As if Mondays weren't bad enough already. Indian traders came back from the weekend to the intimidating sight of a global sell-off in the equity markets, which didn't spare India. The S&P Bombay Stock Exchange Sensitive Index, or Sensex, fell by 1,624 points, losing 5.94% of its value and wiping out Rs 7 lakh crore in investor wealth. The National Stock Exchange of India's benchmark stock market index, the CNX Nifty, also saw a sell-off, dropping by 490.95 points in one of its worst single-day falls ever. To sum up: Mondays are awful.
And Tuesday isn't going to be any better. Markets all over the world were rocked by the sudden financial storm with the Shanghai Composite Index sinking 8.5% in single-day trade on Monday and starting the next morning already down another 6.5%. With Chinese demand set to disappear and the US Federal Reserve about to increase interest rates for the first time in a decade, we might all have to deal with some rather deafening noise: the sound of a bubble bursting.
But why is it happening, and why has India been hit so bad?
The immediate indicator: Chinese manufacturing data
China is already growing at its lowest speed in a decade. Its gargantuan demand for commodities has begun to let up. Debt is also piling in uncomfortable places. And on Friday, the country reported the lowest manufacturing activity level since 2009. For a country that built its rapid growth on an export-led model, this is problem.
The real reason: Chinese impotency
Even though the Chinese equity markets aren't that big a part of the economy, they tell investors and the world plenty about the state of China's domestic markets. Which is why Beijing has spent the last month frantically doing everything it could to prevent its stock markets from tanking.
The central bank cut rates to a record low, authorities launched investigations into market manipulation and China's largest brokerage firms came together promising to spend just under $20 billion themselves, in an effort to stop the markets from slumping even further. Beijing devalued the yuan for two days in a row, signalling its commitment to Chinese exporters. Major shareholders were banned from selling stock, and initial public offerings were suspended. The government has even attempted trying to advertise investment in the stock market as a patriotic move that would help the country.
Yet the Shanghai exchange continues to plunge. This is what has really frightened global markets: Not that Chinese fundamentals signal a slowing down, which was expected, but that this much intervention in the stock market has still not managed to prevent a sell-off. If the all-powerful Chinese Communist Party can't prevent this, what else will it be unable to address?
The aggravating factor: Growing America
The United States is doing well. Sort of. It still is in recovery mode, taking slower than usual, but its economy is nevertheless growing. Which means the US Federal Reserve had been getting ready for its first interest rate hike in a decade, a move that would immediately have an impact around the world. When the Fed indicated it might do something like that in 2013, tapering its stimulus, money disappeared almost overnight from emerging economies in a rush back to safer instruments.
Monday's global sell-off might push forward this action, because the Fed will be concerned about adding stresses to markets that are already being rocked by China's big sneeze. But it can't avoid tightening forever (though some are arguing it has missed the boat on it, or needs to take action right away).
The collateral damage: An Indian recovery
India is not massively coupled to China, despite the huge amount of trade between the two neighbours, and could conceivably weather a storm coming out of Beijing. In fact, despite the sell-off, some key statistics sill suggest Indian equities are seen as reasonably safe options. But that doesn't mean they won't lose money anyway.
Global crises are about liquidity as much as they are about uncertainty. Even if Foreign Institutional Investors aren't tremendously worried about the value of Indian stocks, money is still likely to flow out of India. Unfortunately there are lots of local indicators that could help that decision too.
Questionable Gross Domestic Product numbers aside, India was supposed to grow at a reasonably fast clip this year, in what many hoped would be a return to the boom years of the 2000s. Instead, manufacturing remains woeful, industrial production in general is in trouble, employment hasn't grown massively, consumption data is cause for concern, the monsoon has been patchy and important attempts at reform have got stuck because of politics.
India's macroeconomic fundamentals aren't tremendously worrisome, with a low current account deficit, falling inflation and strong foreign exchange reserves. Where most central banks in the West have run out of stimulus space, India's Reserve Bank still has lots of leeway to lower rates. But the combination of troubling headwinds and a liquidity squeeze could still end up hurting India, making it even harder to stabilise a shaky recovery.
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And Tuesday isn't going to be any better. Markets all over the world were rocked by the sudden financial storm with the Shanghai Composite Index sinking 8.5% in single-day trade on Monday and starting the next morning already down another 6.5%. With Chinese demand set to disappear and the US Federal Reserve about to increase interest rates for the first time in a decade, we might all have to deal with some rather deafening noise: the sound of a bubble bursting.
But why is it happening, and why has India been hit so bad?
The immediate indicator: Chinese manufacturing data
China is already growing at its lowest speed in a decade. Its gargantuan demand for commodities has begun to let up. Debt is also piling in uncomfortable places. And on Friday, the country reported the lowest manufacturing activity level since 2009. For a country that built its rapid growth on an export-led model, this is problem.
The real reason: Chinese impotency
Even though the Chinese equity markets aren't that big a part of the economy, they tell investors and the world plenty about the state of China's domestic markets. Which is why Beijing has spent the last month frantically doing everything it could to prevent its stock markets from tanking.
The central bank cut rates to a record low, authorities launched investigations into market manipulation and China's largest brokerage firms came together promising to spend just under $20 billion themselves, in an effort to stop the markets from slumping even further. Beijing devalued the yuan for two days in a row, signalling its commitment to Chinese exporters. Major shareholders were banned from selling stock, and initial public offerings were suspended. The government has even attempted trying to advertise investment in the stock market as a patriotic move that would help the country.
Yet the Shanghai exchange continues to plunge. This is what has really frightened global markets: Not that Chinese fundamentals signal a slowing down, which was expected, but that this much intervention in the stock market has still not managed to prevent a sell-off. If the all-powerful Chinese Communist Party can't prevent this, what else will it be unable to address?
The aggravating factor: Growing America
The United States is doing well. Sort of. It still is in recovery mode, taking slower than usual, but its economy is nevertheless growing. Which means the US Federal Reserve had been getting ready for its first interest rate hike in a decade, a move that would immediately have an impact around the world. When the Fed indicated it might do something like that in 2013, tapering its stimulus, money disappeared almost overnight from emerging economies in a rush back to safer instruments.
Monday's global sell-off might push forward this action, because the Fed will be concerned about adding stresses to markets that are already being rocked by China's big sneeze. But it can't avoid tightening forever (though some are arguing it has missed the boat on it, or needs to take action right away).
The collateral damage: An Indian recovery
India is not massively coupled to China, despite the huge amount of trade between the two neighbours, and could conceivably weather a storm coming out of Beijing. In fact, despite the sell-off, some key statistics sill suggest Indian equities are seen as reasonably safe options. But that doesn't mean they won't lose money anyway.
Global crises are about liquidity as much as they are about uncertainty. Even if Foreign Institutional Investors aren't tremendously worried about the value of Indian stocks, money is still likely to flow out of India. Unfortunately there are lots of local indicators that could help that decision too.
Questionable Gross Domestic Product numbers aside, India was supposed to grow at a reasonably fast clip this year, in what many hoped would be a return to the boom years of the 2000s. Instead, manufacturing remains woeful, industrial production in general is in trouble, employment hasn't grown massively, consumption data is cause for concern, the monsoon has been patchy and important attempts at reform have got stuck because of politics.
India's macroeconomic fundamentals aren't tremendously worrisome, with a low current account deficit, falling inflation and strong foreign exchange reserves. Where most central banks in the West have run out of stimulus space, India's Reserve Bank still has lots of leeway to lower rates. But the combination of troubling headwinds and a liquidity squeeze could still end up hurting India, making it even harder to stabilise a shaky recovery.
