What now?

Stock markets across the world have been on fire since the US Federal Reserve slashed its benchmark interest rate last month by 50 basis points, and thereby beat market expectations. The Fed chairman, Ben Bernanke, has thus managed to bring about precisely the asset price bubble that he must have hoped to avoid. What the markets have not reckoned with so far, however, is the reason why Mr Bernanke did what he did "" he probably fears that the danger of recession in the US is greater than had been estimated earlier, which is the kind of message that should be lending an air of sobriety to markets instead of getting them dizzy at new heights.

While it is fair to point out that even in the past week of heady price increases, more than half the quoted stocks saw their prices fall, and therefore to argue that this rally has a narrower base than usual, it remains hazardous to predict which way the markets will turn next. For all one knows, the second quarter company results that will start flooding the news wires and air waves in the coming days will send stock prices even higher. After all, advance tax collections have been remarkably buoyant once again, suggesting that corporate profitability has not been affected. On the other hand, the fact that bank credit growth has slowed to a crawl should surely serve as a warning that things are not quite as hunky-dory as the cheerleaders of the market would have one believe. Also, recent surveys of CEO opinion have shown a dip in optimism with regard to the future.

Another argument in favour of viewing the short-term future with caution might be the recent dip in export and industrial production growth figures. However, the maximum deceleration in industrial production has been in consumer durables "" where the index gives excessive weight to products that have long since been ceased to matter. That means the index is not a reliable bellwether. Indeed, the argument could be that if the banks, who are now short of customers, start reversing their interest rate hikes of the past year and more "" encouraged as they should be by the fact that inflation rates have come down "" the current slowdown in credit-driven markets like automobiles and housing might also come to an end. In which case it could be celebration time again.