Back to a Turtles Pace
‘When it rains, it pours’ is an adage proving true for the markets. First, we saw the markets gripped by the dread of the second wave of the corona virus pandemic and just when they were slowly but steadily sailing past the troubled waters of this second wave, they are now facing the wrath of the inflation monster rearing its head. With this the markets are back to square one as over the last four trading sessions they have remained almost unchanged. Currently, the markets are in a spot as on one hand the daily virus cases in the country are not seeing any substantial respite apart from a day or two of a slight downtrend while on the other hand there are the rising commodity prices.
The commodity prices are now impacting the inflation curve, thus giving the markets enough cause to be unsettled. In fact, these prices have soared recently at a fast clip. The future of copper, which is often seen as a barometer of the global industrial economy, scaled to record highs in the latter part of the last week. Even though commodities have retreated from their highs, the elevated prices are expected to raise costs of businesses. For market participants and economists keen to spot any sign of inflation, China is a good place to take cues from. China released producer price index (PPI) figures for the month of April, soaring to 6.8 per cent YoY.
Moreover, in the US the consumer price index (CPI) jumped 4.2 per cent, much faster than expected. Excluding volatile food and energy prices, the core CPI increased 3 per cent from the same period in 2020 and what is more of a concern is that on a monthly basis it rose by 0.9 per cent as compared to an estimate of 0.3 per cent. Despite this sharp surge the Federal Reserve policymakers turned a blind eye, expecting it to be transitional because bottlenecks in supplies will be resolved and comparison to last year’s low base makes the numbers appear worse. However, one has to understand that month-on-month numbers rising is not due to a base effect but actually due to a rise commodity prices.
Adding misery is the fact that the numbers are far ahead of the estimates, which could keep the markets’ upward movement under check. Why do we say so? It’s because if the trend of inflation continues to rush forward, there is a high probability that the Federal Reserve might be forced to raise interest rates to rein costs in sooner than it has indicated it will. And, as we know, higher interest rates discourage risk on sentiment. On the domestic news front, the factory output, measured in terms of Index of Industrial Production (IIP), grew by 22.4 per cent in March courtesy the low base effect. The surge in IIP was mainly on account of 25.8 per cent growth clocked by the manufacturing sector, once again due to an extremely low base in March 2020.
However, the big surprise was that India’s retail inflation slowed to 4.29 per cent in April amidst drop in retail food inflation. It eased to 2.02 per cent in April from 4.87 per cent in March. With this, for the fifth straight time, CPI has come in below the RBI’s upper band of 6 per cent. So, the CPI number may provide a ‘feel good’ factor, but we believe this is like a momentary relief since inflation would creep up as supplies are bound to get impacted due to the lockdowns and night curfews imposed in various states. So, what should market participants do now? It’s surely not a time to be complacent because we have seen that the bulls have made several attempts to cross the hurdle of the 15,000 level but all such attempts have proved futile.
Investors should start reducing their exposure in high volatile stocks and they can hold on to some winning stocks that are standing their ground or exhibiting strong relative strength. Yes, it is always possible that the scares which are doing the rounds for now may disappear sooner or later and the markets may start to rally from thereon. However, that could be a mere pullback as in the short term there are not enough triggers to take Nifty past the 15,000 mark. And as a market participant one needs to understand that real money is made by playing a secular trend and not by playing a pullback rally.
