Moneycontrol Pro Panorama | Will the markets now fire on all cylinders?

Dear Reader, 

Markets are no longer reacting to negative news. After the initial jump, oil prices have fallen by $40 a barrel. A rate hike failed to affect the US markets, which after a small dip, have moved higher. Do these reactions then suggest we can see markets resume their upward journey? 

Let’s first look at two events closely. 

First, the latest event of the US Fed increasing interest rates. 

The Federal Reserve led by Chair Jerome Powell voted 8-1 to increase key rates for the first time since 2018. After two years, since the pandemic, when borrowing costs were kept near zero, the Fed has decided to target a range of 0.25 percent to 0.5 percent. Interest rates were raised by a quarter percentage point and guidance of hikes at all six remaining meetings this year was given.  

With inflation touching a four-decade high and fuel prices getting out of control, the Fed had little room but to wriggle its way out of the inflation mess by increasing interest rates rapidly. The projected policy rate is now likely to be in a range of 1.75 percent to 2 percent by the end of this year and 2.8 percent next year. However, the Fed has not given any indication on when it will start quantitative tightening. 

Conventional wisdom says higher interest rates are bad for the markets. But a look at previous hikes suggests that the market has moved up during these hiking cycles after an initial dip, though volatility remains high during these periods. 

In the present scenario too, markets may continue to rise as the rate hike news is discounted for now.  At the end of the day, it is earnings growth, despite higher interest rates, that will decide the market movement. Given the guidance trajectory from US corporates, earnings growth is likely to remain intact. 

Coming to crude oil, after crossing $140 a barrel since the start of the Russia-Ukraine war, Brent crude is trading below the $100 mark. The fall has been attributed to Russia allowing revival of the Iran nuclear deal, which can result in Iranian oil coming to the market.  

Further, the war in Russia and Ukraine has abated and is restricted to a few cities where the Russian army has surrounded the Ukrainians.   

The other price dampener was the increasing COVID-19 cases in China. The country has announced lockdown in Shenzhen, the second-largest port in the country that handles traffic nearly double of all Indian ports. Analysts fear a slowdown that can impact growth and in turn oil consumption.  

Global markets' reaction to the two events is logical and has been on anticipated lines. However, for Indian markets, an important factor to watch out for is the continuous selling by foreign investors. 

Higher interest rates in the US have led to foreign investors withdrawing money from India. Event risks like war also led to investors pulling their money out from emerging markets, including India. And finally, high oil prices would add pressure on the rupee, which is not appreciated by foreign investors. Data show that foreign institutional investors have already sold over Rs 2 lakh crore of shares in India since October. 

For Indian investors, the only data point to watch out for now is FII flows. When the selling subsides, the Indian market will rally in tandem with global ones. 

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Technical Picks:  Wipro, USD-INR, Century Ply, Coforge, Guar seed and HAL  (These are published every trading day before markets open and can be read on the app) 

Shishir Asthana

Moneycontrol Pro