Will the good start continue?
Equity, gold, emerging currencies and bonds all rallied in January 2012 leading one to believe that all the bad news is over for markets. Will the January rally continue is the big question? The sharp rally across assets could partly be attributed to short covering as equities, gold and currencies closed December 2011 on a distinctly bearish note. Bonds rallied on the back of hopes of further monetary easing in emerging economies and on the fact that the US Federal Reserve will keep rates at all time lows till late 2014. Table 1 gives the month on month and year on year performance of markets across the globe.
The markets go into February on a bullish note and if economic data and the Greek debt issues turn out positive, the rally can continue. On the economic front the markets will watch out for US job numbers, China manufacturing and inflation data, India inflation number and Eurozone manufacturing data. The on going EU (European Summit) is being closely watched for signs of resolving the Greek debt issue, which has plagued the markets over the last six months.
Indian equities, Rupee and bonds had a good month in January. The Nifty and Sensex closed up by close to 10% month on month while the INR (Indian Rupee) gained almost 6.5% against the US Dollar (USD). Ten year bond yields fell 30bps month on month. RBI played a hand in the rally across equities, currency and bonds by cutting CRR (Cash Reserve Ratio), selling USD and buying bonds. The CRR cut by the RBI is an indication of further monetary easing ahead leading to positive sentiments across markets.
Domestic markets will watch the political situation in the country with elections happening across states including the largest state UP (Uttar Pradesh). Signs of anti incumbency or voter angst on inflation and other economic issues could turn market sentiments negative. Corporate guidance for the forthcoming quarter has not been positive and will prey on market valuations. The union budget for 2012-13 will be tabled in the parliament in March and news emanating from that front will keep markets on its toes.
February will see Indian markets consolidating rather than maintain the rally of January 2012 given political and economic issues.