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Markets grab Fed's olive branch: US, Asian markets, Sensex on gaining spree

Rajiv Bhuva     August 10, 2011
While common sense may be the best driver of markets, it's not always followed. When uncertainties prevail, sentiment takes the driver's seat.

Rajiv Bhuva
The single factor which is driving markets in the green zone now is the US Federal Reserve's statement: "The Federal Open Market Committee is 'prepared to employ' additional tools to bolster an economy hobbled by weak hiring and anaemic household spending."

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For the first time, the Federal Reserve pledged to keep its benchmark interest rate at a record low at least through mid-2013 to revive a recovery that's 'considerably slower' than anticipated. And the statement contains no word which is indicative of the third round of Quantitative Easing (QE).

The market took it positively and stocks in the US rallied. Standard & Poor's 500 Index rose 4.7 per cent to 1,172.53, the most since March 2009. However, yields on 10-year US Treasury notes briefly touched a record low of 2.03 per cent.

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What makes me believe that markets have grabbed the Fed's olive branch? A quick look at the European indices, which traded and closed in positive territory of 0.50 to 2 per cent.

That, at a time when the continent's inherent woes have been unchanged, gives strong reasons to believe that when US markets trade in green, other markets should panic less.

And despite worries of scaling up inflation, hardening currency and US slowdown, Asian stocks climbed for the first time in seven days. Even oil prices rebounded from a 10-month low.

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A rally in oil and other commodities would only add to emerging economies' woes. But that is a medium- to long-term concern and hence the day's positive sentiments are ruling the ground for now.

The immediate take away for Asian markets is a likely pause in interest rate hikes, owing to the extended lower interest rates in US until mid-2013. Back home, the BSE Sensex is trading 300 plus points higher, in the 17,000 range again.

Technical analysis is invariably pointing at a bounce back in the Indian indices. The massive sell-off seen across global indices forced the volatility indices to surge to 52-week high levels, according to a technical report by Mumbai-based Emkay Global Financial Services.

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 "The first sign of a decline in the volatility index (VIX) was observed yesterday (on Tuesday) with US VIX declining to 35.06 per cent from a high of 48 per cent," says Neeraj Agarwal, Derivatives Analyst at Emkay Global Financial Services.

NSE VIX has increased to 34.88 per cent from a low of 18.51 per cent observed in the current series. "We expect a similar kind of move in the NSE VIX, aiding a bounce back in the index," says Agrawal.

Beyond volatility index, Agarwal sees a bright spot within the Nifty put-call ratio of open interest, which increased to 1.02 levels after registering a low of 0.93 levels in the penultimate session. Since January, 2011, the ratio has been moving in a range of 0.87 levels to 1.35 levels. "The ratio has a direct correlation with the index suggesting any further increase in ratio will indicate an up move in the index," says Agarwal.

Hence, while fundamental challenges persist and technical factors support, the jump in Indian indices is a bounce back from recent declines - it is a recovery rally, and not a bullish one.

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