Why US Fed's rate hike failed to calm markets?

Thursday’s steep sell-off from morning highs reflect the bearish undertone in the Indian equity markets. 

Despite a rate hike on anticipated lines by the US Federal Reserve, investors sold rallies and pushed the benchmark indices to fresh 52-week lows intra-day.

While the S&P BSE Sensex slumped nearly 1,050 points, the Nifty50 index dropped 332 points to end at 51,496 and 15,361 respectively.

With this, the 50-pack index has broken its crucial near-term support of 15,500, and could be heading towards its next support level of 14,911, which is followed by 13,099.  

UR Bhat, Co-Founder & Director, Alphaniti Fintech, Nifty has broken crucial support of 15,700. Fall from here on will be brutal, he says. Next support is nearly 1,000 points away. Only a healthy bounce back can save investors, he says.

According to analysts, the Federal Reserve’s biggest increase in interest rates since 1994 and signs of weaker consumer spending indicate that inflation is winning the battle. 

Further, they fear that the world’s biggest economy could be hit by a recession as early as 2023.

The Fed, on Wednesday, too, cut its economic growth outlook for 2022 to 1.7% from 2.8% projected in March.

According to the latest estimates by Bloomberg Economics, a downturn by the start of 2024, barely on the radar just a few months ago, is now close to a three-in-four probability.

Against this backdrop, analysts feel the US Federal Reserve’s policy action on Wednesday fell short on liquidity tightening.

G Chokkalingam, Founder, Equinomics Research & Advisory, says US has reached mid-point of rate hike cycle. Markets need two more cycles to fully discount hike cycle, he says adding that however, Balance Sheet reduction is nowhere near mid-point.

Downside bias for US, Indian markets exists.

Apart from these imported headwinds, India is facing domestic concerns such as boiling oil prices, higher inflation, weaker currency, and FPI outflows.

UR Bhat, Co-Founder & Director, Alphaniti Fintech, says inflation is out of control and India has negative real interest rates. He says, once to expect faster-than-anticipated interest rate hikes. Markets should expect substantial correction.

Going forward, analysts at UBS suggest Indian investors trade with caution as it expects the Indian rupee to weaken to 80 against the US dollar, with risks skewed to the upside.

That apart, it also sees yield on the 10-year govt bond topping the 8% mark before the end of the current fiscal.

Further, the brokerage expects DII inflows to moderate, in addition to sustained FPI selling.

Lastly, UBS expects the RBI to raise repo rates to 6.25% by March 2023. 

Clearly, a high inflationary environment for an extended period is blowing up market returns as fears of recession loom large over the US economy, coupled with concerns over a slowdown elsewhere in the world.