The hawkish US Fed spooks financial and capital markets

Soaring crude oil prices and hawkish comments from the head of the US Federal Reserve, Jerome Powell, led to a sharp drop in stock and financial markets on Thursday. Sensex and Nifty witnessed wild intraday swings at the end of January’s derivatives run on the rollercoaster with the biggest sell-off by foreign portfolio investors (REITs) in recent months. Sensex and Nifty have fallen more than 8% from their January peak so far.

Yields on government securities (G-Secs) jumped around 8-9 basis points to two-year highs and the rupiah depreciated against the dollar on Thursday, as the Federal Open Market Committee (FOMC) the US Fed said it expects it will soon be appropriate to raise the target range for the federal funds rate.

Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities Ltd, said: “Markets are down mainly due to the Fed’s hawkish outlook. Powell, Chairman of the Federal Reserve, signaled an interest rate hike in March and predicted the possibility of unexpected and aggressive policy tightening. This led to an increase in US 10-year bond yields and the dollar index, which is negative for emerging markets. Tensions between Russia and Ukraine have pushed up crude oil prices. With all of these headwinds, the market is now facing a monthly expiration date for January F&O contracts, which has added to the volatility.

On Thursday, Sensex fell 581 points or 1% to close at 57,276. During the day, the index fell more than 1,300 points but recovered as US stock futures rose. The Nifty lost 167 points or 0.97% to close at 17,110. On an intraday basis, the index was down more than 400 points. The U.S. Fed did not raise U.S. interest rates at its Wednesday meeting, but Powell’s comments after the meeting are seen by many as a hawkish stance. The general perception has seeped into the markets that the Fed will impose pauses on the stimulus and start to reduce it aggressively. Powell announced a rate hike in March.

But analysts say the bullish momentum seen over the past few months would take time to return. In India, market participants believe the bulls could come back strong if the Union budget announcement next Tuesday does not include unfavorable taxes, gives a clear roadmap on infrastructure spending, more programs to attract global capital and increased purchasing power to the national middle class.

“The bullish momentum appears to be broken and new highs may not arrive in the coming weeks. But in the short term, markets appear oversold and a relief rally is expected,” said G. Devanathan, Zenture Partners LLP. Growth and momentum stocks have been leading the bull race so far, but suddenly global markets have to adjust to the new reality of interest rate hikes which could be rapid since the Fed realized it was behind the curve. Hence this violent drop in stock prices, especially new-age tech stocks,” Devanathan said.

After the sharp sell-off in January, Indian stock markets could take another course if the budget can change the negative sentiments.

“For the Modi government, this budget is important as it gives 24 months time to implement the measures announced now before the 2024 general elections. infrastructure spending, opens up markets with capital convertibility and brings in new programs to attract global funds. Whatever it can do, it has to do now and the government realizes that. So the budget will keep the mood going,” said Deven Choksey, MD, KR Choksey Investment Managers.

Choksey says part of the drop is also due to most traders and investors aggressively trimming their positions in the face of the huge REIT selloff. But if the budget changes sentiment, domestic investors will panic to buy, Choksey said.

In spot markets, REITs have sold shares worth Rs 32,676 crore so far this month, according to exchange data. FPI sold index futures worth Rs worth Rs 10,524 crore and equity futures worth Rs 10,383 crore during the month as data exchange. U.S. stock markets were seen rallying after Thursday’s plunge.

Market participants say that with inflation well above 2% and a strong labor market in the United States, the hike in the federal funds rate could have implications for global economies, including India, as the rise could trigger capital outflows and weaken currencies.

Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The RBI needs to take a call at some point on rewinding liquidity and the Fed’s long-term guidance could be taken as a model by the MPC (Committee monetary policy) for consideration .

“We have high inflation and uncertain growth, just like the United States. The market is demanding higher returns and the question is how long can the RBI maintain its current position? »

Rupee weakens

The Rupee (INR) weakened by around 30 paise to close at 75.09 per dollar (USD) as the greenback strengthened on the FOMC statement.

The USDINR pair also rose because some banks consistently bought US dollars for oil marketing companies, noting high Brent crude oil prices, according to the report.

Published on

January 27, 2022