Riseinequities,Hopetradeandimportanceofcontext

World of finance is a strange place. Stocks, bonds move not with the reality but with the perception of reality. The perception can run amok and that is exactly the quality which makes the markets efficient.

US stocks were up close to 7% in yesterday’s trading. Asian markets are also following suit in the opening trade today. In India the benchmark nifty is trading up by close to 4% as we write this report. The primary reason which is being attributed to the euphoria is that the casualty number around the pandemic hotspots appears to be plateauing. Epidemiologist can debate ad nauseum that whether this reprieve is temporary or marks a genuine success. But markets don’t have that luxury of time, they have formed the perception and it has started reflecting in the price too.

In other news, cross currency swaps levels between US Dollar and other major DM currencies headed lower indicating that the dollar liquidity stress which was the prevalent trade since one week back has started easing. The ease also marks that dollar swap lines which the Fed had promised are working now. Dollar funding might have eased but the king dollar still remains the currency of choice as Dollar index trades above the 100 level.

Latest on the list of nations which have introduced stimulus plans will be Japan as the Japanese govt prepares to declare a state of emergency and announce a close to 1 trillion $ USD stimulus. The news will likely see a lift up in Japanese equities and a possible depreciation in Yen. In UK, PM Boris Johnson had to be shifted to an intensive care unit. The pound sterling weakened on the news.

As the big bang stimulus becomes the part of everyday lexicon we return to our yesterday’s argument about the Wittgenstein’s ruler. When the policy makers are themselves saying that the policies which they are using are unconventional policies, it is naïve to assume that the probable impacts can be forecasted with conventional tools. In a BIS working paper published in 2014 by researchers Qianying Chen, Andrew Filardo and team, specifically tried to measure the impact of unconventional monetary policies by the Developed countries on the Emerging markets. The team concluded that ZIRP and B/S expansion leads to higher equity prices and yield compression in EM’s though with a lag. The study assumed that during GFC and later in European debt crisis, EM’s were only the passive actors which were trying to react to DM monetary policies. But if we want to make predictions as of today based on the insights of BIS 2015, we have to be acutely aware of the changed context. EM’s are no longer reactionary participants this time, they are devising interest rate cuts and stimulus measures of their own. The “ruler” has changed again.

Rupee trades around 75.90 levels and 10 year benchmark around 6.36 levels as the market opens after the Monday holiday in an altered timing regime.