US Fed Chief’s speech may boost D-Street rally

Mumbai: The stock market could extend its record-breaking run in the days ahead after investors perceived US Federal Reserve chairman Jerome Powell's speech on Friday as dovish, helping ease concerns for now that the central bank will rush to reverse its bond-buying programme. Upsides however could be measured as concerns over the timing of pull-back in the monetary stimulus will loom over the markets, keeping investors on edge.

Wall Street firmed up on Friday with the Dow gaining 0.6%, the S&P 500 advancing 0.8% and Nasdaq adding 1.2% to hit record highs after Powell prepared the markets for the start of tapering of its $120 billion in monthly bond purchases this year as the US economy recovers from the pandemic. The Fed chief didn’t provide a specific timeline for starting the scale-back of the stimulus launched in response to Covid-19 in March 2020 but hinted the central bank will not be in a hurry to raise interest rates.

“What the market liked was Powell saying not to expect interest rates rising any time soon,” said Andrew Holland, CEO, Avendus Capital Alternative Strategies.

Market was Expecting Tapering
“The market was expecting tapering and he was quite dovish on the interest rate cycles. In the short term, market will rally more on this,” said Holland.

India’s stock benchmarks on Friday ended at records with the Sensex closing above 56,000 and the Nifty above 16,700 for the first time ever.

Fund managers said investors must brace for swings in the market in the weeks ahead. “I don’t think concerns around taper and interest rate hikes have gone. They have given the same signals as before. The comments were more on expected lines,” said Harsha Upadhyaya, CIO, equity, Kotak Mahindra Asset Management Co. “Towards the end of this year or early next year investors are going to focus more on this. Indian markets may follow the global cues on this.”

Riskier assets such as emerging markets including India and commodities have benefitted from a super-accommodative monetary policy by central banks in developed economies since March 2020. In the US, the mix of fiscal and monetary stimulus resulted in the dollar weakening, causing a deluge of flows into equities. Now, with the US central bank looking to dial back the liquidity programme, which could strengthen the dollar for now, the possibility of a reversal of flows has increased, putting stocks at risk.

“Though Jerome Powell has been careful not to spook the market this time, it does not mean that all worries over tapering are over,” said Jyotivardhan Jaipuria, managing director of Valentis Advisors, a Mumbai-based investment manager. “Investors should not expect great returns from current levels. I would expect returns to be in single digits.”

The focus of the market will now be on when the Fed will announce the start of the taper. There are three more rate-setting meetings scheduled in 2021: September 21-22, November 2-3, and December 14-15.

While many on Wall Street are betting on the Fed beginning the reduction of bond buying in November, some are of the view that the resurgence of the Delta variant could push the central bank to rethink its plan to cut the liquidity programme in a big way in 2021.

HSBC said it expects the Fed to begin rate increases only in 2023. UBS said the eventual Fed tapering announcement should not have a “particularly long-lasting impact” on the dollar.

“However, should a slightly earlier than expected Fed taper push this gap well wider, the dollar can find greater support, particularly so against emerging market currencies,” said UBS global analysts after Powell’s speech.

Some fund managers are not too bearish despite tapering talks. “The taper will happen but liquidity won’t dry up,” said Holland of Avendus. “It is not going to zero in terms of the funds being pumped in.”

The Sensex and the Nifty have largely taken concerns over tighter global liquidity in their stride. So far in August, the Sensex is up 6.7%, taking gains in 2021 to 17.5%.

Shares of smaller companies have been less insulated. Though the MidCap index was up 0.7% and the SmallCap index is down nearly 2%, many smaller stocks have fallen at least 20-30% from their highs in July. So far this year, the MidCap index is up 29.6% and the SmallCap index is up 45%.