Markets Remain Under Pressure
The current phase has been one of the worst times for traders and investors as not only the stock market indices all over the world are under tremendous selling pressure but the cryptos market has been roiled too. Interestingly, in all the last five trading sessions, the Indian markets have ended in red. But there is something that has gone up over these sessions. And that has been the dollar index, not to forget volatility! This clearly reflects the risk-off sentiment. Market participants were all eyes and ears to the US’ inflation data as they were expecting a sharp cool-off in the inflation numbers which would have acted as a key catalyst to provide temporary relief if not a long-lasting durable calm to the stock markets.
However, yet again they were in for a shock as US inflation slowed but this slacking off has been less than what was anticipated in April. US consumer inflation slowed with the annual pace at 8.3 per cent versus the March reading of 8.5 per cent, but it was above expectations for a reading of 8.1 per cent. A bigger problem for market participants was the core inflation reading, which excludes seasonally volatile food and energy prices. This rose 0.6 per cent from March and it was higher than the 0.4 per cent clip that economists had forecast. No matter which way you look at the data, it appears to be bad
As a result, the street is now suspecting a more aggressive stance from the US Federal Reserve as it might look to increase interest rates by 75 bps in its next two meetings. Honestly speaking, the fear of an economic slowdown is more profound than it appears. We say so because although the near-term US bond yields have risen, the 10-year bond yields have done the opposite and instead of rising we have seen them actually receding which could mean it is pricing in a longer term recession. Talking about the emerging markets, the big problem is not just the spill-over of weak US economy at a distant future and higher US inflation, but also the dollar index.
The dollar index has come a long way in the last couple of months and is currently trading at a fresh 20-year high. A high dollar index is usually an emerging market weakness sign – foreign funds or large sovereign funds will prefer going to dollar assets. There is one interesting observation though. This pertains to the FII selling versus the DII+ Robin Hood (retail buying). FIIs continue to be net sellers for the eighth straight month since October 2021, while on other hand the DIIs have been in the buying camp for the eighth straight month. But, FIIs have sold nearly 26 per cent more than what DIIs have bought in this period.
Presumably, the balance of buying has been from the Robin Hood (retail) pack? Now let’s look at the impact and derive what it means. The Nifty 50 made its all-time high in October 2021, while the all-time high in Nifty Small-Cap index was made in January 2022. Nifty is down by 15 per cent from its all-time high while the Nifty Small-Cap index is down by nearly 28 per cent from its all-time high. As such, there has been a sharper decline in the small-cap index and in less time and the reason the pain is more pronounced in the small-cap index is that this is the playing ground of retail investors.
It would be quite reasonable to conclude that the retail investor is now stuck with purchases as prices have largely remained down. Hence, retail investors’ ability to funnel more money into the market would be bit difficult. Meanwhile, we would like to share a piece of advice for those with long portfolios comprising good quality stocks that they don’t want to give up on. Such investors can hedge it up with puts as the India VIX has crossed above the 24 mark and we believe it may scale to levels of 29-30. Hence, the puts will act as a good hedge and for traders who want to play for the big move we would recommend creating a put ratio back-spread.
