When Ben Bernanke became the Big Bull, global markets surged

If the Fed thinks ‘core inflation’ is no threat, given the gains in productivity, markets could roll again.

US Federal Reserve chairman Ben Bernanke became a global big bull when he raised the Federal funds rate by 25 basis points to 5.25% — the 17th straight quarterly hike, which began in June 2004.

Stock markets had feared that this time around he might raise it by more in order to curb inflation. Each hike in interest rate makes the global debt markets relatively more attractive than the equity markets and so leads to a diversion of funds.

So it was no surprise that equity markets across the globe rallied like rarely before last weekend. But remember, like any piece of statistic, inflation is also difficult to compute and interpret. What the Fed looks at is the figure called ‘core inflation’, 40% of which comes from ‘cost of housing’.

This is calculated taking into account market rents, never mind that many people own their homes. If the Fed decides that the statistical computation of inflation is such that it is not a major cause of concern, especially given productivity gains, it may well go easy on further rate hikes, and that would bring a bigger smile to the Indian bull.

Domestic interest rates are also rising. This will hurt most those industries which are more dependent on leveraged buying by customers such as housing, autos and consumer durables, till such time as consumers accept the higher rates and are willing to absorb them. So there could be temporary blips in these industries when domestic interest rates rise again. The auto industry will be further hit by an expected Rs 1,000 /tonne steel price hike.

The steel industry will consolidate after the famous merger of Mittal Steel and Arcelor. The higher price ultimately paid by Mittal was justified on the basis of an expected increase in steel prices, (and the giant creation will help in directing the movement of steel prices), which could explain why steel stocks rose sharply.

However, the takeover of Sahara by Jet has floundered. The stock market had frowned on the proposal from Day 1. The matter will now go to the Supreme Court, to the merriment of lawyers on both sides, the only ones who always win.

But despite all this, India Inc is marching ahead confidently. At least the big boys are. Sample this: RIL has announced an investment of a whopping Rs 25,000 crore in its retail foray, one that will span 1,500 cities/towns and provide employment to 5 lakh people! Its businesses are throwing out dollops of cash for it to be able to take huge bets; its minority partner, Niko, in the KG gas basin, says the gas reserves there are likely to be thrice as large as earlier estimated!

ONGC is likely to buy 5% of Russian Rosneft, which is making an IPO, for an estimated $3-4 billion. Its profits after tax was up 11% to Rs 14,430 crore. This, however, is based on a gross sale price of $59.6 (before a subsidy share of $17.3).

In the current year, the gross sale price would be around $69-70/barrel. Since ONGC estimates crude oil production of 27.4 million tonnes this year, its bottomline is set to explode! And, given the greed of its major shareholder, the Union government, which is always starved of financial resources, this would lead to a higher dividend payout.

The market is in an intermediate correction that normally lasts 8 weeks or so. The Sensex should find resistance around the 11000 mark. Buying on dips is advocated. No need to chase stocks.