The Hindu Business Line : Political uncertainties may dampen sentiment

Volatile trend ahead: A file photo of a trader at a share trading house in Kolkata. The uncertainty induced by external factors, such as unwinding of yen carry trade, pumping out of liquidity by hedge funds or the damage control measures adopted by the central banks of the developed world, would now be partly replaced by internal political jigs. In the process, the market volatility could, perhaps, be taken for granted in the short-term.

Any shift in stance, whether played out dramatically or silently, is better understood in retrospect. After Dalal Street closed the week on Friday afternoon, the Federal Reserve blinked for the second time last week to mark a change in its stance vis-À-vis the global market turmoil. Lowering of discount rate on Friday after Thursday’s dose of liquidity injection, second within a span of seven days, proved to be an effective market stabilisation measure. Wall Street responded positively after weeks of sleepless nights.

From fire to frying pan

But before Dalal Street could heave a sigh of relief over the weekend, the looming political uncertainty on the domestic front may have queered the pitch for this week’s sentiment.

Instead of opening with an upward gap on Monday, the market may attempt to price in a new risk – future of the UPA Government at the Centre – more aggressively than before.

Dalal Street’s reading of a perceived threat from the Left appears to have suddenly come into greater focus after a stand-off on the proposed Indo-US N-deal became apparent on Saturday.

But placing a market value on the not-so-unlikely withdrawal of outside support to the Manmohan Singh Government would be a difficult proposition.

The market factored in such a risk from time to time in varying degrees depending on the developments, ever since the formation of the coalition government more than three years ago. The stock market indeed gave thumbs down immediately after installation of the Government, but withdrew the discounts promptly.

But Dalal Street has always felt that there is an in-built caveat in such a threat perception – perhaps of a theoretical kind.

The Left has called for an emergency meeting on August 22-23, seemingly to articulate its stance towards the government. This means the perceived threat would dangle for almost whole of the week if the issues are not resolved at the earliest.

The uncertainty induced by external factors, such as unwinding of yen carry trade, pumping out of liquidity by hedge funds or the damage control measures adopted by the central banks of the developed world, would now be partly replaced by internal political jigs. In the process, the market volatility could, perhaps, be taken for granted in the short-term.

Number crunch

Stock markets are doomed to crunch numbers ahead of placing a risk premium or value discount when haunted by unknown apprehensions. Be it global credit crunch or a crunch situation forced by real politick. The daily valuation process this week would instinctively juggle numbers for rumours, news, and emerging trends. The market benchmarks are likely to represent a gross summary of all those complicated, often contradictory, developments. It may tend to overreact if the coalition ties break and bring the Government to brink. However, it would not be easy to ignore political developments in the short-term.

This week, market participants may be required to take several calls on the possible risks based on the options the political establishments adopt. Even if the UPA partners decide to walk a middle path and opt for a trade-off, the market will have to do the calculations as well.

The graded response for each of the probable developments has an equivalent number – negative or positive – for the indices. The resistances and supports may both be tested in a same day – theoretically providing opportunities for long-term investors.

More Stories on : Stock Markets | Outlook | A Ringside View

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page