Global cues to track

Investors who wish to take the direct investment route to equity should keep an eye on the developments taking place in global financial markets.

Lokeshwarri S. K

It is no secret that Indian stocks dance to global tunes. Global investors with interests in assets across the world are simultaneously watching the developments in every part of the globe, be it London or Kyrgyzstan, and responding accordingly.

A skirmish in even the remotest location elicits instantaneous reaction from every asset class, and Indian stocks are not spared.

It is therefore necessary that investors who wish to take the direct investment route to equity should keep an eye on the developments taking place in global financial markets. But it is next-to-impossible to monitor all the data points on a daily basis.

The way to circumvent this difficulty would be to keep track of few indicators or indices that can give you a broad idea of the direction in which the global markets and economy are headed.

Global benchmark indices

The primary indicator of the trend in overseas stock markets is the benchmark indices in various countries. Since the movement of US equity markets have a great influence on the stock price movement in other regions, it will do well to monitor the major US indices such as the Dow Jones Industrial Average and the S&P 500. The closing level of this index sets the tone for the Asian and European markets for the next day.

You could also keep a close tab on the indices of markets that trade at the same time as the Indian markets. A knee-jerk reaction in these indices causes a similar reaction in our markets as well.

Other benchmarks that can be tracked are the MSCI Emerging Markets Index and the MSCI BRIC Index. Since a chunk of overseas funds flowing to the Indian stocks are routed through emerging market (EM) or BRIC funds, the destiny of our stock prices are closely intertwined with our EM and BRIC brethren.

CRB Index

The world of commodities is as diverse and complex as equities. Movement of commodity prices in overseas markets affect the domestic prices too. To get a bird's eye view of the movement of the commodity universe, investors could track the Thomson Reuters/Jeffries CRB index.

This index captures the movement of 19 commodities traded on major international commodity exchanges and helps investors gauge the direction of commodity prices.

For instance, this index was surging higher in the first six months of 2008. Commodities including crude oil had a fantastic run in this period as global investors shifted from equity to commodities.

But the CRB index lost almost 50 per cent of its peak value in the second half of 2008 capturing the sharp correction in commodity prices in this period.

Dollar Index

Yet another index that has caught the fancy of stock market investors in recent times is the dollar index. It has been observed in recent past that rising risk appetite causes money to flow out of US treasury and money market instruments in to equities, causing dollar to appreciate and equity prices to fall. The reverse takes place in times of rising risk aversion.

This link makes it important that investors watch the greenback closely. This can be done through the dollar index.

This index captures the relative value of the US dollar against a basket of currencies comprising the Euro, Japanese Yen, Pound Sterling, Swedish Krona and Swiss Franc.

It can be observed that the dollar index is rising since last December. Equity markets have turned choppy in this period. Further strength in this index could spell trouble for stock prices and vice versa.

CBOE VIX

The Chicago Board of Options Exchange's volatility index or the CBOE VIX is also becoming a familiar name among the stock market fraternity in India.

This index, also known as investor's fear gauge, captures the sentiment among the investors by using the option premiums of S&P 500 index. The CBOE VIX tends to decline when stock prices are surging higher and it tends to shoot up in times of market declines.

This index surged to a peak of 89.5 on October 24, 2008. This was the day when stocks across the world touched a nadir on fears of a deep-rooted depression in global economy. Incidentally, the CBOE VIX is trading just above the bull-market range between 10 and 15 over the last two months.

Baltic Dry Index

This index is a favourite among the seasoned stock market participants as it is considered a lead indicator for economic activity.

The Baltic Dry Index published by the Baltic Exchange in London tracks the price of moving raw materials such as coal iron ore and grain by sea. It covers 26 shipping routes and the entire gamut of shipping vessels.

Since dry bulk materials are the inputs for intermediate and finished goods, the cost of moving these goods provides a good indication of economic expansion or contraction.

From the peak of 11,793 in May 2008, this index crashed to 683 in the second half of 2008 when global economy began contracting and recession was looming large.

Slew of stimulus measures by countries across the world has helped the BDI recover about one-third of these losses in 2009.

But the movement of this index has remained choppy since June 2009 indicating that global economy is still not out of the woods.