After effects of US Fed’s price hike

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Ending months of anticipation, the US Federal Reserve has for the first time in nearly a decade increased interest rates from zero to 0.25%. American markets responded positively to the announcement as the content of the speech was dovish, signally a gradual process of rate hikes going forward.

Indian markets tried to join the party, opening higher but in a short while gave away all its gain and moved into negative territory. Clearly there are other concerns and issues for the Indian market that is preventing a rise.

We look at five issues that markets will be looking at now that the US Fed rate hike is done with.

1.  Passage of GST Bill:

Perhaps the single most important factor that investors are keenly looking at is government’s ability to clear the Goods and Service Tax (GST), Bill. The intent was never in doubt but its capability of handling a united opposition has never been witnessed. The government does not have the numbers in the Rajya Sabha was well known. And despite most states, including the Congress-ruled ones in favour of the Bill, political bickering has resulted in parliament being stalled. The government is now considering holding an all-party meet to clear the logjam. There are also reports that introduction of the bill will be postponed to the budget session, when on account of changes in the Rajya Sabha, the government with the help of other parties will be able to reach a simple majority. In such a case, implementation of GST will be postponed by three months. It’s not a question of if the GST Bill is passed, but when.

2.  Oil Prices:

Crude prices continued to slip on their downward path even as US Fed increased rates indicating better growth prospect for the country. Higher levels of inventories and OPEC (Organisation of the Petroleum Exporting Countries) refusing to cut production coupled with lower global demand has failed to improve sentiment in the oil market. As a result of lower oil prices, gulf countries are withdrawing money from their financial savings which include global equity markets. Stemming this haemorrhage is important for the revival of markets.

3. FII Outflows:

Apart from money withdrawn by Arab nations, there is other emerging market exchange traded funds (ETFs) that have been withdrawing from Indian and other emerging markets. Nearly $1.6 billion has moved out of Indian equity markets since November 2015 in anticipation of an adverse impact on Indian markets. Ironically, emerging markets will be impacted mainly if money moves back to the US. One of the keenly watched numbers every evening for market participants these days is FII flows. There has been a continuous outflow from FIIs with some small levels of buying for a few days. Turnaround to an inflow in these numbers will be an important indicator to look for in days ahead.

4. Chinese currency war:

China has stepped on the brakes to prevent a falling economy by pegging its currency lower against the dollar. The Chinese currency, Yuan had been loosely pegged against the dollar, with the dollar strengthening over the last few months China was hit on two fronts. First a slowing domestic economy prevented growth and secondly a stronger currency slowed down exports. In order to help export sales, Chinese government like many other economies decided to devalue their currency. Indian central bank too had to follow the Chinese in order to help Indian exporters maintain their competitive strength. This, however, has not helped much as Indian exports continue to fall for 12 months straight. Devaluation of the currency also increases the chance of FII outflow as their performance in dollar term is affected is rupee is devalued.

5. Earnings and Budget:

With 2015 coming to an end market focus will first shift to corporate earnings which will start flowing in from the second week of January. Markets will be keenly watching the results for the transformation of the strong IIP numbers in corporate earnings. These numbers will decide if analysts will project higher earnings per share (EPS) for 2017. Currently, the general consensus of the market is an EPS of Rs 500 for Nifty. Visibility in the conference calls and earnings upgrades will help decide the trend for the year. But as earnings season will come to a close, focus will shift to government’s budget announcement and how the government intends to steer the country forward.

Source: Business Standard

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