Fed rate hike out of the way, stocks continue to rally
Markets are likely to remain volatile in the near future amid tightening liquidity conditions globally
Indian stocks surged after the US Federal Reserve raised interest rates by a quarter percentage point, in line with investor expectations, and on optimism that peace negotiations between Russia and Ukraine are progressing.
Benchmark indices Sensex and Nifty climbed 1.84% each on Thursday. The indices have gained about 9% in as many trading sessions.
Amnish Aggarwal, director of institutional equities at brokerage Prabhudas Lilladher, said markets have rebounded as the Fed rate hike finally materialized and amid hopes of progress on the plan to end the Russia-Ukraine war.
The rate hike and the certainty about Fed policy provided the markets with a clear route map on the likely trajectory of markets overseas, said Joseph Thomas, head of research, Emkay Wealth Management.
Other Asian markets also reacted positively on Thursday. Asian indices, including Nikkei, Taiwan, Hang Seng and Shanghai Composite, gained 1.4%-7.04%, with Chinese indices leading the gains.
Chinese stocks saw their biggest two-day advance in more than two decades as the government moved to stabilize the financial markets and spur the economy, luring back investors after a brutal selloff.
While the Fed rate hike after more than three years was no surprise, the US central bank’s decision to project six more rate hikes this year appeared aggressive.
“The Fed surprised the market with its indication to hike rate in all six remaining meetings though global equities jumped after the Federal Reserve’s view that the US economy is strong and can handle monetary tightening,” said Mitul Shah, head of research at Reliance Securities
However, more than the rate hike trajectory indicated by the Fed, it is crucial to keep an eye on the proposed reduction of its balance sheet, which is expected to start from the next meeting, said Nishit Master, portfolio manager at Axis Securities. This tightening of liquidity can add volatility to the markets and lower PE multiples, Master said. He expects the markets to remain volatile in the near future amid tightening liquidity conditions globally.
However, some analysts said equities could also benefit from a global fund rebalancing.
In a recent report, analysts at JP Morgan said: “We estimate the potential rebalancing flow for the end of March at around $230 billion out of bonds and into equities from multi-asset investors.” Though most of the funds will go to the US, some may come to emerging markets such as India.
The softening of crude prices, with Brent now trading at close to $100 a barrel levels from the highs of more than $130 a barrel is providing respite, and a further decline in prices will help the Indian economy.
Selling by foreign portfolio investors (FPIs) has also been easing and can support Indian markets. Shah expects FII flow to resume gradually in the emerging markets, including Indian equities, in the coming days. Moreover, Shah said India is better placed than many nations in handling the pandemic and post-covid economic revival.
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