US Recession Worries Swing Global Investors on a Tight Rope

The NSE Nifty 50 index marked a fresh two and a half month high on Thursday as it registered mammoth gains of nearly 1.75 per cent. With this strong upward move it has reached in close vicinity of its important psychological mark of 17,000 and also, its 200 DMA which is placed at 17,029. So, what has resulted into this strong movement in the domestic market? The reason can be attributed to the buoyant cues from the West on Wednesday after the US Federal Reserve policy meet outcome led the US market to rally sharply. The Nasdaq advanced more than 4 per cent as the Federal Reserve hiked interest rates by 75 bps to the range of 2.25-2.50 per cent. 

This is the second 75 basis points hike in two months. The impression of back-to-back 75 basis points hike might sound aggressive and though the first 75 bps rate hike was a bolt out of the blue, the second one was pretty much on expected lines. However, what was the music to bulls’ ears was the statement of the Federal Reserve Chairman Jerome Powell wherein he mentioned or rather outright rejected the speculations that the US’ economy is in a state of recession. The markets took comfort from the growth outlook and Powell’s statement on future rates being data-dependent. 

Market participants appear to have concluded that the FOMC may reach the end of the tightening cycle by the end of 2022. Furthermore, it was heartening to see a cooloff in the US Dollar index, which triggered a ‘risk on’ rally in the markets. Going forward, data like Q2 GDP and the employment cost index in the US which comes in over the next few days would be important to watch out for in the context of whether this data testifies the Federal Reserve’s statement that the US economy is not in recession, or then it may turn out the other way. 

So, a lot depends on this data. That is because if the Q2GDP data is negative and worse than Q1GDP data, then in that case it would be official that the US economy is in recession as the US officially acknowledges a recession if theeconomy logs a negative growth for two consecutive quarters. As regards the domestic markets, battered information technology stocks surged strongly and as we had clearly pointed out in our last editorial, the present levels are quite attractive to get into IT stocks from a long-term perspective. On a week-to-date basis, the Nifty IT index has jumped nearly 1.42 per cent courtesy technology-heavy index Nasdaq that logged the largest one-day gain since November 2020 on Wednesday. 

Interestingly, the Nifty IT index has reached a crucial juncture on a technical basis. It is trading close to its neckline of the double-bottom pattern on the daily timeframe chart. A close above the 28,550 level would result into a breakout of the neckline. Meanwhile, it’s trading above its 20 and 50 DMA. In the near term, the opening gap area of July 28 would act as an immediate support for the Nifty IT index. Talking about yield in the US, the US yield curve is now inverted the most in two decades, highlighting that the markets strongly believe a recession is around the corner. 

Secondly, the large FOMC day moves have historically reversed quite quickly after the decision. We are not saying that it has to happen this time too, but it is often remarked that ‘history repeats itself’. Moreover, the Indian benchmark, NSE Nifty is also approaching towards its important 200 DMA and it is quite possible that it’s re-testing the 200 DMA and will thereafter cool off. Hence, we might still be on slippery ground. The confirmation that this rally is pivotal in nature and not just a mean reverting rally would be received only when the incoming data from the US soothes anxious investors about recession and the Nifty 50 index closes above the 200 DMA. Till then, concerns will continue to keep investors on their heels. Hence, we remain committed to adopting a bottom-up approach while choosing stocks for our investors.