Wednesday, May 24, 2006

Where do US markets go from here?

I think the US markets will not go anywhere till 29th June - the day of the next Fed meeting. Till then, I think there are 2 issues that will prevent US markets from going up:

a) Commodity prices: If commodity prices go up, inflation fears heat up. If they fall, a lot of emerging markets indices go down (as many are leveraged to commodity prices - see brazil), which heighten the uncertainity in US markets.

b) Inflation fears: If economic data is stronger than expected, inflation fears heat up. If it is weaker, economic slowdown concerns hit the market.

Best thing that could happen is, Fed leaves the interest rates unchanged, and inflation does not shoot up due to lagged effects of past monetary tightening. But that can only be understood in retrospect by historians.

If Fed stops raising rated next month, there will be a section of the bond market that will worry that Mr. Bernanke has gone soft on inflation in pursuit of growth. So 10-yr yields might rise in anticipation of this higher inflation. So equity markets could still get hurt.


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