Sensex, Nifty Start On A Rocky Note, Tracking Global Risk Assets’ Sell-Off

Indian equity benchmarks extended their losses from the fag end of last week and were in the red early on Monday, tracking a broad sell-off in risk assets as the dollar keeps gaining on rising recession risks from Europe to the US.

The 30-share BSE Sensex index opened with losses of 348.37 points, or 0.58 per cent, at 59,297.78 and the broader NSE Nifty started the day 112.25 points, or 0.63 per cent, lower at 17,646.20.

“…US markets continued their descent on Friday while other Asian peers too are displaying a sluggish to negative trend in today’s early trades. The minutes of the monetary policy committee (MPC) deliberation for the August monetary policy review indicated more interest rate hikes in the coming months as the retail inflation remained elevated,” said Prashanth Tapse, Senior VP for Research at Mehta Equities.

“Nifty could wobble or waver from here on as the big debate heats up on whether the Fed will scale back to 50 basis points from consecutive 75-basis-point hikes in September. Amidst this backdrop, the US Dollar index rose sharply and flirted around its 20-year high at 108.50, which is negative for emerging market equities like India as it triggers capital outflows,” he added.

The dollar remained in demand on Monday as concerns that the majority of the world’s major central banks are determined to raise interest rates regardless of the risks to growth caused Asian markets to start the day poorly.

Investors eye a host of policy makers at Jackson Hole later in the week, especially Federal Reserve Chair Jerome Powell, with risks that he will not meet investor hopes for a dovish pivot on policy.

“We expect a reminder that more tightening is needed and there is still a lot of progress to be done on inflation, but no explicit commitment to a specific rate hike action for September,” \Jan Nevruzi, an analyst at NatWest Markets, told Reuters. “For markets, a bland delivery like that could be underwhelming.”

Rates are anticipated to rise by 50 or 75 basis points in September, with rates expected to reach 3.5 per cent to 3.75 cent by year’s end. Futures are fully priced for this increase.

According to a Reuters poll of analysts, the Fed will increase interest rates by 50 basis points in September, with the likelihood of a higher peak being more likely.

China’s central bank is anticipated to cut several key lending rates by between 10 and 15 basis points on Monday, bucking the trend toward global tightening.

Last week, concern over China’s economy sent the yuan to a three-month low and put pressure on stocks in the area.

Early Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.4 per cent.

Japan’s Nikkei declined 1.0 per cent, while South Korea’s KOSPI lost 1.1 per cent, despite being helped by a recent dramatic yen reversal.

Nasdaq futures fell 0.6 per cent, while S&P 500 futures declined 0.5 per cent. The S&P 500 has repeatedly failed to clear its 200-day moving average around 4,320 and ended last week down 1.2 per cent.

According to the most recent investor survey by Bank of America (BofA), the majority of investors are still negative, but 88 per cent do anticipate reduced inflation in the future, the greatest number since the financial crisis.

“That helps explain this month’s rotation into equities, tech and discretionary, and out of defensives,” BofA strategist Michael Hartnett, told Reuters. “Relative to history investors are still long defensives and short cyclicals.”

The last week’s sharp increase in global bond yields did little to improve equity valuations. Following a shocking inflation data, British 10-year rates increased to their highest level in five years, while bund yields increased in response to a sharp increase in German producer prices.

While the curve remained sharply inverted to represent the possibility of recession, US 10-year Treasury rates increased 14 basis points during the course of the week and last stood at just under 3 per cent.

The dollar experienced its best performance since April 2020 last week, rising 2.3 per cent to 108.18 on a basket of currencies as a result of the prevailing air of global anxiety, making it the most liquid safe haven.

In addition, there was pressure on oil prices due to concerns about the rising dollar and worldwide demand. Compared to US crude, which lost 99 cents to reach $89.78 a barrel, Brent was down $1.02 at $95.70.