Vijay Kumar Gaba

 The monsoon this year is progressing well. At midpoint of the season, about 70% of 703 districts in the country have received normal to excess rains; and only 5% districts are witnessing a large deficiency. With the dark monsoon clouds hovering over most parts of the country, the skies in markets appear bright and sunny.

The stock markets and bonds have mostly recouped the losses made in the past four months. USDINR is also trading at two months low. Economic indicators are no longer worsening – inflation is high but stable; tax collections are strong; fiscal deficit is under control; core sector growth is recovering; bank credit to industry is picking up; leading indicators like vehicle sales (especially commercial vehicles), freight carried; port & railway traffic are all showing signs of stabilization and recovery. Current accounts are a cause of concern. However, positive FPI flows in July and recent correction in global crude oil prices are providing at least some comfort; which is reflected in INR appreciation also.

The market narratives have also changed remarkably in the past couple of weeks. The phrase “Hyperinflation” has almost vanished from the market discussions. Recession, Peak rates, Peak USD, Peak crude prices, wider adoption of Bitcoin, equity market bottom etc. are now increasingly finding mention in the market commentaries. For example—

CITI Global Commodities Research recently, inter alia, noted “Most analyses of oil markets emphasize the consequences on prices of further supply disruptions. In this report we focus on the potential consequences of an increasingly likely recession. In a recession scenario with rising unemployment, household and corporate bankruptcies, commodities would chase a falling cost curve as costs deflate and margins turn negative to drive supply curtailments.”. It further noted that “It looks as though for this year and into 2023 Russian crude oil exports may remain robust, even if refined product exports may fall. Therefore, further global oil demand weakness should spell higher inventories and weaken oil prices. Yet, the distortionary impacts of Europe boycotting increasing volumes of Russian oil should continue to be headwinds for global oil prices. In a recession scenario, we would see oil prices falling to $65/bbl by year end and potentially to $45/bbl by end-2023, absent intervention by OPEC+ and a decline in short-cycle oil investment.”

Jefferies, in the latest edition of its signature report Greed & Fear '' noted that “There is no doubt that financial markets, in the midst of the silly season, have been in an awful hurry to price in the peak of inflation and the end of Fed tightening. Fed tightening expectations peaked in mid-June at 4% in early 2023 while the money markets are now discounting 50bp of easing next year after the federal funds rate peaks at an assumed 3.25-3.5% in December, or 100bp above the current level following the 75bp hike yesterday to 2.25-2.5%”.

Lazard Asset Management believes that “Despite lingering headwinds, like fallout from regulatory crackdowns and zero-COVID policy aftershocks, China’s growth trajectory is still likely to show a recovery in the second half of 2022, and opportunities may be ripe for the picking in this vast market”. It also noted in a recent report that “Emerging markets fundamentals are in a relatively solid position overall especially as higher commodity prices have improved the terms of trade for commodity-exporting countries. As such, the current account and fiscal balances for many countries have improved while debt valuations have grown significantly more attractive’ – clearly a sign of preference for a “risk on” trade.

Bank of America Research in a recent report, estimated that the US 10yr benchmark bond yields could reach 2% in less than a year.

Particularly, in the Indian context, the market participants seem quite relaxed after the recent market run up and correction in crude oil prices. Recently released World Economic Outlook by the IMF mentioned the resilience of the Indian economy, expecting it to grow ~8% in 2022 and ~6.4% in 2023 despite a widespread global slowdown. As per Emkay Research, H2FY23 may reveal India’s ‘true’ growth trajectory, based on: a slew of reforms in recent years, improving EoDB, thrust on domestic mfg., rising capacity utilization; marginal base-effect from Omicron should be a bonus.” Though the brokerage firm finds food and energy inflation a key challenge for the Indian economy, it notes that the underlying drivers of globalized inflation are cooling, overall easing the inflationary pressures. It accordingly believes that margin pressures on the commodity consumers are beginning to ease and shall reflect in 2HFY23 numbers.

Brokerage firm Edelweiss believes that “US Recession Fears Overplayed - Recessionary models show a low probability of the US undergoing recession. After a dismal H1 of the year, H2 has a better probable payoff. The U.S & European Market are likely to consolidate in the later half of the year and likely to underperform other world equity markets. Emerging markets seem to have limited downside as compared to developed markets.”