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Moneycontrol Pro Panorama | Catch-22 for markets 

In today’s edition of Moneycontrol Pro Panorama: A quality bet, PPL’s tryst with market, what Adani buy means, Guruspeak and more

May 17, 2022 / 03:21 PM IST

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

In Moneycontrol Pro’s interview with Chief Economic Adviser V Anantha Nageswaran, he says there are several risks that indicate the Federal Reserve may not be able to achieve a soft landing for the US markets. One of them is that “financial markets complicate the task of the Federal Reserve by anticipating a slowdown and lower rates. This anticipation could cause them to rally, keeping financial conditions easy, forcing the Federal Reserve to raise interest rates sharply enough such that financial conditions tighten and slow down the economy”. That’s a very interesting insight, implying that, if the markets ignore the Fed tightening, that will only compel the central bank to tighten even more in order to bring down inflation. It’s not a very optimistic message for the markets.

Bill Dudley, former vice-chairman of the Federal Open Market Committee, had earlier said the Fed needs to force the markets down to stamp out inflation. As Credit Suisse’s Zoltan Pozsar has pointed out, “If the origin of QE is to lean against deflation by generating asset price inflation (positive wealth effects), leaning against inflation must involve generating asset price deflation (negative wealth effects)—the core of Bill Dudley’s arguments.”

That’s Catch-22 for the markets -- they will fall if they’re worried about monetary tightening and they will be forced to fall if they start rallying.


The big question is: when will inflation come down by enough for central banks to hold their fire? And could monetary tightening lead to a risky market event? This FT story about the dangers from the relentless rise of the US dollar, free to read for MC Pro subscribers, says, “As unpleasant as the wealth destruction has been this year, its impact on economic activity has been muted and the risk of market functioning has yet to kick in. Having said that, for those with sharp noses, there is already some sense of this owing to the crypto carnage, together with the repeated price gapping in the US Treasury market’s global benchmarks.”

It’s no wonder that Anantha Nageswaran says, “..soft landings have been too rare. History is not in favour of the Federal Reserve.”

What about the Indian market? The behaviour of Indian equities will obviously be affected by what happens in global markets. In this excellent analysis, Madhuchanda Dey considers whether it is time to start bottom-fishing in the Indian equity market, pointing out that a comparison of bond yields with the earnings yield has historically been a good indicator of the market bottom.

The event du jour in the markets has been the rather disappointing LIC listing. Macquarie Research has helpfully pointed out the close connection between the state of the market and LIC’s valuation. In a research note, it said: “LIC’s September-2021 EV consists of almost ~70 percent of equity MTM gains and hence sensitivity of EV to equity-market corrections is far higher than private-sector peers.”

Investing insights from our research team

PPL IPO: Play on import substitution of non-urea fertilisers

Strong set of numbers by Bharat Forge, outlook promising

CMS Info Systems: A quality stock for turbulent times

What else are we reading?

Why are so many Indians not looking for work?

Adani-Holcim deal: Implications for ACC-Ambuja investors and the cement sector

Investing: A game of portfolio, personality and perspective

GuruSpeak | Saketh Ramakrishna: A young trader who struck gold in trading options

Technical Picks: UPL, Guar gum, HDFC, Hindustan Aeronautics and ITC (These are published every trading day before markets open and can be read on the app)

Manas Chakravarty

Moneycontrol Pro

Manas Chakravarty
first published: May 17, 2022 03:21 pm
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