Wall Street reaffirmed Friday with the Dow gaining 0.6%, the S&P 500 advancing 0.8% and the Nasdaq adding 1.2% to hit all-time highs after Powell readied markets for the start of the reduction of its $ 120 billion in monthly bond purchases this year. the US economy is recovering from the pandemic. The Fed chief did not provide a specific timeline to begin reducing the stimulus launched in response to Covid-19 in March 2020, but hinted that the central bank will be in no rush to raise interest rates.
“What the market liked was that Powell said that interest rates are not expected to go up anytime soon,” said Andrew Holland, CEO of Avendus Capital Alternative Strategies.
The market expected a reduction
“The market was expecting a reduction and he was quite dovish about interest rate cycles. In the short term, the market will recover more on this, ”Holland said.
India’s benchmark stock indices ended on record highs on Friday with the Sensex closing above 56,000 and the Nifty above 16,700 for the first time.
Fund managers said investors should prepare for changes in the market in the coming weeks. “I don’t think the concerns about the gradual reduction and increases in interest rates have disappeared. They have given the same signals as before. The comments were more along the expected lines, ”said Harsha Upadhyaya, CIO, Kotak Mahindra Asset Management Co. Stocks“ Towards the end of this year or early next year, investors will focus more on this. Indian markets can follow the global signals on this. ”
Riskier assets such as emerging markets, including India, and commodities have benefited from super-accommodative monetary policy by central banks in developed economies since March 2020. In the US, the combination of Fiscal and monetary stimulus caused the dollar to weaken, causing an avalanche of flows into equities. Now that the central bank of the United States looks to reduce the liquidity program, which could strengthen the dollar for now, the possibility of a reversal of the flows has increased, putting stocks at risk.
“Although Jerome Powell has been careful not to scare the market this time, that does not mean that all concerns about tapering are over,” said Jyotivardhan Jaipuria, managing director of Valentis Advisors, a Mumbai-based investment manager. Investors should not expect big returns from current levels. I expect the returns to be in the single digits. ”
Market focus will now be on when the Fed announces the start of the downsizing. There are three more rate-setting meetings scheduled for 2021: September 21-22, November 2-3, and December 14-15.
While many on Wall Street are betting that the Fed will start cutting bond purchases in November, some are of the opinion that the resurgence of the Delta variant could push the central bank to reconsider its plan to cut the liquidity program heavily in 2021.
HSBC said it expects the Fed to start raising rates only in 2023. UBS said the Fed’s eventual phase-down announcement should not have a “particularly long-lasting impact” on the dollar.
“However, if a reduction by the Fed a little earlier than expected widens this gap, the dollar may find greater support, particularly against emerging market currencies,” UBS global analysts said after Powell’s speech. .
Some fund managers are not overly bearish despite the dwindling talk. “The downsizing will happen, but the liquidity will not run out,” said Holland of Avendus. “It is not going to zero in terms of the funds that are injected.”
Sensex and Nifty have largely taken tighter global liquidity concerns in stride. So far in August, the Sensex is up 6.7%, taking gains in 2021 to 17.5%.
Smaller company stocks have been less isolated. Although the MidCap Index was up 0.7% and the SmallCap Index was down nearly 2%, many smaller stocks have fallen at least 20-30% from their July highs. So far this year, the MidCap Index is up 29.6% and the SmallCap Index is up 45%.