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market | IST

Tracking the pulse of global markets: Return of reflation trade or a regime change?

Mini

It is time to focus on the global picture because at the margin India has outperformed global markets in a big way this year.

After climbing steadily for much of the year, the global markets have became muddled in the recent weeks as investor optimism dipped with the spread of the more contagious delta variant of coronavirus, a spike in treasury yields, and the Federal Reserve's hawkish tilt.
The investors on Wall Street were also saddled with budget wrangling in Washington besides the concerns over COVID-19. The Street closed sharply lower Thursday with S&P 500 posting its worst month since the onset of the coronavirus pandemic.
While the approval of a stopgap spending bill to prevent a US government shutdown lent some support to benchmarks on Thursday, the stocks quickly resumed their downtrend, dragging even the Nasdaq into the red after it traded higher most of the day.
Benchmark S&P 500 fell over 1 percent and the Dow Jones Industrial Average slumped over 1.5 percent. Nasdaq also declined half a percent.
"The market’s been resilient, but the risk tied up in the policy headlines over the debt ceiling, the chaos around these spending bills is weighing on the markets a bit as the quarter comes to a head," said Ross Mayfield, investment strategy analyst at Baird told Reuters.
This was the first monthly drop since January for S&P 500, and the biggest since March 2020. This week, the index slumped over 3 percent and Nasdaq slumped over 4 percent.
"In a larger context, it’s been pretty mild. We’re coming on the heels of seven ‘up’ months and volatility’s been fairly muted despite the headline risks, not to mention COVID-19 and tapering," Mayfield added. "The market had to take a pause, and a pause is necessary and probably to be expected."
Elsewhere in Europe, the markets fell almost one percent, tracking Asian and US counterparts. The pan-European index, Stoxx 600 was down almost one percent on Friday. This index closed September down 3.4 percent, ending a seven-month winning streak. Shares in Asia suffered too on Friday. Japan slid over 2.5 percent and Indian markets slumped half a percent Friday.
At the margin, though India has outperformed global markets this year. But if the global picture muddles, it can lead to periods of sideways movement, choppiness, volatility and risk-off.
And while headline indices on Wall Street may be slipping, Russell 2000, which is made up of mostly economy facing domestic smaller companies is doing relatively well. While Nasdaq is down over 4 percent for the week, Russell is down only 2 percent.
And experts are saying, this performance of economy-facing part of the market kind of smells like reflation is back.
When economies recovered from the setback of the coronavirus outbreak and the resulting lockdowns, the measures of inflation ticked higher. That got analysts talking about reflation. Reflation occurs when economies witness recovery after a broad contraction.
But the question we face is, is this the correct interpretation? Because the backdrop could have started to change meaningfully. One view is, global growth has peaked. And the central banks are preparing the markets for a withdrawal of liquidity. On top of that, we have the factors pointing to a slowdown in China, it started slowly but seems to be picking pace now. Most of it might be self-imposed but it is what it is: the second-largest economy is slowing down.
So, take the cocktail of peak growth, lower earnings revisions, at the margin tighter monetary policy. And then throw in higher energy prices in the mix. All of it tells us maybe it is not a very clean backdrop for undisrupted upmove like the ones we have seen this year. And from here, the picture might get a little more muddled and volatile.
Watch the accompanying video of CNBC-TV18’s Prashant Nair for more details.
(With inputs from agencies)