Moneycontrol Pro Panorama | The uneasy rise in equity markets

While the sensex rose nearly 4 percent from January 1 this year, the blue-chip S&P index is up 14 percent so far this calendar year.

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The Sensex is trading flat on Thursday at around noon, after rising to a new all-time high on Wednesday. The 30-share index is now up only 4 percent from January 1 this year. But it has made a smart recovery in the past three months, rising 10 percent from the March lows.

The Sensex is not alone in shrugging off global macroeconomic uncertainties. The blue-chip S&P index is up 14 percent so far this calendar year.

The period has been marked by a rebound in purchases by foreign investors. India saw the highest amount of foreign portfolio investments among emerging markets in the past three months, according to ICICI Securities. Easing inflation, soft commodity prices, a relatively stable external sector and a resilient services sector are aiding inflows into the Indian market. Historically, such periods of high purchases from foreign investors have coincided with positive returns from equity markets.

However, everyone is not gung-ho about the current rebound in equity markets. The bulk of the current inflows from overseas investors is being routed through exchange traded funds, the so-called passive investment vehicles. Such inflows can be fickle and reverse quickly, depending on the buyers' return expectations.

In his testimony to the US Congress, Federal Reserve chair Jerome Powell warned that the central bank still had more to do to rein in inflation. “The big negative surprise in the market could be global events. The US markets are dancing to the tune of the Fed and a negative surprise can see flows getting affected in Indian markets,” warns this Chart of the Day.

Of course, investors may be looking beyond interest rates. Economic data from the US indicates a resilient job market, strong consumer sentiments and easing inflation expectations. Corporate earnings are not as bad as feared and technology innovations such as artificial intelligence (AI) are promising a wave of productivity gains.

Yet, investors should not ignore economic realities. Rail export-import container volumes lost steam in May and indicate weak external demand. The latest updates from their managements and industry consultants continue to indicate weak discretionary spending trends for the IT services sector. Analyst projections indicate moderation in earnings growth over FY23.

In the US, investors in the treasury bond market are betting that the US economy will slip into a recession. Short-term US government borrowing costs exceeded their long-term equivalents by a wide margin. Such situations, known as an inverted yield curve, have preceded every recession in the past five decades, warns this Financial Times piece, free to read for MCPro subscribers.

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Technical Picks: Aarti Industries, Coriander, CG Power, LIC Housing Finance and Nifty (These are published every trading day before markets open and can be read on the app).

R Sree RamMoneycontrol Pro