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Markets Bloodbath, Version 2: BSE Sensex pulled down by US, Asian markets

Rajiv Bhuva     August 9, 2011
"The Tomatina festival is being celebrated globally, just that it's a little too adventurous this time, as it's being played in investor's blood."

This was the first message of the day on an analyst group that I subscribe to. Analysts are a serious bunch. They do not dole out funny jokes or react to them either. So I knew that I had an interesting day ahead of me.

PERSPECTIVE: What US credit rating cut means for India

A quick glance at world equity indices prompted me to choose the headline - Markets Bloodbath Version 2. To me, Version 1 played out after the 2008 crisis.

So what do the numbers point to? Sheer Bloodbath. In the Americas, indices closed 4.04 per cent lower to 8.91 per cent. In Europe, stock indices closed 2.35 per cent lower to 7.08 per cent. And closer to home, while the Bombay Stock Exchange (BSE) Sensex sank 450 points, or 2.65 per cent, at one point in early morning trade, other Asian indices were down 2 to 7 per cent.

Japan's Nikkie 225 was down over 325 points, or 3.60 per cent. According to Bloomberg, the yen has clawed back more than 75 per cent of its loss against the dollar last week, when Japan carried out an estimated 4.5 trillion ($57.8 billion) in sales of its currency, underscoring the nation's haven status for investors fleeing debt crises in the U.S. and Europe.

Rajiv Bhuva
The yen has rallied in the past two days, coming within 2 per cent of its record 76.25 reached in March against the dollar, as Standard & Poor's downgraded US debt and the European Central Bank was forced to buy Italian and Spanish bonds to quell a crisis of confidence, Bloomberg reported.

US will always be AAA country, says Obama

In a nut shell, timing the intervention has become a dilemma for Japan. With downgrade of the US, the dollar will weaken and intervention is in vain. A further intervention will be costly, and if that does not happen, exporters will take the hit.

South Korea and Taiwan are the other exporting economies which are seeing ongoing fall in its equity markets. Elsewhere around the world, Monday was the first trading day after the weekend rating downgrade of the US.

Money continues to flow into US Treasuries. This will continue to happen for a few weeks because money has traditionally been lying in US Treasuries, and an alternate to that in a tailspin market is doubly problematic. Lumpy withdrawal would disturb investors' equations.

And, there is still some time before the question 'who is best after, or if not the US' gets answered.

The big mover and shaker is China, but it will take a long time before reshuffling its investments because US is still its single-largest market. The gigantic size of the US Treasury is unmatchable, and going forward, it would not be surprising to see 'AA+' as the benchmark that investors look for.

PERSPECTIVE: Bloodbath in equity markets as Dow falls

Back home, the fears of global slowdown have led to a sink in oil prices, which is a respite. But the appreciating currency is a reason to worry, for as long as international prices fall, the value converted into rupees won't show savings.

Just as India's growth has begun to moderate, the global economy is witnessing its second major crisis of the millennium. A crisis of confidence.

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