Are inflation expectations falling?
Investors fear that aggressive interest rate hikes by major central banks to fight inflation could lead to a recession, which would reduce demand for commodities and other items.
This suggests that bad news for financial markets now seems to be quickly turning into good news.
Indeed, equity markets broadly surged on Friday and posted solid gains for the week as the recent decline in commodity prices eased concerns about inflation and the possibility of rate hikes.
The S&P 500, Dow and Nasdaq all posted weekly gains of more than 6%, with the S&P 500 rising 6.4%, the Dow 5.4% and the Nasdaq 7.5%.
The benchmark S&P 500 index confirmed a bear market the previous week. US Treasury yields steadily climbed from a two-week low.
The pan-European STOXX 600 index and the MSCI World Stock Index both posted gains of 2.62% and 2.63%, respectively.
“The (stock) market entered oversold this week, so it was time to rebound,” Quincy Krosby, chief equity strategist at LPL Financial in Charlotte, North Carolina, told Reuters.
“We’ve seen oil prices decline along with other commodity prices,” she said, adding that the market move reflected “expectations of at least a sharp slowdown, if not a full recession.” .
But the risks of a recession or a sharp global economic slowdown must first surface before a drop in demand catches up with inflation-fighting central banks.
On Friday, Indian equity benchmarks rose for a second straight session, capping a successful week. Asian markets, which ended the week on a positive note, carried over overnight gains on Wall Street.
But the rupee hit a fresh all-time low of 78.33 against the dollar, underscoring deep concerns, despite the greenback falling on Friday, posting its first weekly loss of the month.
Following tight monetary policy from the Reserve Bank of India and the US Fed, high oil prices and a volatile rupee, foreign investors continue to flee Indian stock markets, with withdrawals totaling nearly 46,000 crores of rupees so far this month.
The risks are therefore numerous.
For the week ahead, analysts predicted that global trends, the price of crude oil and foreign institutional investment would influence Indian stocks. They also warned that benchmarks would be volatile due to the upcoming monthly expiration of derivatives.
“Indian markets have managed to recover from their lower levels after two weeks of steep declines on the back of a recovery in global markets and lower commodity prices. It looks like this recovery could continue, and we can expect to a decent recovery in the next few days in equity markets,” Santosh Meena, head of research at Swastika Investmart, told PTI.
“Besides the F&O expiration, monthly auto sales figures and the developing monsoon will be important triggers,” Meena said.
He added that crude oil, the movement of the rupee and the behavior of FIIs (foreign institutional investors) would be other important factors.
After two weeks of losses, the 30-stock BSE Sensex rose 1,367 points, or 2.66%, last week. Nifty as a whole rose 405.75 points or 2.64%.
Tata Consultancy Services was the biggest gainer last week, with the valuation of nine of the top 10 companies, based on market cap, rising by Rs 2.51 lakh crore.
While Reliance Industries was the only member of the group to lose ground, the other winners were HDFC Bank, Infosys, Hindustan Unilever Limited and ICICI Bank.
But the development of the rupiah, the expiration of contracts and the progress of the monsoon would be watched by investors.
Ajit Mishra, Vice President – Research, Religare Broking, told PTI: “We expect volatility to remain high this week as well, thanks to the expected expiration of derivatives contracts in June.
“In addition, the performance of global indices, especially the US, the movement of crude and the progress of the monsoon etc. will remain on the radar. This week also marks the start of a new month, so the auto figures will also start pouring in from July 1,” Mr Mishra added.
Yesha Shah, head of equity research at Samco Securities, said: “This week, a host of events are happening that could affect the mood of the market. Investors will be analyzing the quarterly U.S. GDP growth rate numbers.” .
According to Shah, stock-specific swings on D-Street in India will continue to be influenced by car sales data as investors try to predict the direction of the market. Monthly F&O expiry in the second half of the week may also contribute to index volatility.
Last week, several industrial metals experienced declines.
After hitting $8,122.50, the lowest level since February 2021 and a 25% drop from the March high, standard copper on the London Metal Exchange fell 0.5% to 8,367 $ per ton.
Oil prices recorded their second weekly decline despite rising on Friday.
International benchmark Brent rose $3.07, or 2.8%, while U.S. West Texas Intermediate crude rose $3.35, or 3.2%, to end the week at 107, $62 a barrel.