Skittish markets

The tea leaves from the various markets""financial, commodity and asset""are becoming increasingly difficult to read. All markets are in turmoil, with volatile price movements but no definite trend in any one direction. Events that began with the US Federal Reserve hiking interest rates by 0.25 percentage points to 5 per cent on May 10, and ended with the recent increase in oil prices due to fresh tensions in West Asia, have resulted in jittery investors across the world. But even as stocks have fallen, commodity prices have re-started their upward climb, while the rupee is on a slow slide.

After the Fed rate hike, several central banks hiked interest rates across the world, including the Bank of Japan, which moved to end its zero interest rate regime. Though central banks have been increasing interest rates for a few years, there had not been much of an impact on other markets. But this time there has been a significant correction across markets. In May and early June, there was a run on metals such as copper and aluminium, and an exit of global funds from emerging markets. While some of these commodities or markets recovered after a sharp correction, none has come back to the May levels. And as US treasuries became more attractive at higher interest rates, the dollar has actually gained ground since the middle of May, which is the opposite of what most experts would have predicted.

All this is against the backdrop of growing nervousness about what might happen in the oil market and how that might affect the world and national economies. Many markets are in a state of disequilibrium as players try to work out the impact of rising interest rates and record crude oil prices. The price of gold is a clear indication of this, as the market struggles to find the right price for a physical or financial asset. The day the Fed hiked its interest rate, gold traded at about $700 per ounce. Two days later, it rose to a new high of $725. A month later it was down to $567 in mid-June, and has now risen again to $653. The real estate market is another area where prices have settled after a runaway boom; yet there are straws in the wind which suggest that there might be a fresh uptick!

Amidst all the uncertainty, some things are more or less certain. Interest rates and oil prices are likely to rise or stay at current levels; and stock markets, real estate and most commodities are unlikely to cross their previous highs. Higher inflation, which is a growing threat, could lead to lower consumption and/or down-trading. Thus, companies will have to face cost pressures plus slower demand growth. Maintaining the profitability levels of the past two years is therefore going to be difficult for companies. Money flows from FIIs are also expected to slow down or turn negative, which will push down stock prices. Higher interest rates will also see some investors shifting more of their savings to fixed income securities. And gold, which has emerged as a safe haven once again, is likely to remain in the limelight. As investors wait for clarity to emerge, it is time to remember John Pierpont Morgan's reply when asked what he thought of stocks: "They will fluctuate," he predicted.