After a Rise, Comes a Fall 🍁

The markets rose 3% last week, reversing some of that 5% fall in the month of June. It also marked the third consecutive week of the markets ending in the green.

Each time this happens, and you’re wondering what next, there’s one good question to ask yourself - Is This Rally Sustainable?

Because, when you’re in a structural downfall, rallies tend to not sustain. This continues till there are enough fundamental factors to offset the negatives. These rallies are a good time to take stock of what’s happening, and assess if the positives (or optimism) exceed the negatives (or pessimism).

So where are we now?

Negatives

1. The Russia-Ukraine war continues, and trade routes for Ukraine remain blocked. Russia has blocked out the Black Sea and sea-mined it threatening any trade from the sea for Ukraine.

2. At the same time, sanctions on Russia continue getting stricter as the West looks for alternatives to Russian originated goods.

3. Supply chain disruptions across energy (oil, natural gas, coal), food (wheat, edible oils, corn) and industrial commodities (nickel, zinc) continue driving shortages, alternates, substitutes and volatility in prices.

4. US inflation is sticky at high levels, and the Fed has been getting aggressive. While tightening helps fight inflation, it also cools the economy down, which also hurts. The quantum and pace of tightening has been fuelling recession fears. If the US goes into recession, the global economy will get impacted.

5. The bond markets in the US flashed signs of recession, as the 10-year Treasury yield and the 2-year yield inverted. An inverted curve occurs when the short-term yield is higher than the long-term yield. Simply - near-term is riskier than the long-term.

6. Inflation in India is a problem too, just like everywhere around the world. The RBI will continue raising rates, and the economy will likely slow down too.

7. FIIs have been pulling money out of India and their ownership is now at a 5-year low.

8. The Rupee has been losing value against the dollar, and the RBI needs to stabilise this. A weak rupee for a net importer like India is bad news, especially in times of global inflation.

Positives

1. On fears of a recession in the US and with monetary policy reversal across the globe, commodity prices have started declining. There has been a 20-50% decline in the prices of key commodities from their recent highs.

2. India has been buying Russian oil at a pace not seen before. As the West ignores Russia, it has been selling oil to India, China and Turkey at discounted prices, which provides some relief to India’s imports.

3. While inflation is the key problem, India’s structural story continues to be in the right direction.

4. Fiscal policy for India is expansionary, and will support economic rebound. However, some of that ability may get hampered as inflation and increased subsidies cut through the budget, and limit the degree of expansionary policy.

5. June 2022 saw the monsoon coming, but the month had a 8%-below-average rainfall. Sounds negative? Well, June isn’t as critical from an agriculture standpoint as July and August are. July so far, and forecasts for the rest of the month look good though.

Positives outweigh the negatives?

Not yet!

• The fate on the US economy is yet to be determined

• China coming back post its zero-COVID-tolerance policy which might provide support for commodity prices

• Moreover, the fall in commodity prices has been demand-driven and not supply-driven; the fall hence maybe short-lived

• The falling Rupee which needs stabilisation!

The risks are too many and too high for the markets to take a sustainable positive turn.