Home / Markets / Stock Markets /  What explains the dramatic rebound in stock markets despite higher-than-expected US inflation

Indian stock markets rose sharply today, tracking a rebound in global equity markets. BSE benchmark Sensex climbed over 1,000 points today while the broader Nifty 50 index was above 17,300, buoyed by Infosys and banking stocks. Infosys Ltd climbed as much as 4.6% after the country's No 2 IT services company reported a bigger-than-expected increase in second-quarter profit, boosted by strong margin growth. Nifty's IT, private sector bank and public sector bank indexes were up over 2% each.

Asian shares jumped today, following a rebound on Wall Street despite higher-than-expected US inflation. But analysts doubt the sustainability of the rebound in equities as surging US inflation increased likelihood of higher interest rates for longer period of time.

US consumer prices rose 0.4% in September compared to August, twice the 0.2% projected by analysts. The data are the latest sign inflation is becoming more ingrained in the US economy, despite numerous Federal Reserve actions to counter the trend. US stocks last night initially plummeted on the report, which exacerbated recession worries on the increased odds of more aggressive Fed interest rate increases. But later rebounded to close sharply higher.

“There was some really interesting price action despite the red hot CPI print driven by technical factors and positioning. Dollar strengthened immediately post the CPI print but saw a massive reversal on short covering in majors. US Equities also saw a complete reversal intraday. After dropping close to 2% post the CPI print, S&P 500 ended 2.6% higher. Nasdaq ended with a gain of 2.2%. The move was apparently driven by algo trading programs which started buying after S&P500 completed a 50% retracement of the rally from peak COVID lows," IFA Global said in a note.

US stocks have plunged more than 25% this year as the central bank began tightening policy to curb inflation, leaving investors to weigh how much damage is left for share prices.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, echoed the same view. “The uncanny ability of the market to surprise was in full flow overnight when the S&P 500 shot up by 5% from the day’s lows despite the September CPI inflation numbers coming slightly higher than expectations. Such sharp rallies happen due to market positioning. The stock market was oversold on expectations of higher inflation and the consequent continuation of the hawkish Fed stance. This oversold market positioning triggered short covering resulting in an incredible 1,400 up move in the Dow from its low levels," he said.

“Similar short covering and sharp rallies can happen in India too. The big question, however, is regarding the durability of this rally. Under the present unfavourable global macro construct, the rally is unlikely to sustain beyond a level," he added.


Commenting on results of key IT heavyweights like TCS, Infosys and Wipro, Vijayakumar said, "An important takeaway from the IT results announced so far is that the segment is doing well and the management commentary is optimistic. After the sharp correction in IT stocks from their highs, there is value in the segment now. Financials too, particularly the leading banks, are likely to come up with very good numbers in the coming days. These two segments - IT and financials- can impart resilience to the market in the near-term."




Surajit Dasgupta

A newsroom person with close to two decades of experience with print and online publications, I track stock markets, commodities and economy.
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