Inflation, US Fed data to set the tone for markets

Spooked by inflation risk, rise in international crude oil prices, mounting concerns over global monetary policy tightening and renewed FII selling, the domestic stock markets snapped a three-week winning streak and fell more than two percent during the week ended. The BSE Sensex corrected 1,466 points or 2.63 percent to 54,303, and NSE Nifty plunged 382.5 points or 2.3 percent to 16,202 points.

Broader markets were slightly better than the frontline indices, with the BSE Mid-cap and Small-cap indexes shedding only 1.2 per cent and two per cent, respectively. Selling for eighth consecutive month, FIIs have net sold Rs12,662 crore worth shares till date in current month. It is pertinent to know that FIIs sold more than Rs3.45 lakh crore since October 2021.

Partially offsetting FII sales, the DIIs have purchased Rs2.63 lakh crore worth stocks during the period. Selling by FIIs in emerging markets, including India is attributed to rising inflation concerns amid geo-political tensions and faster policy tightening by central banks. Continuous fall in stock price of LIC has also dampened sentiment. Time for DIIs to support the stock, say observers. On the back of the persistent FII selling, rising US bond yields, elevated oil prices and inflation concerns; the Indian rupee hit a fresh record low of 77.87 against the US dollar. Expect the currency to depreciate around 78.20-78.50 a dollar in near to medium term. Though inflation worries have rattled markets all year, the possibility that it could be easing had led to some tentative signs of stability in recent weeks.

However, after the higher-than-expected inflation of 8.6 percent at 40-year high in May, the highest since December 1981; the fresh inflation shock hammered stock and bond prices anew, heightening investors' fears that the US FOMC may fast track its interest rate hike at its two-day meeting next week on June 14-15. Near term direction of domestic markets will be dictated by international crude oil prices, US Fed meeting, rupee-dollar fluctuations, spread of Monsoon and macroeconomic data. If the US market settles down, that is if it stops reacting to any bad news only then other markets across the globe will turn bullish. Markets may take five-six months to stabilize say old timers.

Listening Post: Stagflation—a toxic cocktail of stagnating growth and rising prices—is generally viewed as a relic of the 1970s. But economists are warning it could make a comeback. The term is broadly defined as sluggish growth tied with rising inflation. Economists haven't given it much thought since the 1970s. Earlier this week, the World Bank sharply lowered its growth forecast for the global economy this year and warned of several years of high inflation and tepid growth reminiscent of the stagflation of the 1970s. Stagflation spells trouble for the economy. Rising inflation erodes consumer purchasing power, and weaker demand hurts companies' profits and causes layoffs. Stagflation also puts the Central Banks across the globe in a bind because the central bank's job is to keep both inflation and unemployment low. They can raise interest rates to curb inflation—a path they have started on and intend to continue this year—but if they move too aggressively they risk strangling spending and tipping the global economy

into a recession. Inflation is close to a 40-year high in USA. and multi- decade high in several other countries, and economists are worried about economic growth because of the war in Ukraine as well as lockdowns in China and supply-chain disruptions related to the Covid-19

pandemic. Stagflation would be a sustained period of both higher inflation and slower growth, not just one quarter. Stagflation remains a risk to the global economy, and there are similarities between the situation in the 1970s and today. Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy. Inflation refers to an increase in prices for goods and services. But if inflation rises too quickly, the rapid price increases erode households' purchasing power. Stagflation is a situation in which prices are rising, but demand is weakening and economic growth is slowing or contracting. As a result, businesses make less money and cut jobs, driving up unemployment. At worst, that pushes the economy into a recession.

Stagflation occurred from the early 1970s to the early 1980s, when surging commodity prices and double-digit inflation collided with high unemployment. British Parliamentarian Iain Macleod is credited with first using the word stagflation in 1965.

"We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation." The stagflation of the 1970s ended painfully. Interest rates soared astronomically, triggering a recession and double-digit unemployment.

Quote of the week: "With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future"

— Carlos Slim Helu

It's far too easy for investors to lose perspective. Whenever something big goes wrong, a lot of people panic and sell their investments. Looking at history, the markets recovered from the 2008 financial crisis, the dotcom crash, the Great Depression and even Covid pandemic, so they'll probably get through whatever comes next as well.

F&O / SECTOR WATCH

On the back of weak macro and micro factors, markets remained under pressure and volumes were on lower side in the derivatives segment during the week ended. NSE Nifty fell more than two per cent, while Bank Nifty also closed below 35,000 level with loss of more than two per cent week on week basis. Option data indicate maximum Call Open Interest at 17,000 strike, followed by 17,500 & 16,500 strike, and maximum Put Open Interest at 16,000 strike, followed by 15,500 & 15,000 strikes. Implied Volatility of Calls closed at 17.50 per cent, while that for Put options closed at 18.39 per cent. The Nifty VIX for the week closed at 19.14 per cent. PCR of OI for the week closed at 1.36. NSE Nifty could trade in a broader range of 15,600-16,600 levels in near term. Techies indicate that 16000 - 15800 zone would act as strong support for the Nifty, while 16500-16600 zone is likely to cap any sharp upside in the Nifty. Expect sharp sector specific and stock specific moves in coming week. Crude oil prices have hardened again of late following the European Union's decision to ban a major chunk of oil imports from Russia as well as Saudi Arabia's recent decision to raise prices for Asian buyers by a greater-than-expected quantum. The oil marketing companies (OMCs) are expected to post better operating profits for the April-June quarter this fiscal aided by, rising gross refining margins (GRMs), better margins on auto fuel and LNG as well as an uptick in prices of oil and gas products. Stay invested and add on declines RIL, IOC, BPCL and HPCL. Fuelling the rise in RIL stock price has been the news that the GoI has lost its appeal in the English High Court against a $111 million arbitration award in favour of RIL and Shell in a cost recovery dispute in the western offshore Panna-Mukta and Tapti oil and gas fields. Banks are expected to post steep net interest margins due to a near-total pass-through of RBI's policy rate hike under the External Benchmark Lending Rate (EBLR) regime. They have passed on the entire 90-basis-point increase in RBI's repo rate to their lending rate, making home loans, car loans, personal loans and MSME loans expensive for

borrowers. Contrarians advise accumulation of good bank stocks in the current weakness. Stock futures looking good are BEL, HPCL, Dr Reddy, Reliance Ind, ONGC, SBI Life and NTPC. Stock futures looking weak are Apollo Tyres, AU Bank, Berger Paints, Deepak Nitrate, United Phosphorus and Vedanta.