FallinmarketsandFallacyofhistoricalnarratives

Congratulations, you are living in historic times.

After some decades historians from both financial and social domains would write how the world reacted to the virus spread and came out either in flying colours or lost time while implementing some not so bright schemes. Only time would tell if the monetary responses by the central banks were appropriate. Whether Government diktats on social distancing and lockdowns were right or an over reaction will also be decided by time.

The point which we are trying to labour in is simple. All the actions either the liquidity infusion, rate cuts, banning the short trading or complete closure of markets have been taken amid incomplete information. No one knows that for how long and how severe the current scenario would be. After the market crash of 1929, US economy took almost a decade and war related spending to come back to its feet again whereas the 1987 crash never had a lasting impact as markets came to pre crash levels within months.

As of the markets, Dow Jones dropped by close to 13% in yesterday trade. US 10 year yield is trading at 0.78. Gold has dropped to 1500$/oz from 1650 $/oz seen last week. Silver spot prices were down by 13% yesterday. Brent crude is trading at 30$/bbl.

In the domestic markets, equities were down by close to 7% yesterday. In a press conference in evening, RBI Governor addressed media and took up the topics of Yes Bank and impact of virus on the Indian markets. RBI announced another instalment of Fx Swap and LTRO operations in coming days. When quizzed about the possibility of a rate cut, Governor said that the rate decision is in domain of MPC and the committee has not yet met. The ambivalence of answer keeps the market hopes of the rate cut alive. These are historic times, even the events with 5% probability can happen.