Moneycontrol Pro Panorama | Markets get the Fed blues

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This will be an interesting week for global economies and world markets as central banks take to increasing interest rates. The only uncertainty is the quantum of increase.

US markets are nervous as the expectation is building up that the Fed may go aggressive by announcing a 100-basis point (bps) increase compared to a consensus of 75 basis points. Manas Chakravarty argues that while a 75-bps hike is discounted, investors will look for clues whether the fall in inflation and the slowing of US growth will make the Fed less hawkish.

Earlier in the week, Sweden surprised the European market by announcing a 100-bps increase in its benchmark rate.

After the US Fed, central banks in the UK, Switzerland and Japan are expected to announce rate hikes while the RBI is likely to announce a hike next week.

But is increasing interest rates the only weapon left in the central bankers' armour to fight inflation? Ajay Bagga feels that policymakers must heed the lessons from their failure to bail out Lehman Brothers in 2008 and be mindful of the risks of too much monetary tightening.

Investors will be keenly watching Fed’s economic projections to get a hint on what it thinks about the endpoint on rates as well as its forecasts for inflation and employment. Investors have interpreted the Fed’s recent pronouncements about their determination to tame inflation at any cost as an indication of likely recession.

So, where do these announcements leave the market?

In the short term, markets are nervous, with the CBOE volatility index rising to 27 after hitting a low of 20 in mid-August. Technically too, most advanced markets look weak and any negative surprise could signal a fresh round of selling.

Since the beginning of 2022, markets have been reacting sharply to negative news, indicating structural weakness. One can expect a similar reaction if the announcements surprise the market negatively.

Among the leading markets, India is the only one that is giving positive returns in 2022. Technical charts also show medium term strength, with the indices trading close to their 52-week highs.

In the short term, however, options data show some signs of weakness that could be due to the expectation of rate hikes. There are more sellers in call options than in put options, indicating a short-term fall. The number of stocks advancing in the current rally is also lower than what we have seen in earlier ones.

The silver lining is that foreign investors are not withdrawing funds from Indian markets. This, however, can change if the Fed and other central banks maintain a hawkish view and keep increasing rates.

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Nuclear power is the answer to India’s energy demand challenge

How Japan leveraged commercial banks for high economic growth

Spac implosion: Palihapitiya’s retreat marks the end of an era (republished from the FT)

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Technical Picks: Gold mini, Coal India, Tejas Network, Lupin and Triveni (These are published every trading day before markets open and can be read on the app).

Shishir AsthanaMoneycontrol Pro