Global Cues Make the Markets Jittery
The weather in India has been the talk of the town these days as it has been as diverse as the country itself. There are severe floods, usually not seen in pre-monsoon, in the north-eastern region, drought in the north along with scorching heat in the west. Power supply everywhere is proving to be a huge challenge while wheat has ripened early, sugar cane is drier and seasonal vegetable crops have been damaged. Remarkably similar is the situation on the global scene also. Abnormal weather conditions are persisting in the US and Europe.
Lockdown in some key China provinces and the prolonged Russia-Ukraine war are keeping the global supply chain’s recovery from pandemic disruption on the back burner. Aggressive monetary tightening by central bankers is leading to sharp correction in asset prices such as equity and cryptos. In some of his most hawkish remarks to date, US Federal Reserve Chairman Jerome Powell said that he will back interest rate hike until prices start falling back toward a healthy level.
Furthermore, the sentiment remained underscored by a whopping 9 per cent surge in British consumer price inflation. As a result, the situation was dire in the US markets. What added to the misery of market participants were the disappointing Quarterly Results from American big box department store chain Target Corporation. The stock of Target Corporation recorded its worst rout since October 1987 and this was testimony enough that inflation is catching up with some of America’s biggest retailers as their earnings were impacted by higher costs on everything from products to fuel.
US stock indexes were not far behind as they recorded the biggest single day drop in almost two years. On the domestic front, lot of hopes were attached to the LIC listing to bring bullish sentiment back to life on D-Street. However, poor listing performance by LIC added fuel to the fire. Meanwhile, the stocks of tyre companies were seenrelatively outperforming the Nifty 500 index and barring CEAT all other stocks delivered positive returns led by Balkrishna Industries.
So, what was the tailwind for the tyre companies that they relatively outperformed the Nifty 500 index? The reason for these stocks moving up is related to its important raw material, namely, rubber. It is the main raw material used in manufacturing tyres. Interestingly, the rubber price (JPY | KG) has declined to 241.50 mark from the recent highs of nearly 275 which was marked in April. In percentage terms, it’s nearly 12 per cent off from its recent high.
The Nifty has corrected 15 per cent from the October 2021 lifetime high and completed the Category 1 correction of 11-13 per cent. Historically, the market experiences Category 2 correction of 25-30 per cent every two years. The March 2020 correction is already completed for two years. The current downtrend can be classified as Category 2 correction, and if history is used as a reference point, we can expect a decline of 25 per cent from the October 2021 high. But for that to materialise, the Nifty has to breach its important support level of 15,600-15,700 on closing basis.
The macroeconomic conditions are thus clear – inflation is elevated, money is tightening, consumption is moderating and growth is slowing despite the hike by US Federal Reserve. This makes further rate hikes a little trickier. Will it hurt inflation more or hurt the growth more? It will be a tightrope walk for the US Federal Reserve between taming inflation and at the same time not allowing growth to falter on another side. The sell-off in the market is very unpleasant for investors to watch, but honestly speaking, falling markets are a fact of life when it comes to market cycles and this is the best time to accumulate quality stocks for the long term.
