Very Bad Sign When Markets go Down on Rate Cuts

It is a very bad sign when markets go down on good news. While the rate cuts from the RBI could be construed as a good sign in the short term, it is also a tacit admission to rapidly slowing growth in the future. Given the stock market is a discounting mechanism slowing growth and earnings downgrades are not factored into current stock prices and more declines are likely in the future as equity markets factor in a global recessionary outlook caused by rampant deflation.



Ultimately these rate cuts do also signal Rupee weakness versus the dollar in the long term and that most certainly wont help our deficits and the ambitious targets for the fiscal deficits proposed in the recent budget and our GDP estimates will mostly likely come down to the 5-6 % mark for the upcoming year. All in all a very negative outlook for equity prices in the upcoming year.

Major Sell off likely post the budget

yes the budget is here but that's where the good news ends. Markets appear overvalued at trailing P/E's of well over 22.  Have a look at the data below:

2008 GDP - 7.5%, Dollar/Rupee - 42, Stock market Peak January - 6350, P/E -24, 3 month return from Jan 08  < -30%
2015 GDP - 5.5%, Dollar/Rupee - 62, Stock market Peak till date - 9119, P/E -24, It remains to be seen how much of a decline will occur, as of now -6.0%.



So clearly the stock market has advanced on weak fundamentals and rapidly deteriorating macros and no matter how great the budget, a substantial sell off beckons.

Warning Signs for Global Financial Markets in 2015-16

There are two major warning signs that are developing for risk assets in 2015:

First we have significant #dollar strength despite a recent bounce in the euro, with the dollar index hitting multi-year highs. This is on the back of the potential end to the quantitative easing by the fed but also due to weakening fundamentals in the# Euro Zone which is mired in a deep recession and is unlikely to come out of it any time soon despite huge dosages of QE from the ECB.



Even after another bailout for Greece, which is tantamount to throwing good money after bad dollar strength is all set to continue and would result in a serious bout of carry trade liquidation that could take down commodities, emerging market currencies and eventually global stock markets:





The second major development is the potential upsurge in volatility. The #Vix index has not made new lows on each of the recent new highs for the S and P 500 in well over a year and is holding support in a multi year rounding bottom formation. This has resolved into higher prices for the Vix over the 50 level in August and lower prices for risk assets across the board. The Vix is incidentally well above it's 52 week low of 10.28.

Both these trends are set to continue into 2016 which could result in significant under performance of financial markets across the globe.

Warning signs for risk assets in 2015-16 http://t.co/SC6JzKADnp pic.twitter.com/JlxRFU9vxy

— samuelR (@RajveerRawlin) September 7, 2015