Volatile market conditions ahead, investors should be cautious: Analysts

The domestic stock markets are currently under the influence of the interplay of many macroeconomic factors. The market movement will depend on how these factors play out in the next few weeks. Primary among them is quantitative easing. Investors have to track these factors closely before they invest further in the stock markets.

Sluggish US economy

The US economy has slowed down according to the latest data. The report, known as the 'Beige Book' , based on anecdotal information gathered by officials at the Fed regional banks, says that for the period April and May there has been a softening in the GDP growth in the US. This has currently been attributed to the burden of high gas prices that has weakened consumer spending .

The US Fed's Governor Ben Bernanke felt the slowdown due to high gas prices and Japan's crises is temporary and growth should pick up later this year without additional support in the form of another round of quantitative easing.

Quantitative easing II

Despite the recent weakening economic data, the Fed's enormous treasury buying programme is expected to conclude in June 2011. Many investors say quantitative easing two (QE2) has boosted stock prices in the US since late last year. Further, the stimulus has driven commodity prices higher due to carry trade, and has depressed the dollar.

With QE2 coming to an end the opposite is happening . The stock markets are on a decline trend and the dollar has strengthened against other currencies. The ending of QE2 is expected to unwind the carry trades in commodities and bring commodity prices lower.

Global liquidity pie shrinking

The end of QE2 will shrink the global liquidity pie. The Asian markets such as Hong Kong were a key beneficiary of the flood of liquidity that entered the global financial system as a result of the Fed's actions last November.
But if liquidity in the whole world is shrinking, then it becomes a question of which markets can attract this contracting liquidity. Analysts are of the opinion that emerging markets such as China are poised to attract the shrinking global liquidity due to their superior GDP growth.