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.

The reason and the aftermath of sub-prime crisis

The sub-prime crisis which started in July 2007 has taken a heavy casualty of the credit markets and spreading its tentacles. Because of this, the credit markets across the globe have literally come to standstill and the stock markets are frequently checking their bottom range.

This sub-prime crisis contributed a lot to the unprecedented volatility on the movement of stocks. The fall of the mighty Bear Stearns was attributed to this crisis.

The move by the US government to reduce the interest rate 0.75 percentage points literally brought the bench mark interest rate to 2.25 per cent. The reduction is sixth since the year 2007, September.

It is known to every one that the Federal Reserve played a major role in the takeover of Bear Stearns by the JP Morgan Chase by favoring the underwriting of transaction. Another example that caused havoc in UK due to sub-prime crisis is the fall of Northern Rock and has since been nationalized.

What is the reason for the sub-prime crisis?

1. The American banks and other financial institutions adopted some highly questionable practices while advancing loans.

2. Borrowers with poor track record were in fact awarded the loans or so to say, were forced to take loans.

The policy adopted by these institutions were called innovations that time when the picture was rosy. Many of the leading banks fail to assess the risks in the products they sold. There was a difference in the interest rates for those who had a poor track record. When the problem with the defaulters became unmanageable, the risk was manifested and it affected not only the gUS companies but hugged the global markets including the stocks.

Latest News :

There have been reports that the Asian markets have bounced back and it was a magnificent start for the Indian stock markets on the Monday and exemplary on Tuesday, 25th March, 08, i.e. today. However, one has to wait and watch about how far the bulls can run and when the bears will interfere.