STRESS TEST RESULTS TO HAVE A "BEAR"ING

After the phenomenal over 700 rise, the markets have been kind of lack luster and down. People have once again become cautious, not just on Dalal Street but world over. The US markets were down yesterday, the Asian markets are weak and Europe seems mixed, heading more towards the negative.

So what has changed for the market suddenly? From the over optimistic 700 points rise why this change in psyche? On the economic parameter, for India, everything remains the same as it was two day ago. Politically, there is now mounting concern. With the counting day nearing, scheduled for 16^th May, there a small niggling unease taking shape. ‘Who will head the Govt?’ is now the biggest question in India. Marketmen are of the opinion that the chances of Congress coming to the front are strong but what matters is the kind of coalition ii makes to form the Govt. Will it be Left or the emerging Third Front? Thus political concerns now supercede the economic worries and that is expected to keep the lid on the bulls for some time now.

Another major worry is the stress test results of the US banks, which are expected on Thursday in USA. 19 banks are under this stress test scanner and corporate grapevine has it that over 10 of them are expected to need assistance. The latest news emerging is that Bank of America would need as much as $34 billion in additional capital. Wall Street is agog with news that after the stress test, it would emerge that many banking companies might need more capital, either because they do not have enough tangible common equity or are experiencing rising loan losses. Prominent names doing the rounds in need of “assistance” are Citigroup Inc, Wells Fargo &Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, Regions Financial Corp and SunTrust Banks Inc. Though the regulators have said no large institution will be allowed to fail, and have pledged government funds if necessary, there is an air of guarded caution in the air.

As explained by the Govt, these bank stress tests are not like a pass or fail kind of verdict. It is more about establishing the financial health. Just as we human beings have our health check ups which indicates what needs to be corrected where and gives an indication about the over all well being, these bank stress tests will tell us about their financial health. And just as we need medicines to overcome certain weaknesses, these banks would need its medicine – more money, to nurture it back to health. The markets are not worried about any collapse; it is just unease; typical nerves one feels prior to announcement of results.

Some positive news on the USA economic front, indicating that recession would come to an end soon had emerged last week, which led to the surge on the bourses. And in India, the mood is certainly turning optimistic. Many corporate results for FY09 and Q4 FY09 are out and as per these indicators, it emerges that Q3FY09 was the worst. There is pressure seen in the performance of Q4FY09 but it is easing. The rise in sales of car sales in April 09’ has also helped boost the sentiments. FIIs, to some extent have started reposing some faith in our markets. Economically, we were never in recession, we have slowed down. And we all know it would take some more time before it gathers some momentum. But the mood is that we are not as bad off as USA or UK and that is keeping the mood robust. It is now only politics and over the next two days, the results of the stress test which would have a bearing on the market. Best to be cautious in this market.

By Ruma Dubey