USstocks,Rupeerise,OMOandRobertShiller

US Stock markets are flying high as the optimism has flooded in from every corner. The Dow Jones Industrial Average gained 1.4%, the S&P 500 rose 1%  and the Nasdaq inched up by 0.6%. Let’s have a quick look at the reasons for this unbridled optimism. The decline in the number of new cases is one – this fell to less than 37000 per day down from more than 60000, secondly there is news on the vaccine that it might be fast tracked and finally there in the “historic” plasma therapy which the US President announced on Sunday. Along with that, the Fed’s assurance on continued support through liquidity and low rates is also salubrious for stocks. The narrative which is emerging is that the good times will come back quickly and will be supported through policy actions for sufficient time to come. Essentially the recovery will be not be just “V”shaped but it has the potential of looking like a “hockey stick”.

Nobel Laureate Robert Shiller writes in his book Narrative Economics about the power of narratives in the financial markets. He writes that once a sufficiently probable narrative has been arrived at and a sufficient number of  participants believe in it, it can take a life of its own. The basic point which Shiller makes is that words like panic and euphoria which the financial press often uses to describe any phase of economic history are actually a misnomer because they somehow indicate that the participants were not rational in those times. He argues that, just at those points, a particular narrative had taken the centre stage.  He gives the example of the tech boom during the turn of the millennium. The narrative which gripped the collective consciousness was that everything is going to digitized and the brick and mortar space will die a quick death. The narrative was perfectly rational but it didn’t actually play out the way it was anticipated. Now let us come to the present day narratives which are floating around - the USD decline, the tech boom, the Sino rise, decoupling. Which of these will attain a critical mass and become the dominant one is still to be seen. Readers can decide about the rationality of each one.

Domestically the INR had its day of reckoning yesterday. After remaining in a tight range for a long period it saw a very steep fall in the closing hour of market trade yesterday. The opening was 74.93 and it traversed a full 70 paise to close around 74.20. The stable zone had pulled a lot of market participants into an induced complacency where they were confident that the mighty powers will come in to protect the levels which was not the case yesterday. This resulted in lots of possible stops getting triggered, accentuating the move. On the bond side, after the yields going right yesterday finally the central bank made an announcement of conducting OMOs to the tune of 20000 Cr INR. The 5.79 2030 bond which closed at 6.22 yesterday is now trading at 6.15. The notional OMO may be not much but it clearly indicates the intent of the Central Bank.