Uncertain November for markets
November is the beginning of the Christmas holiday season across the globe. India celebrates Diwali, which is one of its most important festivals, in November. Financial markets globally usually look for a Santa Claus rally while Indian markets look for a Diwali rally. The Santa Claus rally and Diwali rally may not materialize given the uncertainties in economies and markets.
India saw disappointment with the RBI choosing to hold its key policy rate, the repo rate, in its policy review on the 30th of October 2012. RBI only cut the CRR (Cash Reserve Ratio) by 25bps in the face of weakening economic growth. The central bank lowered India’s GDP growth forecast for 2012-13 to 5.8% from 6.5% even as it raised inflation forecast for March 2013 to 7.5% from 7%. RBI’s lack of action on the repo rate coupled with its negative macro forecasts would hurt market sentiments. The Sensex, Nifty, Rupee and ten year government bond yield will see more negative movements than positive movements in November.
Global markets are feeling the effects of weak economies on corporate earnings. Third quarter 2012 results from chip makers to equipment manufacturers came in lower than expectations and more importantly the guidance from these companies were not too positive. Weak economic growth outlook has hit business sentiments the world over leading to many corporates reducing growth and earnings forecasts. The IMF has reduced world GDP growth estimates for 2012 as well as 2013 indicating the weakness in global economic growth.
The US presidential elections will get over in November 2012 and the elected president has to address the issue of the “Fiscal Cliff” facing the nation. US economy will see spending cuts and tax increases beginning 2013 and this is likely to pull down economic growth. Slow economic growth will make it difficult for the US to bring down its fiscal deficit.
Japan and China are facing sharp slowdown in export growth. Japan’s exports for September 2012 fell 10%, the sharpest fall in recent times, indicating the slowdown in global trade. China’s third quarter GDP came in at 7.4%, the lowest in three years. China is facing domestic over investment issues and export market weakness leading to uncertain prospects for its economy. China’s equity markets are the worst performing markets on a year on year basis.
Commodity markets are soft on the back of global economic weakness with the Reuters CRB commodity index that tracks a basket of 19 commodities down over 8% on a year on year basis and over 4% on a month on month basis.
Bond yields in the US and India are down year on year while the US Dollar is one of the best performing currencies over a one year period. Weak commodity prices will help keep down inflation expectations across the globe and keep bond yields low. Low interest rates should help domestic demand leading to improvement in economic growth down the line. In the meanwhile markets will struggle in November.