Inching Towards a Breakthrough
The Nifty rallied almost 1,100 points from its June lows and retraced 62 per cent of the recent down move but after this walk in the park, traders are back to facing a tough time on D-Street. Traders can handle a one-sided move to some extent but when the market is indecisive about what it wants to do, it makes matters worse. However, the week has been buzzing with news flows from across the globe. First of all, there is this poisonous snake called inflation. June consumer data showed that US’ inflation climbed to a new 41-year high of 9.1 per cent, way above the street expectation.
pectation. Meanwhile, on the Indian turf, the CPI came in more or less as expected by the street. It was at 7.01 per cent for June, almost a status quo vis-Ã -vis 7.04 per cent of May. Considering the red-hot imprint of inflation in the US, and the Bank of Canada raised its interest rate by a whopping 100 basis points in a bid to crush this monster. This has opened the door for a 100 basis point rate hike during the Federal Reserve’s meeting on July 27. The US bond market’s recession warning continues to flash red with the steepest inversion of the yield curve since 2007.
The two-year treasury yield was at 3.19 per cent, holding above the 10-year yield which was seen trading at 2.96 per cent. However, there is one more school of thought emerging among market participants which is that since the CPI numbers in the US have surpassed all expectations and the Federal Reserve will go ballistic in bringing it down, this aggressive rate hikes will bring forward the slowdown and disinflation cycle which will eventually cool down the CPI numbers. And considering that we will eventually get over this cycle pretty fast, the market is pricing the rate cuts in February 2023.
Meanwhile, on the domestic front, things seem to improve slowly but steadily. For starters, Reserve Bank of India (RBI) Governor Shaktikanta Das said that inflation is likely to ease gradually in the second half of the ongoing fiscal. Secondly, another pointer to this fact is that the downside risk to inflation is materialising with a cooling of commodity prices, led mainly by cooking oil, the prices of which have collapsed to their lowest levels in recent times. The impact of these depressed edible oil prices is already being witnessed in the June CPI and will only accentuate in the coming months.
Also, crude oil prices have seen a sharp slump from their March peak while soybean oil too has declined sharply. All this means that price pressure will start easing in H2FY23 but till then the RBI will not let down its guard. Its fight against inflation will carry on, implying that the central bank will hike rates once gain in August. Another silver lining for India Inc. can be seen in the fact that European currency has weakened against the dollar and is now at par with the greenback for the first time in 20 years. Indian companies who have raised Eurodenominated debt will have to repay less at maturity and while servicing interest.
That is because companies will have to buy fewer dollars while repaying Euro-denominated loans and will save on interest cost as well. Coming back to the matter of what to expect for the markets ahead, the zone of 15,750- 15,900 is an important support level on the downside, while on other hand, the level of 16,250 is likely to act as an immediate barrier. We expect consolidation in the said range of 15,750-16,250 as the market move into corporate news environment. This may shift into a very stock-specific mode in the coming weeks. Nifty Mid-Cap and Small-Cap 100 have performed very well on a MTD basis and hence keep a close eye on the broader markets!
