Jerome Powell: Powell’s hawkish stance makes markets jittery – Blue Barrows

Mumbai: Indian equities could take a beating early this week, mirroring the Wall Street rout on Friday, after US Federal Reserve Chair Jerome Powell poured cold water on market expectations of less aggressive interest rate increases or even of policy easing in the near future in a hawkish speech at the Jackson Hole economic symposium. With the dollar likely to strengthen and the yield on US bonds expected to rebound following Powell’s comments, the risk-on sentiment in the market could reverse immediately as foreign fund managers pause stock purchases for the moment.

Fund managers and analysts who spoke to ET over the weekend expect the Sensex and Nifty to decline 5-10% by October, depending on the extent of the bounce in the dollar and US 10-year yields-both considered key signals for foreign money flows. The US markets plunged on Friday in a steep sell-off with the Nasdaq diving 3.9%, the S&P 500 tumbling 3.3% and Dow Jones Industrial Average falling 3%. The declines are the biggest in a day since June 13, around the time the market rebound began.

“The dollar index and the US 10-year have been giving upward momentum signals indicating a short-term bearish outlook for the equity markets and that has coincided with Powell’s hawkish comments,” said Rishi Kohli, CIO, hedge fund strategies, InCred Alternative Investments. “I am not super bearish but I will not rule out a dip in Nifty to 16,600 by October, depending on how the dollar index and US 10-year behave.”

When the US dollar and bond yields move up, it’s a sign of tighter central bank liquidity, which is considered negative by the market. It’s the reverse when the dollar and yields fall.

The Nifty ended at 17,558.90 on Friday ahead of Powell’s Jackson Hole speech later in the day.

Nifty


A Pushback Against Market Hopes

Investors are giving utmost importance to the Fed chair’s remarks in the meeting as the stock market had run up in anticipation that the American central bank might veer toward a more dovish monetary policy with inflation showing signs of peaking. Wall Street had perceived Powell to be a dove. Hence, his reiteration of the Fed’s commitment to fight inflation in the conference on Friday is seen as a pushback against the market’s recent hopes of a rate-cut signal in 2023

“Powell’s eight-minute speech basically made it clear to doves in the market that ‘you guys have got it wrong this time’,” said Ritesh Jain, co-founder, Pinetree Macro. “The sell-off in the US after the speech is an indication, and that will rub off on EMs like India this week.”

Canada-based Jain warns that the markets could even wipe out most of the gains made in the past two months if the dollar stays strong.

“It will be crucial for investors to manage risks and play on the backfoot for now,” he said.

Markets are expected to weaken over the next week, said Amish Shah, head of India research, Bank of America Securities.

“The markets will have to price in for disappointment that the US Fed has not toned down its hawkish stance, nor has it signalled the possibility of a rate cut in 2023,” he said.

Powell reminded everyone what one of his predecessors Paul Volcker had to do to bring inflation down in the late 1970s and early 1980s, wrote Ed Yardeni, founder and chief investment strategist at Yardeni Research, in a note to clients.

Till August 17, the Sensex and Nifty had gained as much as 18% from June 17-when both indices hit 52-week lows–helping erase most of the losses in 2022. The rebound coincided with a reversal in the dollar upmove and softening of US yields amid growing expectations the Fed might go slow in its fight to curb four-decade-high inflation in the world’s largest economy. This led to renewed overseas portfolio flows, helping the market recover. Foreign portfolio investors have pumped nearly Rs 5,000 crore in July and over Rs 49,000 in August into Indian stocks after pulling Rs 217,000 crore out of the country between January and June.

Market watchers said some of the ‘hot money’ flows in the past two months that were trying to pre-empt the Fed’s policy moves could dry up or even reverse in the short-term.

“Markets are likely to see some pain till October as the Fed will look to frontload rate hikes before the mid-term polls in the US,” said Pinetree’s Jain. While the US mid-term elections will be held on November 8, the Fed’s next rate-setting meet will be on September 20-21.

“Seasonally also, the market tends to be in a phase of weakness in September and October,” said InCred’s Kohli. “So, it is time to be cautious.”

There is however a silver lining for the market following Powell’s hawkish remarks at the Jackson Hole conference.

“The good part is that the Jackson Hole announcement could be the last major headwind for the markets in 2022 because the Fed has already prepared investors for what to expect,” said Shah of Bank of America Securities. He does not expect a prolonged sell-off in the near-term.