Tuesday, July 8, 2008

What are the reasons for falling stock market?

The stocks around the globe especially the Indian and Chinese markets are experiencing a free fall. Everyone is proposing his/her own hypothesis for the fall in stock market values. Many reasons are attributed for the fall and it includes inflation, rising global crude prices, weak currency especially in the Indian and US currencies. Recent trends in the market reveal that fundamentals apart, perceptions have a big role to play in what investors are willing to pay for the stocks.

The following aspects are considered as major reasons for the fall of stocks of Asian economies and particularly India, which witnessed one of the worst nightmares in recent times.

Prices of crude oil
Within a price band of US $93-95 during the end of December 2007, the crude basket almost shot up to $144 a barrel, a hike of nearly 54% and nobody knows where it will stop or at what higher limit it will stabilize?. A rising interest rate in US, weakening US dollar, political uncertainty in oil producing countries (OPEC), and a drop in stockpiles of oil reserves in US are all negative points pushing up the crude prices. In any growing economy that imports crude to satisfy its ever growing demand for oil, there will be an inflated import bill and a jump in trade deficit. The increased crude bill sets off successive chain reactions which hits the common man hard and results in a widespread rise in prices of all other essential commodities.

Inflationary woes
A rise in crude with concomitant rise in essential commodities bulges the inflation level and growing economies view it as one of the worst bottlenecks to move forward. Inflation affects the stock market investors in many ways. Higher commodity prices could reduce the profit margins of companies if they could not rise the product prices and inflation restrict the consumers urge to spend on lavish things like a luxury car or purchase of a new bungalow. In an attempt to reduce the inflation, the government will naturally intervene and increase the interest rate which will further squeeze the demand and big corporate companies will be compelled to postpone their expansion plans.

Political uncertainty
The refugee’s money is more sensitive to political turmoil and hence with the slightest political instability, the foreign institutional investors are ready to pack their bags. In India, with the left parties withdrawing their support to the Congress led government, the political crisis looms large on the face of the common man.

Global cues
The stock market in a country can not insulate itself against anything untoward happening in the neighboring nation and the stocks are bound to be affected, especially so when it is moving down. The emerging nations take the cue from the developed markets and both are dependent on each other. Since there is no sign of recovery in the US economy, it will definitely have a negative impact on the Asian economies which are already reeling under high crude prices and galloping inflation.

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