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- The classic US cocktail seems to be brewing up on expected lines and the entire market has been taken into tailspin. Something many of the market participants had been discussing for a while has played out
- The first quarter GDP numbers are out and the US economy has grown at 1.6% p.a. down from 3.4% in Q4CY2023. The economy is not growing but the economic data is coming strong is a bit paradoxical in nature; this is what one can say and assessment is right that the US is heading into stagflation
- Opportunity lost – Fed might be thinking or the second wrong to make things right also goes into a spin. In a high growth high inflation environment you can afford to keep rates elevated and maybe you are in a position to give some leeway by a one off tweak but in a low growth high inflation scenario your heart and mind move in divergent directions. Heart says cut while the mind says it’s just not possible as it may further add to inflation
- Markets were bound to react and they have done so basis their characteristic nature. Treasury yields spiked further to 4.72% on 10y and the only silver lining being that 2y is still below 5% and hence the 2*10 inversion is narrowest seen during last couple of years
- Is this not a false signal as one side the market has discounted the first rate cut now being shifted to December while the inversion indicating that this is a temporary blip and things should turn to normal soon. My own take is a bit contrarian though – enough of inflation targeting and now Fed will be nudged into chase growth by cutting rates. Of course my view and I can be wrong as well
- Wall street had a knee jerk reaction and Dow opened down 700 pts before recovering close to 200 pts at the time of finishing this write up. Even Nasdaq has lost 215 pts and there is nervousness in the market as the traders continued to run for cover
- My assessment in a way also gains credence from the fact that despite an adverse number and hopes of rate cut receding the dollar index continues to trade in the range, not having seen the spike and still trading 105.50; even gold has refused to slide further down consolidating around USD 2340
- Sam proposes in / for India and Uncle Sam implements in / for US (pun intended) – Trump’s biggest trumpet was tax cuts to the tune of USD 2.00 trln a year, that in a way were beneficial to super rich and affluent class, putting further pressure on US fiscal situation. Biden has vowed to do away with these cuts and impose 44.6% capital gains tax, the highest in country and in addition also propose a 25% tax on unrealized gains for HNIs
- Further details on the news are still awaited as I need to deep dive further but Cointelegraph is of the view that apparently it’s aimed at crypto gains and may not have much impact but there is another story which says it’s across the board. Then on incremental flows the perception building up is that this may see flow to offshore areas. Something to delve upon during course of time
- Coming to India – I get a feel that it’s time to slow down and gather things a bit. Though on govies there are no major headwinds but the factors that have to bring down the yields have also gone into hibernation. 10y g-sec closed at 7.20% (old) and the new 10y was at 7.16%
- I’m not unduly worried about govies, my worry is nifty and more so the index as a whole. It was monthly expiry y’day and nifty had a gap down opening by 100 pts and then the sideway movement for first few hours before the pullback and rebound happened and the index closed higher by 170 pts
- Going specific today on event driven outcome with a disclosure that I may have some holding in the share. On the back of RBI action on Kotak Bank, the share slipped over 10% in the day’s trade y’day. Why am I giving a mention here? Because there was asset switching evident clearly as the fall in Kotak stock saw the rise in price of other Bank stocks – Axis, SBI, Canara and other PSUs as well as ICICI Bank etc. No comments though on whether it’s a good buy or not at these levels
- Closing remarks – off the cuff – stock specific headwinds / tailwinds will come and go, even index may witness some mischief by a cartel, some irresponsible guys may continue to ignore the early warning signals and keep dumping funds simply looking at one another committing the blunder, but in the end its only one thing that will help you succeed and that one thing is called – discipline and you don’t need anyone’s certificate, you just need to ask yourself and observe your actions
Stay safe, stay healthy, God bless you all, have a great day !!
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Vikas Miglani writes 