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Global stocks, US$ weakness & more - Views on News from Equitymaster
 
 
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  • Mar 10, 2008

    Global stocks, US$ weakness & more

    • The spectre of a US economic recession that can have serious after-effects on the global economy, fails to leave stock market investors across the world. This is seen from yet another day of weakness in markets in Hong Kong, Singapore and China. These markets are taking cues from the US indices that closed in the red last Friday, on the back of a weak employment report for February and fears of more write-offs of subprime 'assets' in the US. Following this rout in the Indian stock market, even the US dollar has not been spared.

      This dollar weakness is on account of the fact that speculation is rife that the Federal Reserve (US central bank, like India's RBI) will cut its short-term interest rate further in the next monetary policy meeting on March 18. The dollar has, in fact, dropped to a new low against the Euro (US$ 1.53 per Euro) and lowest in eight years against the Japanese Yen (102.3 Yen per US$). As if the recession fears are not enough, the rising crude and food prices and their consequent impact in inflation going forward is also ringing alarm bells among policymakers and investors. Crude oil for instance spiked above US$ 106 per barrel on Friday before retreating a bit.


    • As for the Indian scenario, while stocks continue to retreat (the BSE-Sensex closed 9% down last week), the fact that inflation is again rearing its head is a sign of concern. As reported by the RBI, inflation (as measured by the wholesale price index or WPI) touched the 4.9% level last week (from 4.4% in the week earlier). This increase in inflation is led by rise in prices of primary articles (4.9% YoY rise in prices) and manufactured products (4.6%). As a matter of fact, inflation in primary articles has been mainly led by rise in prices of wheat and oilseeds.

      With the WPI inflation nearing the RBI's target band of 5% to 5.5%, there might be pressure on the central bank to take note of the same and suggest some monetary adjustments so that the impact of rising prices is lowered on consumers. However, more than that, considering that this rise in prices is more of a supply related issue, the implementation of agricultural reforms as announced in the recent Union Budget shall go a long way in steering the economy out of an inflationary spiral in the long run, short term concerns notwithstanding.

     

     

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