A turn in fortunes

Reshma Krishnan

THE world stock markets saw a turn in fortunes in August from July when they were caught in a bear hug. While it might be premature to say that the markets are bullish, they definitely look better than last month.

Otherwise, it was a quiet month at the bourses with most of the more high profile markets posting positive returns but almost all of them uncertain on what happens next.

Two aspects stood out: One, the increasing influence central banks seem to have on the psyche of investors if not on their activities in the bourses. In the spotlight this month were the Bank of Japan, the European Central bank, the Bank of England and, of course, the US Federal Reserve. Two, Nasdaq becoming the mother of all bourses with the international indices shadowing the movement of the index.

August was a good month for Nasdaq. It opened at 3,685.52 and showed a 11 per cent return, closing at 4,103. The rally was despite tame economic data but a renewed confidence in the technology sector.

There are, however, differing interpretations among investors on the health of the US economy. While on the one hand, early suggestions such as the consumer price index _ which was up only 0.23 per cent compared to a rise of 0.6 per cent in July _ seem to indicate a cooling down, home sales data point to the strongest demand figures in seven years. Nasdaq is trying to find its feet and is nervously awaiting the results of a Fed meeting early next month. Maybe, that will help it find the right direction.

Nikkei had a good month as it tested the psychological barrier of 17,000. It has been trading in the 16,000-17,000 range the last couple of months. It opened the month at 15,814 on the back of lows, resulting from a debt-ridden financial sector, and rallied to a high of 17,181 and closed the month at 16,861, posting an overall positive return of 6.3 per cent.

This performance came despite a rate hike by the BoJ. The BoJ ended its 18-month zero-rate policy when it raised its rates by 25 basis points to 0.25 per cent. The reason why investors shun a market when rates are hiked is because a higher interest rate squeezes corporate profits by pushing up borrowing costs. The Japanese investor was, however, unfazed and the index actually went up by 2 per cent following the rate hike. This surge was mainly on the back of strong earnings forecasts. But the fast-pitched rally saw as rapid a fall as profit-taking began and companies started unwinding cross-border holdings. It remains to be seen if a further rate hike (which seems probable) will be met with similar nonchalance.

The UK markets rallied on the back of Nasdaq, with the US technology index rally raising confidence in technology stocks. The news that the Bank of England is to keep the rates unchanged was met with relief. Footsie-100 opened at 6,379.3 and ran a course similar to Nasdaq, posting a 3.6 per cent return.

The Paris bourse had a good month too. In fact, it was another record month for the CAC, which closed at 6,684, its third highest. Otherwise, the index made no substantial trends this month and moved broadly sideways within 6,300-6600 range.

The German DAX made no significant gains. It lacked direction and is unsure of its next move. It opened at 7,145 and closed the month up 40 points at around 7,185. The index is feeling the pressure ahead of the ECB meeting, designed to hike interest rates in a move to arrest the falling euro. While it might help the currency, investors are baling out ahead of the rate hikes, which they feel will affect the Frankfurt market.