The storm clouds are gathering once again. After a brief reprieve, the global picture is again starting to look nervous reminding us that the ghost of the 2008 financial crisis is still with us. Crucial elections this past weekend in Greece and France have pushed Europe back into uncertain times. A highly fractured mandate in Greece has thrown the nation into turmoil and a shift of power in France has raised questions over the fate of the European fiscal austerity pact.
The result has been a sharp rise in risk aversion across global markets this week. On Tuesday, the benchmark equity index in Greece tumbled to the lowest levels in 20 years. Greece was not the only market to tumble. France, Germany, Italy all saw a sell-off in equities reflecting the nervousness that has once again gripped equity investors who seem to be shunning risk assets. For India, this does not bode well. Global investors, rightly or wrongly, tend to bunch risk assets together. And so a risk-averse environment is unlikely to leave India untouched.
The return of risk aversion is evident in the bond markets as well. As investors sought safety, money returned to US treasuries and German bunds which are now seen among the safest assets available. German bund yields, which move inversely to prices, have dipped this week. At the same time, US managed to sell 3-year treasuries at the lowest yield in 3 months – a reflection of strong demand for these “safe assets”. This is bad news for capital flows coming into India through portfolio investment. Investors may not pullout money from Indian equity markets but they may not bring in any fresh money either.
The currency markets are seeing a ripple effect as well. As talk of a possible Greece exit picked up once again, the Euro tumbled. The Euro fell below 1.30/$ – a level that the single currency has held on to since January. The fall in the Euro has a direct bearing on all emerging market currencies including the Rupee. As the Dollar strengthens, all currencies adjust to the strength in the Dollar. And so the Rupee has fallen back towards 53.50/$ despite strong intervention from the Reserve Bank of India just last Friday. In the light of the Euro fall, it seems futile for the Reserve Bank of India to try and defend the currency especially at a time when forex reserves are anything but abundant. Yet the markets do expect the RBI to continue supporting the Rupee to some extent.
In all of this, the silver lining may lie in the decline in commodity prices. As concerns around the global economy rise, commodity prices have fallen as well. So crude oil prices have slipped to their lowest levels in 6 months. This comes as a relief to a country like India which is grappling with a wide current account deficit. A large chunk of our import bill is on account of oil imports and even a marginal decrease in oil prices is positive for India. Unfortunately some of the benefits of lower oil prices are taken away by the weaker currency. Still lower commodity prices are perhaps the only silver lining in an otherwise worrying global scenario.
All eyes are now on Europe but also on economic data from the US. Will the political turmoil is Greece die down? How well will France’s new leadership work with the German leadership? And will economic data suggest a moderation in the US economy? Will the appetite for risk assets among global investors return? All questions that will remain crucial for India and indian investors in the days ahead.
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- Big Macs provide good glimpse of global economy (pri.org)
- 11 Quotes That Show How Worried The Financial World Is About Europe Right Now (theeconomiccollapseblog.com)