Will the party end?

Last Updated: Mon, Jul 08, 2013 06:40 hrs

Short-term traders spend a lot of time guessing the likely pattern of the next day's trading. Most use some combination of technical tools and scour the news wires for information that could influence prices. A few try astrology, lunar cycles and more esoteric "indicators".

Since September 2012, guessing the trend in the next Indian trading session has been relatively simple. It has boiled down to time zones. New York is 9 hours 30 minutes behind Indian Standard Time (IST), which means the NYSE's daily trading session starts when it's evening in India. Japan is 3 hours 30 minutes ahead of India, so trading there starts when it's early morning in India. Europe is between 3 hours 30 minutes and 5 hours 30 minutes behind India, so trading starts in various European bourses while India is in mid-session.

The trader needs to first, take a look at the net gains or losses of the US market on the session of the prior day and then factor in trends on the Japanese markets which will still be open, before taking a view on Indian trends.

It is possible to follow some simple rules. If both the US and Japan are up, India will open strong. If both are down, India will open weak. If one of those key markets is up and the other is down, the US is likely to be more influential. When the European markets open in mid-session IST, there could be a change in trend. On days when nothing much happens in the US or Japan, the Indian markets are also likely to range-trade.

This pattern of correlation has held for the most part. The exceptional days have involved one of three things. There has been a policy review by the Reserve Bank of India. Or, some specific GDP-related Indian data has been released. Or, some local scam or another has highlighted political instability.

This pattern started in September 2012 because the third Quantitative Easing programme (QE3) was launched at that time. Since September, the US Federal Reserve has pushed $85 billion of liquidity into global markets every month. The correlation with Japan rose in 2013, after "Abenomics" came into play, with Japan's central bank pushing out $75 billion every month.

Some of that money - a relatively small part - ends up in India, chasing risky assets. The US markets drop in terror every time the Fed makes noises about tapering back QE3. In the next Indian session, the FIIs also sell some rupee assets.

The party must come to an end some time. It might be sooner rather than later. One of the stated thresholds for the tapering of QE3 is the US unemployment rate dropping to seven per cent. Last Friday, new US payroll data was released. Job growth in America looks strong with 195,000 jobs added in June (the data is seasonally adjusted). The unemployment rate remains technically unchanged at 7.6 per cent, the same as in May 2013, and down from 8.2 per cent in June 2012. This is deceptive - there are more people actually looking for jobs, a healthy signal. This makes it more likely that the Fed will taper at its next meeting in September, or at least, set clear timelines.

When the flood of easy money eases, the correlations will still hold. But the direction of the trends is likely to change. Just as QE3 forced asset prices up everywhere, regardless of fundamentals, a tapering could pull these down.

The other possibility is that investors will actually start looking at India-specific data. That doesn't present a pretty picture. The country-specific risk is quite high, given a toxic combination of a high current account deficit, a lame-duck government and an inability to address glaring structural issues. Once tapering starts, logic says any trader should be net-short on rupee assets until, at the very least, the next Lok Sabha is sworn in.

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