Moneycontrol Pro Panorama: Equity markets face rough weather, time to wear your seatbelts

Indian markets will be taking cues from global developments. The rally in US stocks was led by frontline IT stocks. (Image: Shutterstock)

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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. 
The worst may not be over for the equity markets. Besides headwinds from the war in Europe, rising oil prices, sticky inflation, higher interest rates and increasing cases of COVID across the globe, equity markets may be running out of a critical fuel, of funds.  

According to Citigroup Inc, equities and other risk assets will take a hit when central banks withdraw as much as $800 billion of stimulus deployed to prop up the global economy. 

The failure of banks on both sides of the Atlantic caused central banks to pause tightening and inject liquidity to prevent a crisis. Markets rallied after they were refuelled with over $1 trillion of central bank liquidity.  

According to Matt King, Citi’s global markets strategist, high-frequency liquidity indicators suggest the benefit of this infusion is wearing out. The fresh round of infusion has resulted in the Federal Reserve increasing its balance sheet by $440 billion. 

The infusion has worked temporarily, bringing back sanity in the market, holding down real yields, fuelling an equity market rally, and tightening credit spreads. Even Bitcoin and other cryptocurrencies benefited from the increased liquidity. However, there has been no benefit to corporates as earnings continue to fall even below moderate expectations. 

The good times are coming to an end across the world. The US and Europe are also expected to continue on their path of quantitative tightening which they walked before the bank crisis. On the brighter side, China’s economy seems to have bottomed out and is showing signs of a revival. No wonder then that fund managers are hoping for a China boost.

The Citi note states that they expect almost all central banks to stall or go into outright reverse mode. In the coming weeks, $600-800 billion in global liquidity is expected to be sucked out. What's the outlook on interest rates and is the Fed nearing a pause in the rate hike cycle? Read Ajay Bagga's take.

This cannot be good news for markets that are struggling to rise. Citi's report sums it up by saying that with peak liquidity past, they would not be surprised if markets were to experience a sudden loss of pressure.  

Indian markets will be taking cues from global developments. The rally in US stocks was led by frontline IT stocks. However, in India, IT stocks have taken a beating after a poor quarterly performance. Relatively speaking, Indian markets are on weaker ground.  

Furthermore, rising oil prices, a heat wave combined with a likelihood of poor monsoon are not good news for Indian markets. Retail investors continue to believe in Indian markets even as domestic institutions have sold shares in the recent past.  

With the liquidity taps closing, it is time to stay alert and wear your protective gear.  

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Technical Picks: Reliance Industries, Aluminium, AU Bank, TVS Motor, Escorts and USD-INR (These are published every trading day before markets open and can be read on the app). 

Shishir AsthanaMoneycontrol Pro