Inflation and US Fed data set tone for markets

Spooked by the risk of inflation, rising international crude oil prices, growing concerns over global monetary policy tightening and renewed FII selling, domestic stock markets have recorded a three-week winning streak and fell more than 2% over the past week. The BSE Sensex corrected 1,466 points or 2.63% to 54,303, and the NSE Nifty plunged 382.5 points or 2.3% to 16,202 points.

The broader markets performed slightly better than the frontline indices, with the BSE Mid-cap and Small-cap indices losing only 1.2% and 2%, respectively. Selling for the eighth consecutive month, FII sold shares with a net worth of Rs 12,662 crore till date of the current month. It is pertinent to know that FIIs have sold more than Rs3.45 lakh crore since October 2021.

Partially offsetting FII sales, DIIs bought shares worth Rs2.63 lakh crore during the period. The sell-off by FIIs in emerging markets, including India, is attributed to rising inflation concerns amid geopolitical tensions and faster policy tightening by central banks. The continued fall in LIC’s stock price also dampened sentiment. It’s time for DII to back up the stock, observers say. On the back of continued FII selling, rising US bond yields, high oil prices and inflationary concerns; the Indian rupee hit a new high of 77.87 against the US dollar. Expect the currency to depreciate around 78.20-78.50 per dollar in the short to medium term. Although inflation concerns have rattled markets all year, the possibility of it easing has led to some tentative signs of stability in recent weeks.

However, after higher-than-expected inflation of 8.6% to a 40-year high in May, the highest since December 1981; The new inflationary shock has hammered stock and bond prices again, heightening investor fears that the US FOMC could accelerate its interest rate hike at its two-day meeting next week on June 14-15. The short-term direction of domestic markets will be dictated by international crude oil prices, the US Fed meeting, rupee-dollar fluctuations, monsoon spread and macroeconomic data. If the US market stabilizes, that is, if it stops reacting to any bad news, other markets around the world will turn bullish. Markets can take five to six months to stabilize, alumni say.

Listening post: Stagflation, a toxic cocktail of sluggish growth and rising prices, is widely seen as a relic of the 1970s. But economists warn it could be making a comeback. The term is broadly defined as slow growth linked to rising inflation. Economists haven’t given it much thought since the 1970s. Earlier this week, the World Bank sharply lowered its growth forecast for the global economy this year and warned of several years of high inflation and sluggish growth reminiscent of the stagflation of the 1970s. Stagflation means problems for the economy. Rising inflation erodes consumers’ purchasing power and weaker demand hurts corporate profits and causes layoffs. Stagflation also puts central banks around the world in a bind, because the central bank’s job is to keep both inflation and unemployment low. They can raise interest rates to curb inflation – a path they have started on and intend to continue this year – but if they act too aggressively they risk strangling spending and disrupt the global economy.

in a recession. Inflation is near a 40-year high in the United States. and high over several decades in several other countries, and economists worry about economic growth due to the war in Ukraine as well as blockages in China and supply chain disruptions linked to Covid-19

pandemic. Stagflation would be an extended period of higher inflation and slower growth, not just one quarter. Stagflation remains a risk for the global economy, and there are similarities between the situation in the 1970s and today. Soaring oil and food prices are driving up the cost of living, and business leaders are expressing concern about the outlook for the economy. Inflation refers to an increase in the prices of goods and services. But if inflation rises too quickly, the rapid rise in prices erodes household purchasing power. Stagflation is a situation in which prices rise, but demand weakens and economic growth slows or contracts. As a result, businesses make less money and cut jobs, which drives up unemployment. At worst, it plunges the economy into a recession.

Stagflation occurred from the early 1970s to the early 1980s, when soaring commodity prices and double-digit inflation collided with high unemployment. British MP Iain Macleod is credited with first using the word stagflation in 1965.

“We now have the worst of both worlds – not just inflation on one side or stagnation on the other, but both together. We have a kind of ‘stagflation’ situation.” The stagflation of the 1970s ended painfully. Interest rates soared astronomically, triggering a recession and double-digit unemployment.

Quote of the week: “With a good perspective on history, we can have a better understanding of the past and the present, and therefore a clear vision of the future”

��� Carlos Slim Helu

It is far too easy for investors to lose sight. Whenever something big goes wrong, many people panic and sell their investments. Looking at history, markets have recovered from the 2008 financial crisis, the dotcom crash, the Great Depression and even the Covid pandemic, so they will likely go through whatever comes next as well.

F&O / SECTOR WATCH

Due to weak macro and micro factors, markets remained under pressure and volumes declined in the derivatives segment over the past week. NSE Nifty fell more than 2%, while Bank Nifty also closed below the 35,000 level with a loss of more than 2% week on week. Options data shows maximum call opening interest at 17,000 strikes, followed by 17,500 and 16,500 strikes, and maximum put opening interest at 16,000 strikes, followed by 15,500 and 15,000 strikes. Implied call volatility closed at 17.50%, while put options closed at 18.39%. The Nifty VIX for the week closed at 19.14%. The OI’s PCR for the week closed at 1.36. NSE Nifty could be trading in a wider range of 15,600-16,600 levels in the near term. Technicians indicate that the 16000 – 15800 area would act as a strong support for the Nifty, while the 16500-16600 area is likely to cap any strong rise in the Nifty. Expect sharp sector and stock specific moves in the coming week. Crude oil prices have tightened again lately following the European Union’s decision to ban a large portion of oil imports from Russia as well as Saudi Arabia’s recent decision to raise prices for Asian buyers by a larger amount than expected. Petroleum Marketing Companies (OMCs) are expected to post better operating profits for the April-June quarter of this fiscal year, helped by higher gross refining margins (GRMs), better automotive fuel margins and LNG as well as an increase in the price of oil and gas products. Stay invested and add the RIL, IOC, BPCL and HPCL declines. RIL’s share price rise was fueled by news that the Indian government has lost its appeal in the English High Court against a $111 million arbitration award in favor of RIL and Shell in a recovery dispute of costs in the western offshore Panna-Mukta and Tapti oil and gas fields. Banks are expected to post high net interest margins due to near-full pass-through of the RBI’s policy rate hike under the External Benchmark Rate (EBLR) regime. They passed the entire 90 basis point increase in the RBI repo rate on to their lending rate, making home loans, car loans, personal loans and MSME loans expensive for

borrowers. Opposites advise the accumulation of good banking stocks in the current weakness. Equity futures that look good are BEL, HPCL, Dr Reddy, Reliance Ind, ONGC, SBI Life and NTPC. Equity futures that look weak are Apollo Tires, AU Bank, Berger Paints, Deepak Nitrate, United Phosphorus and Vedanta.