Dear Reader,
The markets seem to have been inspired by the Paris Olympics to climb to Olympian heights. After all, the Olympic motto ‘Faster, Higher, Stronger’ could very well be a description of recent market behaviour. But while the markets rose very high very fast, they weren’t really stronger. That is seen from the bout of angst that overwhelmed the markets at the end of the week.
It’s funny that this nervousness comes during a week that finally saw the US Fed signal that a September rate cut is on the table. As my colleague Anubhav Sahu wrote, Fed chair Powell mentioned the possibility of a rate cut several times during his press conference. US bond yields fell, the USD weakened, and stocks soared. A day later, while bond yields stayed down, equities fell sharply on worries over slowing growth. The Vix shot up.
And then, on Friday, came the confirmation that the US economy is indeed slowing much more rapidly than expected. Non-farm payrolls for July came in at 114,000 while the estimate was of 176,000 jobs. Private-sector firms added 97,000 jobs in July, the weakest since March 2023. The unemployment rate was 4.3 percent, against the estimated 4.1 percent. Average wage gains fell to their lowest level since May 2021.The Fed funds futures markets, which on Thursday were assigning a 22 percent probability that the Fed would cut the policy rate by 50 basis points in September, suddenly upped that probability to around 60 percent. The probability that the Fed Funds rate will be lower by over 100 basis points from its current level by December this year jumped to over 80 percent when the non-farm payrolls data came out.
Reflecting all this, US bond yields plunged, as did the USD, stock futures and commodities, while the Vix and gold prices shot up.
Won’t the rate cuts be good for the stock markets? The problem is that the US ISM Manufacturing PMI, a gauge of manufacturing conditions, fell to 46.8 in July, signalling not just contraction from the previous month, but contraction at an accelerated pace. The sub-index for jobs plummeted while that for selling prices firmed up, raising a whiff of dreaded stagflation. On the S&P Global US Manufacturing PMI for July, which too, at 49.6, shows a shrinking manufacturing sector, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, “Business conditions worsened in July as the first fall in new orders since April caused a near-stalling of production. Purchasing activity is falling and hiring has slowed amid concerns over weaker-than-anticipated sales.’’ Some analysts are saying that the Fed made a mistake in not cutting rates at their last meeting—it is behind the curve. The non-farm payrolls data for July confirmed their worst fears. While rate cuts are welcome, it all depends on whether the rate cuts lead to a soft landing, or whether they are needed to avert a recession.
Another question worrying the US markets is whether the AI bubble is bursting. As the FT story headlined ‘RIP semiconductor rally?’ (free to read for MC Pro subscribers) asks, “Has one of the market’s legs been kicked out from under it?”
The Bank of England too cut rates by 25 basis points this week, reducing its policy rate for the first time in four years. But with the decision a narrow 5-4 in favour of the reduction, this may not be followed up with more cuts. Inflation has remained elevated at the EU after its rate cut, but nevertheless the markets are still pricing in a very strong probability of another cut.
Rate cuts and/or imminent cuts may cushion other markets, but the Bank of Japan’s rate hike led to an 8.3 percent drop in the Nikkei 225 in two days. The yen strengthened from 155 to the USD on Tuesday to 147.40 by Friday and Japanese companies will lose the weak yen tailwind.
And finally, there are worries again of an escalation of the conflict in the Middle-East, with the Israeli attack on a top Hamas leader in Tehran.
Not everybody is convinced that the US economy is in trouble, though. This FT story, for instance, says there’s no pressing need for the Fed to cut rates in September. Williamson had added, “Many firms are expecting the weakness to be temporary, linked to paused spending and investment ahead of the Presidential Election.’’
Back home, the fall in the markets comes after a spectacular week in which the Nifty climbed to 25k and the Sensex took out 82k, in spite of a consultation paper by market regulator SEBI on measures to curb speculative volumes in derivatives.
The fall in the Indian markets on Friday was on global cues. But there are some signs that growth may be moderating. CARE Ratings said that their CareEdge Economic Meter (CEM), a composite index to track the state of the economy on a real-time basis, expanded at the slowest rate of expansion in the past 6 months. It’s early days yet, but the CMIE data show that corporate performance for the June quarter so far has been less than stellar -- our analysis of the results of several companies are given below. The picture on rural consumption remains patchy, and high food inflation is a dampener. Auto sales for July too have been mixed. And of course valuations in many stocks have reached Olympian levels and, unlike the Fed, it’s unlikely that the RBI’s Monetary Policy Committee will cut rates at its next meeting, to be held next week. Nevertheless, the Indian markets are not really worried, as the Nifty Vix shows.
The best strategy during such times is that of careful bottom-up investing. Our excellent Research team, whose Budget 2023 portfolio had delivered astounding returns of over 100 percent in around 18 months, has now come up with their Budget 2024 portfolio of fundamentally sound and reasonably valued stocks that will profit from the announcements made in the recent Union Budget.
And finally, this would perhaps be the right time to view once again the famous Monty Python Olympics.
Cheers,
Manas Chakravarty
Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
Stocks
Why this defence stock is still looking good, ITC, Zomato, TCI, Tata Motors, Sun Pharma, V-Guard, Dabur, Tata Steel, Ceigall India IPO, Intellect Design Arena, ideaForge, Sumitomo Chemical India, CSB Bank, Dixon Technologies, Tata Consumer, Navin Fluorine, UltraTech’s India Cements acquisition, Ola Electric IPO, IndiGo, IndusInd Bank, Ashok Leyland, ICICI Bank, Thangamayil Jewellery, Mphasis, JSW Energy, Shriram Finance, Amber Enterprises, IPO: Should investors bet on the largest pharma contract manufacturer of India?, Kaynes Technology, Colgate Palmolive, Shaily Engineering, NTPC, FY25 could be the year of the banking underdogs, Coal India, Maruti, GAIL, M&M, Crompton Consumer, Varun Beverages, 360 ONE Wealth, Mas Financial
Markets
Lessons SEBI should learn from global markets before introducing curbs
SEBI curbs combined with tax increases will take the wind out of the derivative market
What the inflation targeting framework missed
Decoding Economics: Stock picking is alive and well
Why Sovereign Gold Bonds may die a silent death
Financial Times
It pays to be a lazy investor—but for how long
What OPEC’s next big goal should be
Premium beauty is heading for a rough patch
Companies and sectors
ITC’s cigarettes business helps it sail through rough seas, What’s driving Gurgaon’s gold rush in real estate?, Ola IPO, Suzlon’s order book, Adani, Birla acquisitions could reshape southern cement landscape, Why the diamond industry is losing its shine, Elevated stress of SBI Cards points to trouble in plastic paradise, Torrent Power, Lenders are cautious on higher NPA levels, but no alarm bells so far: Amit Diwan, It’s Adani Vs Birla and Birla Vs Asian Paints in battle of giants, Why India is missing the boat in shipping,
Economy & Policy
Where’s the competitive spirit in India’s duty regime? Monsoon Watch, SC judgement allowing states to tax mineral rights poses risk to industry, What the budgetary allocations tell us about government priorities, The Eastern Window: Time for India to change its policy towards Chinese investment? Growing remittances an excellent example of India’s demographic dividend, Government’s silence on WazirX mess is unfair to India’s 19 million crypto investors, The old 30 percent corporate tax rate is giving the new 22 percent rate a run for its money, Pro Economic Tracker, PCA framework for bigger co-op banks is good news for depositors, How to make a just transition in energy mix?, Banks get a Rs 8,500 crore worth pot of gold from the bottom of the pyramid
Personal Finance
Coming soon: Mutual funds to be governed by SEBI’s insider trading norms. Here’s what it means
The art of putting an equities’ trading strategy in place
From FOMO to FOLO: Navigating investment trends with a long-term outlook
Tech & Startups
Start-Up Street: VC funding makes a turnaround, will it gain momentum?
See green shoots in IT hiring, GCCs make up 70% of mandate: Quess Corp CEO
Productivity benefits from AI, automation help Cognizant work with fewer employees
Politics
UP byelections a litmus test for Yogi Adityanath
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