rate as yen is already strengthened but its observation will be crucial.

Says Paresh Gandhi, director, B M Gandhi securities: "Very strong yen against most world currencies will benefit Indian markets as many Japanese investors will find it attractive to invest in India. I expect huge funds coming from Japan as India will emerge as safe, strong and rewarding once the current markets stabilizes."

Next week is the central bank listing and as the derivative settlement will be nearing, it will be important to watch the trend.