Why Sensex closed near 7-month high

Why Sensex closed near 7-month high

The BSE Sensex rallied for the sixth day to close at the highest level since February 23, 2012. The sharp rally had little to do with domestic macroeconomic triggers, which suggest further weakness in the economy. Stocks moved sharply on global news and liquidity flows.

Here are five reasons why markets have hit seven-month high:

1. The latest trigger came from Germany's top court, which backed the legality of the euro zone bailout funds, although with conditions. German approval of the ESM was crucial to boost the euro zone's crisis fighting powers and a key requirement for the European Central Bank's new plan to buy the bonds of struggling euro members.
2. Many analysts expect the Fed will announce a new effort to revive the sluggish US economy on Thursday, which added to bullish sentiments on the Street. The assumption that the Fed will announce new stimulus measures is so widespread that some worry the market could take a plunge if the Fed fails to deliver.
3. Domestically, hopes for government reforms rose after the aviation minister signalled the country was moving to allow foreign direct investment into the sector. Under the current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.
4. The weak factory output data, which grew an annual 0.1 per cent in July, has raised hopes of rate cut next week. Manufacturing, which contributes about 15 per cent to overall GDP, contracted for the second straight month. The sector is battling weak demand in both overseas and domestic markets.
5. Markets have witnessed increased liquidity after the European Central Bank announced its latest bond-buying plan last week. ECB's program is intended to keep the short-term borrowing rates of debt laden countries like Italy and Spain at manageable levels, giving them time to enact debt reduction measures and economic reforms.