US Fed’s tough fight on inflation unnerves D-St traders, investors – Times of India

MUMBAI: US Federal Reserve chief Jerome Powell’s blunt warning to financial markets across the globe that his primary job now is to contain inflation, even if that comes at the cost of growth, employment and pain for the household, has put Dalal Street traders on the backfoot for the holiday-curtailed trading week to begin.
Top analysts and market commentators have turned extremely cautious about the short-term trajectory of sensex and nifty after each of the Dow Jones, S&P 500 and Nasdaq indices shed between 3% and 4% on Friday night after Powell’s eight-minute speech at the annual Jackson Hole conference. And the news that foreign funds have net bought over Rs 50,000 crore during the current month__the highest monthly inflow figure in 20 months__isn’t helping much.
On Friday, ahead of the US Fed chief’s speech, the sensex had closed at 58,834 points while the nifty had settled at 17,559.

US Fed chief’s statements at the Jackson Hole symposium indicated the central bank’s strong commitment towards controlling inflation over growth, said Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services. “In cues for major central banks across the world, (Powell) said that inflation is likely to remain higher for a longer period and thus requires an aggressive stance. This is likely to be negative for equity markets. Indian markets are likely to react negatively on Monday with increasing volatility over the next few days.”In the days leading to the speech by Powell at Jackson Hole, market players globally were building a strong consensus that since the US economy was entering a technical recession, the US Fed may temper its aggressive rate-hike stance. Asa result the stock markets had rallied in the recent weeks while the US 10-year government bond yields remained below the psychologically important 3% level.
On Friday, as the stock markets slumped sharply, the 10-year yield jumped higher to close at 3.04%. Also the Dollar index, a measure of the greenback’s strength against a basket of major currencies, rallied to close near its 20-year peak. All these were signals that the market players were again expecting the Fed to raise its policy rate by 75 basis points (100 basis points = 1 percentage point) in its next rate-setting meeting during September 20-21.
Since a higher interest rate in the US usually strengthens the dollar, it’s bad news for most emerging markets like India that have a high import bill. These two factors also raise the chance of foreign funds withdrawing money from the Indian markets, brokers said. In India, after taking out over $30 billion between October 2021 and June 2022, foreign portfolio investors had turned net buyers in July and continued the trend in August. This trend could again reverse, some institutional players fear.