By Mr. Mitul Shah - Head of Research at Reliance securities.
U.S. equities closed sharply lower with S&P 500 fell 5.8% for the week, its largest decline since the Covid pandemic roiled markets in Mar'20. The Dow Jones fell 4.8% for the week, marking its biggest drop since Oct'20, while Nasdaq plummeted 4.8%. The FED raised interest rates by 75bps earlier in the week which muddled the already volatile markets even further. In bond markets, the yield on the benchmark 10-year Treasury ended the week at 3.238% after hitting an 11-year high of 3.498% during the week. The Prospects for repeated interest rate hikes throughout the rest of the year have led investors to believe that further monetary policy tightening could reduce growth. U.S. mortgage rates recently reached their highest level in more than 13 years. Recent economic data have shown sharp declines in key sectors.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan fell to a five-week low, dragged by selling in Australia. Japan's Nikkei fell 1.8% and headed for a weekly drop of almost 7%. In the currencies market, the yen tanked after the Bank of Japan stuck to its accommodative policy stance. The yen fell 2.2% by late Friday, strengthening the U.S. dollar, which rose 0.73% against a basket of major currencies. Sterling fell 1% in New York as investors focused on the gap between U.S. and UK rates while the Bank of England is opting for a more moderate approach than the Fed.
On Domestic front: The domestic equities closed the week in red following weak global cues amid fears of global recession. For the week, Nifty declined 5.6% while broader markets underperformed compared to the main indices as Nifty Mid Cap and Nifty Small Cap fell 5.64% and 7.9% respectively. Sectoral indices took a major hit and ended in red. Nifty Metal witnessed the highest decline of 9.1% followed by Nifty Oil & Gas and Nifty IT which plummeted 8.5% and 8.2% respectively.
Inflation is a major threat to the world economy and central banks around the world are attempting to bring it under control. Interest rate hikes, growing concerns about corporate profits and economic growth continue to throttle investor sentiments amid global issues of Russia-Ukraine war and rising COVID cases. Earlier, the World Bank revised India's growth forecasts for FY23 to 7.5%, marking a 1.2% cut from its previous forecast of 8.7%. However, RBI reiterated that, India is in a better position in comparison to many competing economies and is likely to avoid stagflation owing to its resilience in face of multiple shocks and strong macro fundamentals. After RBI's 50bps interest rate hike, the U.S FED also increased rates 75bps. Furthermore, the European Central Bank confirmed its intention to hike interest rates by 25bps at its July meeting, with a further hike expected in September, the scale of which will be determined by the medium-term inflation outlook. The markets are likely to remain volatile next week as the rate hikes and inflationary pressure continued to be a major drag for global and Indian equities.