Why analysts are expecting some relief for stock markets after Fed meeting
Premium- Analysts say that Fed's aggressive stance is already factored in
Indian stock markets were muted as investors turned cautious ahead of the US Federal Reserve's decision on interest rates. The Fed is to announce its rate decision at 11:30 pm tonight. In noon trade, Sensex was slightly in green while Nifty remained near 15,750. Some analysts say that Fed’s aggressive stance is largely factored in so possibility of a negative surprise is low.
The Nifty is down about 4% in past week. If Fed hikes rate by 50 bps, it could positively surprise the markets, say some analysts.
"Expectations for a rate hike have mostly been factored in and I expect markets to see a short-term bounce from here. A 50 bps hike would be a positive surprise," said Siddharth Khemka, head of retail research, Motilal Oswal.
More than the quantum of the rate hike (50 or 75 bps) it would be the message from the Fed in today's policy announcement that would determine the market direction, said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. “The market is prepared for a 75bp rate hike and, therefore, that decision, if it comes, is unlikely to rattle markets."
For India Indian markets, relentless FPI selling has been a major negative. “With dollar index above 105 and US 10-year bond yield at 3.46 %, FPIs are likely to continue selling, pulling the market down from every rally. A sustained upward move in the market is possible only when the FPIs substantially reduce selling," he added.
For investors who want to deploy some money in stock markets, here is Vijayakumar's suggestion. "The only sensible investment strategy in this scenario is to slowly accumulate high quality stocks whose prices are depressed not because of poor fundamentals, but sustained FPI selling."
In the run-up to the Fed's policy announcement, global financial markets have been very jittery, particularly after the release of US May inflation data last week.
“Just before last Friday’s US CPI data, the market was on a silent mode and discounting 50 bps only. However, after a surprise jump in US CPI to another record (40 and half years) high, dynamics got changed overnight. US yields shot up, equities fells, USD strengthen against DM/EM currencies. The reason behind the same is Fed opened the door for a 75 bps hike," CR Forex Advisors said in note.
“In less than three trading sessions, the market discounted a 75-bps hike with a 96% probability. If they do so then it would be the largest one-time hike for the Fed since 1994."
Commodities like gold and oil were trading in a narrow range today ahead of the Fed decision. “If Fed’s decision comes largely in line with expectations, there is a possibility we may see some correction in US dollar which may help commodities recover. Apart from Fed decision, market players will also focus on economic projection as it will give more clarity about how high interest rate are expected to rise as well as what will be its impact on economic growth," Kotak Securities said in a note.
Whatever be the outcome of today's Fed announcement, Sunil Damania, Chief Investment Officer, MarketsMojo, says investors need to be cautious. “There is a very high probability that the Fed could sharply hike interest rates in subsequent meetings as inflation is one primary concern that will keep the US central bank on its toes," he said.
Technical outlook
“Nifty June series continues to trade with a negative bias – no strong reversal confirmation seen yet. Short term momentum parameters also suggest possibility of high volatility in the near term coinciding with the Fed decision on interest rates. Critical medium term trend support is seen at 15500 below which trend gets challenged. Advice being extremely selective for the near term," said Sahaj Agrawal, Head of Research- Derivatives at Kotak Securities.