Global markets under pressure amid US Federal Reserve meeting on high inflation

Futures indices for Sensex and Nifty 50 opened significantly lower on Friday due to a sharp rise in oil prices triggered by escalating tensions in the Middle East, as well as rising bond yields, which intensified concerns about a potential Fed rate hike next week.

The BSE Sensex index began trading lower at 74,309 and continued its decline, reaching a low of 74,160 at the start of trading, representing a drop of 742 points or 1 percent. Similarly, the Nifty 50 index opened in the red at 23,270 and hit a bottom of 23,231, showing a fall of 246 points or 1.05 percent.

Analysts note the strengthening of negative factors for the market related to the escalation of the conflict in the Middle East. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, stated that high crude oil prices are dampening risk appetite. Dwarsh Vakil, Head of Primary Research at HDFC Securities, noted that financial markets are adapting to a higher probability of monetary policy tightening, as federal fund futures indicate a greater than 70 percent chance of a rate hike next week.

By 9:27 AM, the 30-stock Sensex was trading 630 points or 0.84 percent lower, reaching 74,270, while the NSE Nifty index fell by 222 points or 0.94 percent, settling at 23,256.

Sectoral Dynamics and Market Indicators

All sectoral indices experienced declines. The Nifty Realty index fell by more than 3.5 percent, and Nifty Metal corrected by 2.8 percent. The Nifty Bank index also decreased by more than 1 percent. In the broader market, indices reflected the trend of benchmarks, trading in a downward trajectory. Both Nifty Midcap 100 and Nifty Smallcap 100 lost 1.3 percent. The fear index India VIX jumped by more than 6 percent, reaching 12.5. A weak advance-decline ratio indicated selling pressure: 2,377 stocks declined versus 504 that rose, and nearly 90 remained unchanged.

Among Sensex stocks, Tech Mahindra, Infosys, HCL Tech, Bajaj Finance, and ITC showed growth, increasing by up to 1.5 percent. On the other hand, the biggest losers were M&M, Bajaj Finance, Tata Steel, IndiGo, and UltraTech Cement, each falling by more than 2 percent.

Reasons for the Market Decline

Oil Prices

Oil prices have risen and are on track to close the week above $100 per barrel for the first time since mid-May. Brent crude futures jumped by 0.42 percent to $108.1 per barrel, while West Texas Intermediate (WTI) rose by 0.33 percent to $102.8. Vijayakumar emphasized that if high oil prices persist or, worse, increase further, the impact on India's GDP growth and, consequently, corporate earnings will be significant.

Bond Yields

Vijayakumar added that 'the rise in US bond yields is an equally negative factor.' The ten-year yield is now 4.96 percent—the highest level since late 2023. He noted that the approach of this figure to the 5 percent mark is viewed by many as a possible turning point for global equities. 'A correction in the global stock market is likely, but predicting its timing is difficult.'

Primary Market

Furthermore, the rapidly developing IPO market is attracting investor attention. Significant oversubscription and attractive listing gains have drawn millions of investors to the IPO market. This has led to a withdrawal of large funds from the secondary market. Meanwhile, NSE announced the price band and subscription date for the long-awaited IPO.

Asian Stocks Fall

Asian stocks sharply declined as the rise in oil prices and bond yields triggered a wider outflow of capital from risk assets. At the time of the last check, Japan's Nikkei 225 index fell by 2.8 percent, followed by South Korea's Kospi, which dropped by 2.3 percent. Australia's S&P/ASX 200 lost 1.2 percent.

US Markets

US markets closed lower overnight due to stronger producer inflation data, intensifying fears of another rate hike. The Dow Jones Industrial Average fell by 0.6 percent, the S&P 500 dipped by 0.5 percent, and the Nasdaq Composite finished down 0.65 percent.

ECB Raises Interest Rates

European stocks fell to two-month lows after the European Central Bank raised interest rates for the second time this year to combat rising inflation. The ECB's key deposit rate is now 2.5 percent, which is at the upper end of the 'neutral' range, which politicians believe neither restricts nor stimulates economic growth. Dwarsh noted that the ECB raised the rate in line with expectations, as the conflict continues to fuel inflationary pressures. The Bank of Japan is expected to raise rates to 1.25 percent after the highly anticipated meeting next Friday.

Despite oil price shocks, the war in the Middle East, and changes in the US Federal Reserve system, the South African rand has shown significantly less volatility this year.

On Tuesday morning, the rand traded around R16.16, weakening after the speech by US Fed Chairman Kevin Warsh, which increased expectations regarding an interest rate hike in the US. This circumstance makes dollar-denominated assets more attractive while simultaneously reducing interest in riskier emerging market currencies like the rand.

Investec Chief Economist Annabel Bishop noted that the rand weakened from below R16 to R16.19 on Friday as markets initially interpreted Warsh's comments as 'hawkish,' but then recovered to R16.12 on Monday afternoon.

Bishop reported that the probability of a 0.25 percentage point US rate hike in September initially jumped from 43% to 61%, reinforcing forecasts for higher rates overall. However, she added that markets subsequently analyzed the speech and found it less 'hawkish' than initially assumed.

Warsh stated that 'inflation expectations... are currently... well anchored, but they must be closely monitored. The Fed's job is to ensure that inflation expectations do not get out of control.' The Fed Chairman also emphasized that medium-term inflation expectations remain largely stable.

Bishop explained that Warsh's message did not contain an urgent call for US rate hikes, as he deliberately avoided giving markets guidance on future rate moves. She concluded that despite strong mentions of the need for low inflation, Warsh's speech was not particularly 'hawkish' overall, making a prolonged market reaction unlikely.

The movements of the rand also indicate that the pressure is mainly caused by the strengthening dollar, rather than broad weakness in the South African currency. Bishop noted that the rand did not weaken noticeably against the pound or the euro. TreasuryONE Currency Strategist Andre Silvers similarly noted on Tuesday morning that the rand remained more resilient against both currencies, despite falling precious metal prices, rising oil prices, and increased geopolitical risks.

By Tuesday morning, markets assessed the probability of a US rate hike this month at 57%, Silvers reported. Higher US rates usually prompt investors to direct funds into dollar assets, and periods of heightened global uncertainty can strengthen this trend as investors seek safer assets and reduce their exposure to risky emerging markets. Silvers pointed out that both these factors are currently supporting the dollar, with the DXY index holding around the 99.40 level.

Trading Economics also linked the pressure on the rand to the strengthening dollar and falling precious metal prices following Warsh's comments, while the resumption of attacks by the US and Iran negatively impacted risk sentiment and led to rising oil prices. Bishop added that the rand's weakness was relatively limited compared to the currency's historical volatility, and suggested that it would likely continue to strengthen.