Markets crack on hawkish chorus of central bankers

The benchmark indices shed nearly 1.5% on Monday, mirroring global cues, as the hawkish commentary from the US Federal Reserve and other central bankers spooked investors.

Global stocks fell, treasury yields climbed and global currencies lost ground against the dollar on Monday as the import of Friday’s speech by Fed chair Jerome Powell sunk in. Japan’s Nikkei 225, South Korea’s Kospi and Taiwan Weighted indices ended up to 2% lower. European Central Bank board member Isabel Schnabel joined the chorus of hawkish central bankers over the weekend emphasising the need to combat inflation even at the risk of tipping economies into recession.

Equity investors lost Rs 2.39 trillion in Monday’s session.

The rupee breached the 80-to-a-dollar mark to hit a fresh record low of 80.18 even as the US dollar surged to a 20-year high against a basket of currencies.

Also read: Dollar touches 20-year high, but kept in check by euro, as rates in focus

“The market has adjusted its rate expectations post the hawkish comments of the US Fed chair; it now expects US Fed Fund rate to climb to 4% by early 2023 and stay there in H1CY23,” said strategists at Kotak Institutional Equities.

“The US Fed is clearly signalling that it may be willing to induce a deeper and longer slowdown in the US economy in order to bring down inflation under control while markets had assumed a shallow and short slowdown. In fact, equity markets had started factoring in rate cuts by the US Fed in Q2CY23,” the note said.

A sharp decline in global growth, quantitative tightening by central banks and increasing geopolitical tensions are the key risks to Indian equities, according to foreign brokerage BofA Securities.

“We believe a mild recession in the US/muted global growth is now priced in. However, a sharp impact on global growth would lead to risk-off trade, impacting EMs. Similarly, while $3.1 trillion of quantitative tightening by central banks of major economies by December 2023 is now priced in, its potential acceleration is a risk,” said Amish Shah, research analyst at BofA Securities.

He added that a revival in China’s economic growth could impact FPI flows into India given that China’s weight within MSCI EM has come off from 43.2% in October 2020 to 31.1% now, even as India’s weight has increased from 8.1% to 14.3%. This could shrink India’s valuation premium.

Also read: Sensex, Bank Nifty end 1% down, RIL falls post AGM; Nifty support at 17250, use dips to buy quality stocks

“In the short term, most of the emerging market central banks and ECB will have to follow the Fed and increase rates to protect their currency and stay away from imported inflation. The Fed and ECB will increase rates further, but they will need to be watchful of the repercussions on growth, which will be visible in years to come,” said Aishvarya Dadheech, fund manager, Ambit Asset Management, adding that the Indian market will remain resilient and remain in the consolidation phase for some time.

Market watchers are closely monitoring the pace at which central banks are tapering their bloated balance sheets. The Fed is tapering its assets at a much less pace than planned. The plan was to reduce the balance sheet by $47 billion per month from June to August and $95 billion every month thereon. From June 1 to August 24, however, the balance sheet has shrunk by $63.6 billion.

The immediate support for Nifty is now placed around 17,100, with 17,450 and 17,530 are likely to act as resistance on any pullback. Auto sales numbers, core sector and GDP data will be among the domestic cues in a holiday-truncated week.