The increasing sense of urgency - can markets survive?

During the week ending 12 October major Central Banks gave coordinated rate cuts of half percentage each. In the process, the ECB, FED had to give up their previous stances on the interest rate cuts.

The markets however, noted the significance of the move with derison - they promptly plunged deeper into fresh depths. Markets seemed confused as they were caught up in a global vicious cycle of competitive crash in equity indices, each index outdoing the other in the race to the bottom. Emerging Markets have crumpled too in this carnage. India was down 14%, Bovespa was down 20%, Thailand was down 23%. The markets in the West kept up quite well - Major indices were down atleast 20% this week.

The hand-in-hand march of indices during the last one month debunks most effectively the story put out by everyone during the last two years that the BRIC economies offered an alternative arena for investments and operated independently on their own strengths. The decoupled markets theory was developed in the last 5-6 years and sold to an "unsuspecting" west. During the carnage in the equity markets the developing countries have realised the "perils" of the globalisation and to their dismay found that markets were not decoupled - there was just a lag.

Of course, the decoupling is true definitely atleast on one account - the credit crisis that has hit the developed markets has not landed on the shores of emerging economies. Half of this is possibly due to laziness of policy makers rather than an intelligent choice of action. Equally, it is true that the caution of Central Banks has not allowed the spawning and blooming of new products and the current crisis in the emerging economies.

The impact on the emerging economies is thus on account of the risk of evaporation of export markets, the withdrawal of liquidity from their markets and the resultant impact on their GDPs. These factors are enough to bring the equity markets down. Along with that countries with insufficient balance of payments strength are hit by currency weakness and tight liquidity (and tight rates). Their Central Banks are attempting to protect the economies from these sudden impacts.

Globally, markets need to get out of the panic mode now. The G7 action is directed at that - whether collectively or individually. The UK model of capitalisation of banks as well as offering funding (along with guaranteeing market funding) is likely to be adopted in one form or other by most countries. The US is already following in that direction.

The huge growth in volume of OTC and Exchange Traded contracts amongst financial market participants covering various products was much celebrated all these years as it created employment and wealth. The large volumes is itself a result of the growth of trade, commerce, international funds flow, commodity hedging, and debt and equity funding during the last few decades. Over the years the participants have also changed - there are now a lot of retail clients and wealth management clients. Much of the activity is possibly rightly described as speculative or leveraged. Given this change, The impact of this correction on savings and GDP is possibly underestimated at this stage.

With the stock markets hitting multi-year lows and PEs dropping to single digits after the 50% fall in global indices in the last one year (and the 20% drop this week) rationality may return soon. The new week will face the market's concerns on the settlement of Lehman Contracts, the state of Morgan Stanley and the lack of fresh steps from the G7. It would be interesting to see if the market will take comfort from the increasing frequency of action from Regulators and Governments. The action is clearly directed at staving off a collapse. The measures to fight the recession will come later if markets survive.

The setting in of a recession in developed markets has been accepted more or less. But equity markets cannot give up 20% every week. This parabolic action is mostly likely signifying the bottom is now within sight.

Therefore, I would say - Hang on! We are almost there!