Last time it was Greed, now its Greece

Yep, S&P finally took the initiative; possibly after the questioning of entire rating system during sub-prime crisis. Greece's sovereign rating was downgrade to Junk (BB+), Portugal downgraded two notches to 'A-' and Spain downgraded one step to 'AA' sending jitters down the spine of stock markets worldwide.

As a preliminary analysis, I can think of two things

a) Gold: The commodity could see some downward pressure on the possibility of the countries nearing debt/interest repayment selling part of their Gold reserves to payoff the interest on the debt or part of it. For the medium to long term, the current scenario could be positive for Gold. The downgrades in the 'Euro' countries would put southward pressue on the 'Euro' currency. Holders of Euro would like to switch to a safer currency or to Gold which is the ultimate store of value.

b) Emerging market equities: The downgrades and the possibility of crisis does not bore well for equity markets especially of emerging countries. Increase in Risk Aversion in Western countries would result in outflow of FII money which has been the primary reason for stock markets running amok. Obviously the Westerners would like their money to be parked in perceived safe zones like US treasury. Also, at a P/E of over 20, Indian equity markets are not cheap either.

And yes, the last recession was due to Greed of bankers to create Mortgage Baked Securities out of sub-prime, graded high by so called rating agencies; sold to unassuming investors. This one could possibily due to a tale of debt, downgrades and defaults, flagbeared by Greece.

A view from technical perspective in my next article.

Finally the Euphoria around the Bugdet ends

FM presented the Budget, Opposition walked out, Equity markets liked it, Analysts gave a mixed reaction (with most who had predicted a bad budget ending on the wrong side), thus bringing an end to the Euphoria surrounding the Indian Budget . Finally, we are back in the arms of global cues; with Greece being the epicenter.

I believe that the community that is going to benefit the most from this budget is Bania's, Marwaris and alike (read the thrifty ones). As the FM left more money in the hands of public in general, by bringing down tax slabs, he also kept bringing more products/services under the ambit of CENVAT/Service tax. The public will win on direct taxes front and loose on the indirect taxes front but this has huge implications for the wise as they get the power to choose to be affected or not. Savings and Investments would rise giving a thrust to Capital Markets.

Again, as always, middle and lower income group, specifically individuals earning less than 25,000 pm (I think most of us fall in this category) were left to burn. On one end, they don't benefit from fall in tax rates and on the other, they will have to pay more indirect taxes. Fuel price hike would put an upward pressure on inflation, adding to their worries.

The best part I liked was FM wanting to bring all government spendings on Oil marketing companies under the Fiscal Balance Sheet as opposed to off-balance sheet items they have long been. This will add to the fiscal responsibility of the government but would also mean that volatility in global crude oil prices would be passed on swiftly.

Some articles I read speak that though the governments has put out an ambitious target on reducing Fiscal Deficit to 5.5% of real GDP, the government has failed on the Revenue Deficit to GDP front, meaning government will still have to borrow more from markets, making the budget worrysome and adding to borrowing costs of corporates.

Anyways, Indian equity markets have broken from a narrow range set before the budget only to get into a broader range, which I believe could be taken out on either side, as and when the clarity on global front emerges. For now, an inverted Head and Shoulder pattern has emerged on Nifty.

4950 is a long term resistance above which the target looks like 5150 with resistance around 5050 and 5100. 4850 is the support below which support is at 4720 levels.

USD to benefit from EURO uncertainity

There is a possibility that Uncle Sam will be saved from devaluation of its currency for longer then estimated, as its closest substitute 'The Euro' is starting to show cracks. Burden of saving Greece would obviously fall on Germany and France; The Big brothers. If Greece is saved, there is no reason why Spain, Portugal and Italy shouldn't be.

At the same time nationals of saviors would obviously want to know as to why their thrift should be punished for spendthrift attitude of their neighbours. Why should the taxes they pay, to be used for investment in their own country and for the future of generations, should not be used to do so. Also, saving these countries does not guarantee they the will come out winning. Possibility is that they may come back for more later and what then?

Now, in case Greece is not saved, that would obviously put strain on Euro as one of the pillars of the edifice would crack. This again would harm other members as this would devalue their net worth.

Currently there is a lot of uncertainty in the EU and this obviously augers well for the USD as uncertainty in the EU would make holders to Euro to run towards USD, the only other highly liquid international currency.

Well are their any implications for the market?
a) In case the Greece defaults, Equity markets would fall.
b) Greece is helped. In case other countries come forward requesting help, uncertainty would loom again and markets hate uncertainty.
c) Euro weakens and USD strengthens. This would mean that Dollar carry trade would begin to revers as FIIs would start pulling from markets like India.

The overall scenario looks pessimistic. What could take markets higher would be some kind of settlement, that would be temporary in nature but capable of delaying the crisis (again). Skeletons have started to rattle in the cupboard, its only time before they would start showing.

Comments Welcomed.

Reference:
Euro currency union showing strains