PositivePMI,Yuanandlogicofdecoupling

In 2008 during the global financial crisis (GFC) as the whole world was in meltdown mode, the Indian economy appeared relatively unharmed. At that time one word which gained a lot of currency regarding the Indian economy was “decoupled”. The word essentially denoted that the Indian economy has some how discovered the magic potion which keeps it humming while the outside world is in the throes of a turmoil. It was later realized that the buoyancy in the economy was more predicated on a relaxed credit off take cycle which manifested in bigger issues 6-7 years down the line. It turns out that in a hyper connected world with intermeshed supply chains and free flowing capital flows, decoupling is possible only in case one chooses to become a hermit state.

The word “decouple” can also be used to describe the current state of equity markets vis a vis their relationship with the economic reality on the ground. In the US the Dow Jones was up by 1.78% yesterday, now within striking distance of its all time highs. The Nasdaq composite is already trading at its all-time high, a fact that was championed by the US President on his Twitter feed. The Shanghai composite is also trading at its best levels seen in a year, promptly erasing any memory that a pandemic even occurred. Now, as has been long argued, the rise is contingent on two things: firstly that the low interest rate regime will continue, and secondly that the recovery will be quick and swift. The former as, which is in the domain of executive actions, can be relied upon to continue but it is the latter which presents the issue of taking a leap of faith.

In a statement yesterday Dr Anthony Fauci, the US’s top voice on the pandemic, issued a sober statement that the US is still “knee deep” in the first wave. The daily rise in numbers in excess of 50,000 is a situation that demands “immediate addressing”. As we have written previously that more the current situation stretches, more structural it will become. Any business bankruptcy doesn’t involve only two parties, it triggers a chain reaction in the system, making the whole more vulnerable. Now the counter argument to this is that the Central Banks and Governments are standing “put” to avoid such outcomes. One needs to be cautious while bandying this line of argument as it is neither complete nor exhaustive. Some country with reserve currency status might get away but others cant.

In other news, we will see the Reserve Bank of Australia coming out with their monetary policy. In data released yesterday US services sector showed a sharp rebound for the month of June as the ISM non manufacturing activity jumped to 57.1 last month. PBOC set the Yuan reference rate at 7.0310 per dollar against the previous fix of 7.0663, it is the strongest fix since April. The offshore Yuan at one time climbed beyond 7 also during the trade. The appreciation of Chinese currency benefits the global players which own capital assets in China.

Domestically Indian rupee opened around 74.71 levels, it has been in a range and unable to break conclusively beyond 74.50 levels post the large up move last week. Indian bonds remained flat yesterday with 10 year benchmark closing at 5.83. Indian stock markets open flat today. The FII number in the Indian markets appear neutral for the month so far with debt markets having an overall positive flows compensated by equities seeing a net outflow.