Mayhem in the markets

August 05, 2011 10:46 pm | Updated November 17, 2021 12:33 am IST

The intense selling pressure the Indian stock markets have been experiencing recently is in line with the great sell-off that is rocking the global markets. In eight trading days since July 26, when the Reserve Bank of India hiked the interest rates by a larger than expected margin, the Sensex has lost 1,178 points. But it is the developments in the financial markets of Europe and the United States that have had a far greater influence than the domestic factors. International financial markets have witnessed three sharp shifts in just a few weeks. In the U.S., the S&P 500 has fallen on eight of the past nine trading days losing about a tenth of its value in the process. On Thursday alone, the Dow Jones industrial average and most major stock indices around the world sagged more than 4 per cent. With Thursday's fall, the three major American indices had given up all the gains made so far in 2011. Europe has not fared any better. The FTSE 100 is down by almost 7 per cent and the DAX by 11 per cent since August 1.

Currency markets too have had their share of turmoil. As fearful investors turned to safe-haven currencies, the yen and the Swiss franc, they appreciated sharply, eroding their countries' competitiveness. Central bank intervention to stem their rise has not been wholly successful. After the stock and currency markets, the market for bank funding is sputtering, especially in Europe. Inter-bank credit lines are drying up. This development is a direct consequence of the expanding debt crisis in the eurozone countries. Banks which have lent to the weaker countries are cowering as they wait to take the hit. Consequently, they have become extremely risk averse. In general, the market shift seems plainly driven by a wave of pessimism and fear about the economic outlook. In the U.S., the sense of relief that immediately followed the aversion of a default in the the last minute has given way to deep concerns over the economy and employment prospects. Investors are no longer as optimistic about the strength of corporate profits as they were in the first half of the year. However, even as the near-term economic outlook is anything but bright, fears of a double-dip recession appear to be exaggerated. Unlike in 2008, when its banking system broke, the credit markets are healthy today, and in the U.S., as in Europe, it is a crisis of confidence that finds expression in the financial markets. Yet the perception of weak growth has had a positive outcome for consumers, as the prices of several commodities including petroleum have fallen sharply. Amid the carnage, there are some pillars of hope.

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