Tumbling Markets – A Different Perspective

I do not know the answer to questions given below, but one thing I say with some degree of certainity that a direction to world markets in the near term will be provided by two events. One being, voting by German parliament on their support for announced Greece Package and the other being US Senate vote on Financial Regulation bill. These two events are going to provide a direction to world markets for the next couple of days. In any case, I believe that the debate over risk of Euro Zone breaking in pieces on the back of sliding Euro and expected contraction in Euro Zone economies will continue to gain momentum, leading to more uncertainty in the market place, making equities and commodities markets across the globe jitterier.

• Markets across verticals tumbling, is it only fear which is leading to this panic or there is more to it:

• Euro debt crisis continue to give momentum to the debate on Euro achieving parity with $, leading to a heightened debate over Euro Zone breaking down in pieces (on the back of sliding Euro)

• Increasing debate over a single currency for one economy; helping them to manage their fiscal situation better than having a common currency for 37 economies within Euro Zone

• Deflation debate (demand contraction specially in Euro Zone and then in US) continuing to gather more momentum leaving central bankers in dilemma on whether to continue with the easy policy which could lead to Inflation being a much bigger problem in future or reverse the policy, which could squeeze liquidity from the market place and can again lead to a scenario witnessed during the 2008 financial crisis, which could then lead to economies starting to contract once again?

• The problem in Greece could spill over to the entire Euro Zone, leading to more bail outs, which could again magnify the debt problem going forward. This could lead to Euro continue to slide, ultimately leading to Euro Zone breaking into pieces; resulting in a real chance of Euro Zone again slipping not only to recession but in depression; taking the entire world with them

• Will carry trade unwinding turn this fear into panic and then capitulation on the back of back of continued strength in $ and a fear of its continuance?

• Continuing governments interference all around the globe specially Europe and US on financial regulation and within market place

• Euro Zone to witness liquidity squeeze leading to significant demand contraction, which subsequently can easily spill over to US first and then to Asian economies – confirming the Double Dip theory

• Increasing debate over Chinese markets entering into a bear territory on the back of fear of expectedly significant slowdown in Chinese economy and a higher probability of burst in property market bubble

• Economies more exposed to commodities such as Brazil, Australia, Africa possessing a bigger risk of witnessing a demand contraction on the back of weakening Euro Zone and potential of this weakness to spill over to other economies, will commodities emerge as fallen hero, which actually led the economic recovery

When majority of market experts felt that central bankers across Asian economies especially India, should have acted a little early with respect to monetary tightening, I try and look at few imaginary questions, which might or might not become part of debates going forward and answers to which is not known to me but definitely puts one in thinking mode and derive a perspective out of it.

• Whether central bankers across Asia are going to regret their move of tightening monetary policy?

• Did they all get carried on with the phenomenal recovery seen in their respective countries?

• Will Reserve Bank of Australia realize that they acted too fast without properly accessing the economic scenario on an economy they are largely dependent on?

• Will India’s RBI halt their tightening policy stance or will the danger of Inflation at the expense of growth force them to continue on their tightening policy stance?

• Can Chinese central bankers afford to direct banks to go slow on lending or have more cash, which could dampen the headline growth no., but if they don’t, the debate over Chinese economy being a bubble or higher probability of a property bubble will further gain momentum.

• Will the FED can even think of raising rates any time soon on the back of deflation debate continuing to gain momentum and Inflation taking a back seat.

• Will Dollar continue to be the safest bet going forward despite weak US economy and bad US fiscal situation?

• Will the 37 different types of countries within Euro Zone having different fiscal situation, economical differences continue to have one common currency with no power to any particular strong economy to print money the way US has?

• Can the central bankers in larger economies within Euro Zone be able to convince each other that given the political and economic differences, having a common currency still makes sense and Euro could still come out of all these turbulence and emerge as one of the most strongest currency having the capability to replace Dollar as a reserve currency or

• Will they think that having a single currency for each of the economy makes more sense as it gives them more power and control over managing their fiscal situation?

• Will the Euro come to parity with US$ overtime, and if this was to be case, won’t Euro Zone break, and this happens, are we set to witness a debt crisis which could translate to a deeper recession (worst than the deep recession), which could start in Euro Zone and subsequently spill over to other parts of the world creating a deep liquidity crisis; leading to the recession.

• Will the double dip become reality?

Thanking You,

Personal Regards,

Vinit Tulsyan

Advertisement